10-Q/A 1 v053514_10qa1.htm

AMENDMENT NO. 1

FORM 10-Q/A

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 25, 2006

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: 001-15046

NEW DRAGON ASIA CORP.

(Exact name of Registrant as specified in its charter)

FLORIDA	88-0404114
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

Suite 2808, International Chamber of Commerce Tower Fuhua Three Road, Shenzhen, PRC	518048
(Address of Principal Executive Offices)	(Zip Code)

(86 755) 8831 2115

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of Class A Common Stock outstanding as of July 31, 2006 was 51,940,550.

NEW DRAGON ASIA CORP.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2006

TABLE OF CONTENTS

		Page
PART I:	FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements:

	Consolidated Balance Sheets as of June 25, 2006 (unaudited) and December 25, 2005	4

	Consolidated Statements of Operations (unaudited) for the three months and six months ended June 25, 2006 and 2005	5

	Consolidated Statements of Stockholders’ Equity and Comprehensive Income (unaudited) for the six months ended June 25, 2006 and the year ended December 25, 2005	6

	Consolidated Statements of Cash Flows (unaudited) for the six months ended June 25, 2006 and 2005	7

	Notes to Consolidated Financial Statements (unaudited)	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	39

ITEM 4.	Controls and Procedures	39

PART II:	OTHER INFORMATION

ITEM 1.	Legal Proceedings	40

ITEM 1A.	Risk Factors	40

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

ITEM 3.	Defaults Upon Senior Securities	40

ITEM 4.	Submission of Matters to a Vote of Security Holders	40

ITEM 5.	Other Information	40

ITEM 6.	Exhibits	40

SIGNATURES		41

EXHIBITS

EXPLANATORY NOTE

We are filing this Amendment No. 1 to Quarterly Report on Form 10-Q/A to (a) amend the financial statements and the notes to the financial statements and (b) amend Item 2 of Part I to amend our Management's Discussion and Analysis of Financial Condition and Results of Operations. Except as specifically referenced herein, this Amendment No. 1 to Quarterly Report on Form 10-Q/A does not reflect any event occurring subsequent to August 8, 2006, the filing date of the original report.

PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

	June 25, 2006			December 25, 2005
	Restated (Unaudited)			Restated
ASSETS

Current assets:
Cash and cash equivalents	$	12,523		$	14,332
Accounts receivable, net		7,536			6,515
Deposits and prepayments, net		4,326			4,970
Inventories, net		6,996			7,630
Due from related companies		838			679
Total current assets		32,219			34,126

Deposit for property, machinery and equipment		--			1,000
Property, machinery and equipment, net		23,570			18,315
Land use rights, net		6,875			3,980
Goodwill		125			--
Total assets	$	62,789		$	57,421

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	3,509		$	2,696
Other payables and accruals		2,144			2,298
Taxes payable		2,558			1,854
Embedded derivatives at fair value		10,120			12,135
Due to related companies		398			598
Total current liabilities		18,729			19,581

Due to New Dragon Asia Food Limited		71			137
Due to joint venture partners		133			54
Total liabilities		18,933			19,772
Minority interests		366			91
Series A &B Redeemable Convertible Preferred Stock, $0.0001 par value: Authorized shares - 5,000,000 Issued and outstanding - 12,182 in 2006 and 13,600 in 2005		4,095			3,559

Commitments

Stockholders’ equity:
Class A Common Stock, $0.0001 par value: Authorized shares - 102,000,000 Issued and outstanding - 51,867,062 in 2006 and 49,322,291 in 2005		5			5
Class B Common Stock, $0.0001 par value: Authorized shares - 2,000,000 - none issued and outstanding		--			--
Additional paid-in capital		20,620			15,216
Receivable from stockholder		(49	)		(49	)
Retained earnings		17,813			18,029
Accumulated other comprehensive income		1,006			798
Total stockholders’ equity		39,395			33,999
Total liabilities and stockholders’ equity	$	62,789		$	57,421

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

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data; unaudited)

	Three months ended June 25,						Six months ended June 25,
		2006 restated			2005			2006 restated			2005

Net revenue	$	11,544		$	8,993		$	22,640		$	17,275
Cost of goods sold		(9,372	)		(7,584	)		(18,614	)		(14,374	)
Gross profit		2,172			1,409			4,026			2,901
Selling and distribution expenses		(216	)		(561	)		(446	)		(682	)
General and administrative expenses
(Including stock-based compensation of $2,320 for the six months ended June 25, 2006)		(552	)		(405	)		(3,309	)		(978	)
Income from operations		1,404			443			271			1,241
Other income (expense):
Interest expense		--			(1	)		--			(1	)
Interest income		7			--			23			--
Other income (expense)		(1	)		1			4			3
Gain on fair value adjustments to embedded derivatives		7,112			--			605			-
VAT refund		998			795			1,099			795
Income (loss) before income taxes and minority interests		9,520			1,238			2,002			2,038
Provision for income taxes		(376	)		(258	)		(634	)		(511	)
Income (loss) before minority interests		9,144			980			1,368			1,527
Minority interests		(57	)		(8	)		(133	)		33
Net income (loss)	$	9,087		$	972		$	1,235		$	1,560
Accretion of Redeemable preferred stock		(479	)		--			(986	)		--
Preferred Stock Dividends		(219	)		--			(465	)		--
Income (loss) available to common stockholders	$	8,389		$	972		$	(216	)	$	1,560

Earnings (loss) per common share
Basic	$	0.16		$	0.02		$	NIL		$	0.03
Diluted	$	0.15		$	0.02		$	NIL		$	0.03
Weighted average number of common shares outstanding
Basic		51,448			45,061			50,647			45,061
Diluted		61,925			45,061			50,647			45,061

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

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Amounts in thousands, unaudited, restated)


	Class A Common Stock Shares Amount				Additional Paid-in Capital			Receivable from Stockholder			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders’ Equity			Comprehensive Income
Balance at December 25, 2004		45,061	$	4	$	9,909		$	-		$	16,922		$	-	$	26,835		$	-
Net income		-		-		-			-			3,995			-		3,995			3,995
Stock-based compensation expense		-		-		105			-			-			-		105			-
Foreign currency translation adjustment		-		-		-			-			-			798		798			798
Preferred Stock issuance cost		-		-		565			-			-			-		565			-
Fair value of warrants issued		-		-		5,047			-			-			-		5,047			-
Beneficial conversion feature		-		-		5,168			-			-			-		5,168			-
Conversion of Preferred Stock and related interest payments made in Class A Common Stock		2,039		0.5		1,971			-			-			-		1,971.5			-
Exercise of warrants		2,222		0.5		2,025			-			-			-		2,025.5			-
Receivable from stockholder		-		-		-			(49	)		-			-		(49	)		-
Balance at December 25, 2005, as originally reported		49,322		5		24,790			(49	)		20,917			798		46,461		$	4,793
Restatement Adjustments						(9,574	)					(2,888	)				(12,462	)		(2,248	)
December 25, 2005 , as restated		49,332		5		15,216			(49	)		18,029			798		33,999			2,545
Net income (loss)		-		-		-			-			1,235			-		1,235			1,235
Accretion of Redeemable Preferred Stock												(986	)				(986	)
Preferred Stock Dividends												(465	)				(465	)
Stock-based compensation expense		-		-		2,320			-			-			-		2,320			-
Foreign currency translation adjustment		-		-		-			-			-			208		208			208
Conversion of Preferred Stock, related interest payments made, and cashless exercise of warrants in Class A Common Stock		1,545		-		1,964			-			-			-		1,964			-
Exercise of stock options		1,000		-		1,120			-			-			-		1,120			-
Balance at June 25, 2006		51,867	$	5	$	20,620		$	(49	)	$	17,813		$	1,006	$	39,395		$	3,988

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

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

	Six months ended June 25,
	2006			2005
	Restated			Restated
Cash flows from operating activities:
Net income (loss)	$	1,235		$	1,560
Adjustments to reconcile net income (loss) to net cash provided by/used in operating activities:
Allowance for doubtful accounts		(244	)		49
Provision for inventory reserve		9			(11	)
Depreciation and amortization of property, machinery, equipment and land use rights		1,144			582
Loss on sale of property, machinery and equipment		--			3
Gain on fair value adjustments to Embedded derivatives		(605	)
Minority interests		133			(32	)
Stock-based compensation expense		2,320			--
Changes in operating assets and liabilities: (Increase) decrease in:
Accounts receivable		(714	)		133
Deposits and prepayments		644			(1,007	)
Inventories		625			(1,477	)
Due from related companies Increase (decrease) in:		(159	)		361
Accounts payable		800			(139	)
Other payables and accruals		(552	)		470
Taxes payable		704			165
Due to related companies		(200	)		(679	)
Net cash provided by/(used in) operating activities		5,140			(22	)

Cash flows from investing activities:
Acquisition of Chengdu plant		(2,300	)		--
Proceeds from disposal of property, machinery and equipment		--			2
Purchases of property, machinery and equipment		(4,253	)		(8	)
Purchases of land use rights		(1,943	)		--
Minority interests		142			--
Net cash used in investing activities		(8,354	)		(6	)

Cash flows from financing activities:
Payments of issuance costs related to preferred stock		(60	)		--
Proceeds from/repayment to parent company		(66	)		884
Proceeds from/repayment to joint venture partners		79			(22	)
Proceeds from exercise of stock options		1,120			--
Net cash provided by financing activities		1,073			862
Foreign currency translation adjustment		332			--
Net increase (decrease) in cash and cash equivalents		(1,809	)		834
Cash and cash equivalents at the beginning of the period		14,332			219
Cash and cash equivalents at the end of the period	$	12,523		$	1,053

Non-Cash Investing and Financing Activities

Conversion of preferred stock to common stock	$	1,800		$	--

Interest payments on preferred stock in form of common stock	$	164		$	--

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

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS

New Dragon Asia Corp., a corporation incorporated in the State of Florida (collectively with its subsidiaries, the “Company”), is principally engaged in the milling, sale and distribution of flour and related products, including instant noodles and soybean-derived products, to retail and wholesale customers throughout China through its foreign subsidiaries in China. The Company is headquartered in Shandong Province in the People’s Republic of China (“PRC” or “China”) and has its corporate office in Shenzhen and seven manufacturing plants in Yantai, Beijing, Chengdu and Penglai.

NOTE 2. BASIS OF PRESENTATION

The consolidated financial statements include the financial statements of New Dragon Asia Corp. and all of its subsidiaries required to be consolidated in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany balances and transactions have been eliminated in consolidation.

Investments in companies in which the Company has significant influence, or ownership between 20% and 50% of the investee, are accounted for using the equity method. Under the equity method, the investment is originally recorded at cost and adjusted to recognize the Company’s share of net earnings or losses of the investee. The adjustment is limited to the extent of the Company’s investment in and advances to the investee and financial guarantees made on behalf of the investee. The Company’s investments in other entities are accounted for using the cost method.

These consolidated financial statements are unaudited. However, in the opinion of management, the consolidated financial statements include all adjustments, consisting of only normal, recurring accruals, necessary for their fair presentation. Interim results are not necessarily indicative of results to be expected for a full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 25, 2005.

FIN 46, “Consolidation of Variable Interest Entities” requires an investor with a majority of the variable interests (primary beneficiary) in a variable interest entity (“VIE”) to consolidate the entity. A VIE is an entity in which the voting equity investors do not have a controlling financial interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. VIEs are required to be consolidated by their primary beneficiaries if they do not effectively disperse risks among the parties involved. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses or receives a majority of its expected residual returns. The Company has completed a review of its investments in both non-marketable and marketable equity interests as well as other arrangements to determine whether it is the primarily beneficiary of any VIEs. The review did not identify any VIEs.

The consolidated financial statements were prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, sales returns and allowance, and inventory reserves. Although management believes these estimates and assumptions are adequate and reasonable under the circumstances, actual results could differ from those estimates. U.S. GAAP differs from that used in the statutory financial statements of the major operating subsidiaries of the Company, which were prepared in accordance with the relevant accounting principles and financial reporting regulations in the PRC. Certain accounting principles stipulated under U.S. GAAP are not applicable in the PRC.

Accounting for Derivative Instruments

Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires all derivatives to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in our Series A & B Redeemable convertible Preferred Stock, are separately valued and accounted for on our balance sheet. The pricing models we use for determining fair values of our derivatives are a combination of the Black Scholes and Binomial Pricing Models. Valuations derived from this model are subject to ongoing internal and external review. The model uses market-sourced inputs such as interest rates, and option volatilities. Selection of these inputs involves management's judgment and may impact net income. The Company has obtained a valuation report from a valuation firm to support it estimates.

In September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding contracts that are settled in a company's own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company's balance sheet, with any changes in fair value recorded in the company's results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required. In accordance with EITF 00-19, in August 2006, we determined that several of the outstanding warrants to purchase our common stock and the embedded conversion feature of our financial instruments, should be separately accounted for as liabilities. We had not classified these derivative liabilities as such in our historical financial statements. In order to reflect these changes, we restated our financial statements for the period ended June, 25, 2006 to record the fair value of these warrants and conversion features on our balance sheet and record unrealized changes in the values of these derivatives in our consolidated statement of operations as “(Loss) gain on fair value adjustments to embedded derivatives.”

The EITF recently deliberated the impact of liquidated damages clauses in registration rights agreements and the effect on accounting and classification of instruments subject to the scope of EITF 00-19 in EITF 05-04 The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to Issue No. 00-19. The EITF has not reached a consensus on this issue and has deferred deliberation until the FASB addresses certain questions, which could affect a conclusion on this issue. Specifically, EITF 05-04 presents alternative views on whether the liquidated damages provisions in registration rights agreements should be combined with or treated separately from the associated financial instrument. We view the registration rights agreement and the financial instrument a liability to be recorded as incurred. If the EITF were to adopt the view that the registration rights agreement should be viewed as a separate instrument from the financial instrument, we may have to account for additional derivatives.

Restatement of Financial Statements to Reflect Derivative Accounting

The consolidated financial statements for the interim period ended September 25, 2005 included in this report have been restated to reflect additional non-operating gains and losses related to the classification of and accounting for: (1) the conversion features of Series A Preferred Stock and associated warrants, (2) the amortization associated with the discount recorded with respect to our Series A Preferred Stock as a preferred stock dividend, and (3) the conversion features associated with the preferred stock issued by us and associated warrants

We have determined that the conversion features of certain of our financial instruments, including our 2005 preferred stock and warrants to purchase our common stock are derivatives that we are required to account for as if they were free-standing instruments under GAAP. We have also determined that we are required to designate these derivatives as liabilities in our financial statements. As a result, we report the value of these embedded derivatives as current liabilities on our balance sheet and we report changes in the value of these derivatives as non-operating gains or losses on our statement of operations. The value of the derivatives is required to be recalculated (and resulting non-operating gains or losses reflected in our statement of operations and resulting adjustments to the associated liability amounts reflected on our balance sheet) on a quarterly basis, and is based on the market value of our common stock. Due to the nature of the required calculations and the large number of shares of our common stock involved in such calculations, changes in our common stock price may result in significant changes in the value of the derivatives and resulting gains and losses on our statement of operations.

Summary of Restatement Items

In late August 2006, we concluded that it was necessary to restate its financial results for the fiscal year ended December 25, 2005 and for the interim periods ended September 25, 2005, March 25, 2006 and June 25, 2006 to reflect additional non-operating gains and losses related to the classification of and accounting for: (1) the conversion feature of the Company's Series A Redeemable convertible Preferred Stock issued in July 2005 (the "Series A Preferred Stock") and the Company's Series B Redeemable convertible Preferred Stock issued in December 2005 (the "Series B Preferred Stock”), the warrants to purchase common stock associated with these offerings, the amortization dividend associated with the discount recorded with respect to the Series A and B Preferred Stock, and (3) warrants to purchase common stock issued with Series A and B Preferred Stock). We had previously classified the value of these conversion features and warrants to purchase common stock, when applicable, as equity. After further review, we have determined that these instruments should have been classified as derivative liabilities and therefore, the fair value of each instrument must be recorded as a derivative liability on our balance sheet. Changes in the fair values of these instruments will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in our statement of income. At the date of the conversion of each respective instrument or portion thereof (or exercise of the options or warrants or portion thereof, as the case may be), the corresponding derivative liability will be reclassified as equity. The Company restated weighted average outstanding shares and fully diluted weighted average outstanding shares for the effects of change caused by the above restatement and other calculation errors.

We originally reported the Series A Preferred Stock and Series B Preferred Stock as mandatory redeemable preferred stock. The accompanying financial statements have been restated to show the Series A & B Preferred Stock as temporary equity between long-term liabilities and stockholder's equity at June 25, 2006.

The accompanying financial statements for the six months and the quarter ended June 25, 2006 have been restated to effect the changes described above. The impact of the adjustments related to the classification of and accounting for the conversion features and warrants for the interim period ended June 25, 2006 are summarized below:

Consolidated Statement of Operations (in thousands except per share data)


	Six months ended June 25, 2006 as originally reported			Adjustments				Six months ended June 25, 2006 as restated

Net revenue	$	22,640						$	22,640
Cost of goods sold		(18,614	)						(18,614	)
Gross profit		4,026							4,026
Selling and distribution expenses		(446	)						(446	)
General and administrative expenses
(Including stock-based compensation of $2,320)		(3,309	)						(3,309	)
Income from operations		271							271
Other income (expense):
Interest expense		(2,648	)		2,648		a		--
Interest income		23							23
(Loss) gain on fair value adjustments to Derivatives		--			605		b		605
Other income (expense)		4							4
VAT refund		1,099							1,099
Income (loss) before income taxes and minority interests		(1,251	)						2,002
Provision for income taxes		(634	)						(634	)
Income (loss) before minority interests		(1,885	)						1,368
Minority interests		(133	)						(133	)
Net income (loss)	$	(2,018	)					$	1,235
Accretion of Redeemable preferred stock		--			(986	)	c		(986	)
Preferred Stock Dividends		--			(465	)	d		(465	)
Income (loss) available to common stockholders	$	(2,018	)					$	(216	)


Earnings (loss) per common share
Basic		(0.04	)		0.04		e		Nil
Diluted		(0.04	)		0.04		e		Nil
Weighted average number of common shares outstanding
Basic		50,610			37		f		50,647
Diluted		50,610			37		f		50,647

Adjustments

a- reverse interest expense recoded for Mandatory Redeemable Preferred stock now accounted for and mezzanine equity

b- change in derivative value during the period

c- accretion of Redeemable preferred stock

d- Preferred Stock Dividend previously recorded as interest expense

e- to reflect basic and fully diluted earnings per share based upon corrected net loss

f-Adjust weighted average shares outstanding for corrected calculations

Consolidated Statement of Operations (in thousands except per share data)


	Three months ended June 25, 2006							Three months ended June 25, 2006
	As originally reported			Adjustments				As Restated

Net revenue	$	11,544						$	11,544
Cost of goods sold		(9,372	)						(9,372	)
Gross profit		2,172							2,172
Selling and distribution expenses		(216	)						(216	)
General and administrative expenses		(552	)						(552	)
Income from operations		1,404							1,404
Other income (expense):
Interest expense		(1,477	)		1,477		a		--
Interest income		7							7
(Loss) gain on fair value adjustments to Derivatives		--			7,112		b		7,112
Other income (expense)		(1	)						(1	)
VAT refund		998							998
Income (loss) before income taxes and minority interests		931							9,520
Provision for income taxes		(376	)						(376	)
Income (loss) before minority interests		555							9,144
Minority interests		(57	)						(57	)
Net income (loss)	$	498						$	9,087
Accretion of Redeemable preferred stock		--			(479	)	c		(479	)
Preferred Stock Dividends		--			(219	)	d		(219	)
Income (loss) available to common stockholders	$	498						$	8,389


Earnings (loss) per common share
Basic	$	0.01			0.15		e	$	0.16
Diluted	$	0.01			0.14		e	$	0.15
Weighted average number of common shares outstanding
Basic		51,470			-12		f		51,448
Diluted		59,978			1,947		f		61,925

Adjustments

a- reverse interest expense recoded for Mandatory Redeemable Preferred stock now accounted for and mezzanine equity

b- change in derivative value during the period

c- accretion of Redeemable preferred stock

d- Preferred Stock Dividend previously recorded as interest expense

e -to reflect basic and fully diluted earnings per share based upon corrected net loss

f-Adjust weighted average shares outstanding for corrected calculations

Balance Sheet Impact

In addition to the effects on the Company’s consolidated statement of operations discussed above, the restatement impacted the consolidated balance sheet as of June 25, 2006. The following table sets forth the effects of the restatement adjustments on consolidated balance sheet as of June 25, 2006:

	June 25, 2006							June 25, 2006
	As previously reported			Adjustments				As restated

ASSETS
Total current assets	$	32,219						$	32,219
Property, machinery and equipment, net		23,570							23,570
Land use rights, net		6,875							6,875
Deferred financing cost, net		1,589			(1,589	)	a		--
Goodwill		125							125
Total assets	$	64,378						$	62,789

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	3,509						$	3,509
Other payables and accruals		2,144							2,144
Taxes payable		2,558							2,558
Embedded derivatives at fair value		--			10,120		b		10,120
Due to related companies		398							398
Total current liabilities		8,609							18,729

Due to New Dragon Asia Food Limited		71							71
Due to joint venture partners		133							133
Mandatorily redeemable convertible preferred stock		5,525			(5,525	)	c		--
Total liabilities		14,338							18,933
Minority interests		366							366

Redeemable Convertible Preferred Stock		--			4,095				4,095

Commitments

Stockholders' equity:
Class A Common Stock, $0.0001 par value:
Authorized shares - 102,000,000
Issued and outstanding - 51,867,062 in 2006 and 49,322,291 in 2005		5							5
Class B Common Stock, $0.0001 par value:
Authorized shares - 2,000,000 - none issued and outstanding		--							--
Additional paid-in capital		29,813			(9,193	)	d		20,620
Receivable from stockholder		(49	)						(49	)
Retained earnings		18,899			(1,086	)	e		17,813
Accumulated other comprehensive income		1,006							1,006
Total stockholders’ equity		49,674							39,395
Total liabilities and stockholders' equity	$	64,378						$	62,789

Adjustments

a-reclassify costs of offering to Redeemable Convertible preferred Stock

b- fair value of embedded derivatives at June 25, 2006

c- reverse Redeemable convertible preferred stock at June 25,2006 and recorded as mezzanine equity

d-reverse values recorded for warrants and conversion features at date of the sale of Redeemable convertible preferred stock

e- to reflect aggregate effect of income statement adjustments.

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions that has an effect on a company’s financial statements accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes”, as a result of positions taken or expected to be taken in a company’s tax return. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the potential effect that the adoption of FIN 48 will have on the Company's financial statement presentation and disclosures.

In March 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140”, that provides guidance on accounting for separately recognized servicing assets and servicing liabilities. In accordance with the provision of SFAS No. 156, separately recognized servicing assets and servicing liabilities must be initially measured at fair value, if applicable. Subsequent to initial recognition, the Company may use either the amortization method or the fair value measurement method to account for servicing assets and servicing liabilities within the scope of this Statement. SFAS No. 156 is effective as of the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company will adopt SFAS No. 156 in fiscal year 2007. The adoption of this Statement is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140,” to permit fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation in accordance with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement occurring after the beginning of an entity’s fiscal year that begins after September 5, 2006. The Company will adopt SFAS No. 155 in fiscal year 2007. The adoption of this Statement is not expected to have a material effect on the Company’s consolidated financial statements.

In April 2006, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)”, that will become effective beginning in the third quarter of 2006. FSP FIN No. 46(R)-6 clarifies that the variability to be considered in applying Interpretation 46(R) shall be based on an analysis of the design of the variable interest entity. The adoption of the FSP is not expected to have a material effect on the Company’s consolidated financial statement.

In May 2005, the Company adopted SFAS No. 154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 changed the requirements for the accounting for and reporting of a voluntary change in accounting principle. The adoption of this Statement did not affect the Company’s consolidated financial statements in the period of adoption. Its effects on future periods will depend on the nature and significance of any future accounting changes subject to this statement.

NOTE 4. CONDENSED BALANCE SHEET INFORMATION

Condensed balance sheet information as of June 25, 2006 consisted of the following (in thousands, restated):

	Inside China		Outside China			Total
Assets
- Cash and cash equivalents	$	11,241	$	1,282		$	12,523
- Others		50,198		68			51,855
Total assets		61,439		1,350			62,789
Liabilities		8,411		10,522			18,933
Minority interests		366		--			366
Intercompany		24,393		(24,393	)		--
Equity		34,159		5,236			39,395

Assets located outside of China consist primarily of cash and cash equivalents, deposits and deferred financing costs related to the issuance of the preferred stock. Liabilities located outside of China consist primarily of preferred stock, net of the related beneficial conversion feature and fair value of the warrants.

Condensed statement of operation information for the six months ended June 25, 2006 consisted of the following (in thousands, restated):

	Inside China			Outside China			Total

Net revenue	$	22,640		$	--		$	22,640
Cost of goods sold		(18,614	)		--			(18,614	)
General and Administrative expenses		(296	)		(3,013	)		(3,309	)
Income/(Loss) from operation		3,284			(3,013	)		271
Provision of income tax		(634	)		--			(634	)
Other income/(expenses)		1,126			605			1,731
Net income/(loss)		3,643			(2,408	)		1,235

The Company does not believe that providing additional information regarding cash flows is meaningful to the reader, in light of the nature of the assets and operations located inside China and outside China, respectively.

NOTE 5. EARNINGS PER SHARE

The Company computes earnings per share (“EPS’) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. Approximately 1,860 dilutive shares for warrants and option and 8,.935 shares on an “as converted” basis for the Redeemable Convertible Preferred stock for the six months ended June 25, 2006 were excluded from the calculation of diluted loss per share since their effect would have been anti-dilutive.

The calculation of diluted weighted average common shares outstanding for the three months ended June 25, 2006 and 2005 and for the six months ended June 25, 2006 and 2005 is based on the average of the closing price of the Company’s common stock during such periods applied to warrants and options using the treasury stock method to determine if they are dilutive. The Redeemable Preferred stock is included on an “as converted “basis when these shares are dilutive.

The following table is a reconciliation of the weighted average shares used in the computation of basic and diluted earnings per share for the periods presented (amounts in thousands, except per share data):

	Three Months Ended June 25,
	2006						2005
	Income		Weighted						Weighted
	(Loss)		Average				Income		Average
	Restated		Shares		Per-Share		(Loss)		Shares		Per-Share

Earnings per share - basic
Income available to common stockholders	$	8,389		51,448	$	0.16	$	972		45,061	$	0.02
Effect of dilutive securities
Redeemable convertible preferred stock		698		8,935				--		--
Options and warrants		--		1,542				--		--
Earnings per share - diluted
Income available to common stockholders	$	9,087		61,925	$	0.15	$	972		45,061	$	0.02

	Six Months Ended June 25,
	2006							2005
	Income			Weighted						Weighted
	(Loss)			Average				Income		Average
	Restated			Shares		Per-Share		(Loss)		Shares		Per-Share

Earnings per share - basic
(Loss ) available to common stockholders	$	(216	)		50,647	$	Nil	$	1,560		45,061	$	0.03
Effect of dilutive securities
Redeemable convertible preferred stock		--			--				--		--
Options and warrants		--			--				--		--
Earnings per share - diluted
Income available to common stockholders	$	(216	)		50,647	$	Nil	$	1,560		45,061	$	0.03

NOTE 6. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (in thousands):

		June 25, 2006			December 25, 2005
		(Unaudited)

Accounts receivable	$	8,185		$	7,408
Less: Allowance for doubtful accounts		(649	)		(893	)
	$	7,536		$	6,515

The activity in the Company’s allowance for doubtful accounts is summarized as follows (in thousands):

		June 25, 2006			December 25, 2005
		(Unaudited)

Balance at the beginning of the period	$	893		$	775
Add: provision during the period		10			250
Less: write-offs during the period		(254	)		(132	)
Balance at the end of the period	$	649		$	893

NOTE 7. DEPOSITS AND PREPAYMENTS

Deposits and prepayments consisted of the following (in thousands):

		June 25, 2006		December 25, 2005
		(Unaudited)

Deposits for raw materials	$	3,870	$	4,350
Prepayments and advances		456		620
	$	4,326	$	4,970

NOTE 8. INVENTORIES

Inventories consisted of the following (in thousands):

		June 25, 2006			December 25, 2005
		(Unaudited)

Raw materials (including packing materials)	$	5,605		$	6,133
Finished goods		1,534			1,631
		7,139			7,764
Less: Inventory reserve		(143	)		(134	)
	$	6,996		$	7,630

The activity in the Company’s provision for inventory reserve is summarized as follows (in thousands):

		June 25, 2006			December 25, 2005
		(Unaudited)

Balance at the beginning of the period	$	134		$	547
Add: provision during the period		19			--
Less: write-offs during the period		(10	)		(413	)
Balance at the end of the period	$	143		$	134

NOTE 9. DUE FROM RELATED COMPANIES

		June 25, 2006		December 25, 2005
		(Unaudited)

Due from related companies for sales	$	838	$	679

NOTE 10. PROPERTY, MACHINERY AND EQUIPMENT

Property, machinery and equipment consisted of following (in thousands):

	Useful Life		June 25, 2006			December 25, 2005
	(In years)		(Unaudited)

Buildings	40	$	12,553		$	9,967
Machinery and equipment	5 - 12		18,372			14,663
			30,925			24,630
Less: Accumulated depreciation and amortization			(7,355	)		(6,315	)
		$	23,570		$	18,315

NOTE 11. LAND USE RIGHTS

Land use rights consisted of the following (in thousands):

		June 25, 2006			December 25, 2005
		(Unaudited)

Land use rights	$	7,704		$	4,705
Less: Accumulated amortization		(829	)		(725	)
	$	6,875		$	3,980

NOTE 12. OTHER PAYABLES AND ACCRUALS

Other payables and accruals consisted of the following (in thousands):

		June 25, 2006		December 25, 2005
		(Unaudited)

Deposits from customers	$	685	$	1,093
Accruals for payroll, bonus and benefits		290		334
Utilities and accrued expenses		1,169		871
	$	2,144	$	2,298

NOTE 13. CONVERTIBLE PREFERRED STOCK

On July 11, 2005, the Company issued 6,000 shares of Series A Preferred Stock , initially convertible into an aggregate of 6,315,789 shares of Class A Common Stock at a conversion price of $0.95 per share, raising $6 million in gross proceeds. Six-year warrants to purchase an aggregate of 3,157,895 shares of Class A Common Stock at an exercise price of $1.04 per share were also issued to the investors. As part of the compensation to the placement agent, five-year warrants to purchase an aggregate of 378,947 shares of Class A Common Stock at an exercise price of $1.04 share were also issued. As of June 25, 2006, all of the five-year warrants had been exercised, and 3,118 shares of Series A Preferred Stock were converted into 3,282,106 shares of Class A Common Stock.

On December 22, 2005, the Company issued 9,500 shares of Series B Preferred Stock, initially convertible into an aggregate of 5,937,500 shares of Class A Common Stock at a conversion price of $1.60 per share, raising $9.5 million in gross proceeds. Six-year warrants to purchase an aggregate of 2,968,750 shares of Class A Common Stock at an exercise price of $1.76 per share were also issued to the investors. As part of the compensation to the placement agent, five-year warrants to purchase an aggregate of 356,250 shares of Class A Common Stock at an exercise price of $1.76 per share were also issued. As of June 25, 2006, 200 shares of Series B Preferred Stock were converted into 125,000 shares of Class A Common Stock, and no warrants were exercised.

Pursuant to SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” the Preferred Stock is recorded as a liability since it has an unconditional obligation that must be either redeemed for cash or settled by issuing shares of Class A Common Stock.

The key terms of the Series A Preferred Stock and Series B Preferred Stock are as follows:

	Series A Preferred Stock	Series B Preferred Stock

Preferred Dividend	7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.	7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.

Redemption	July 11, 2010 Beginning on the 24th month following closing and each month thereafter, the Company shall redeem 1/37th of the face value of the Preferred Stock in either cash or Class A Common Stock valued at 90% of the volume-weighted current market price.	December 22, 2010 Beginning at the end of the 24th month following closing and on each third monthly anniversary of that date (quarterly) thereafter, the Company shall redeem 1/13th of the face value of the Preferred Stock in either cash or Class A Common Stock valued at 90% of the volume-weighted current market price.

Mandatory Conversion	The Company may at any time force the conversion of the Preferred Stock if the volume-weighted current market price of the Class A Common Stock exceeds 300% of the then applicable conversion price.	The Company may at any time force the conversion of the Preferred Stock if the volume-weighted current market price of the Class A Common Stock exceeds 200% of its price at issuance of the Preferred Stock.

Registration	The Company shall file to register the underlying Class A common shares within 30 days of the closing date and make its best effects to have the Registration declared effective at the earliest date. In the event such Registration is not continuously effective during the period such shares are subject to transfer restrictions under the U.S. federal securities laws, then (subject to certain exceptions) the holders are entitled to receive liquidated damages equal to 2.0% of the purchase price of the Preferred Stock per month.	The Company shall file to register the underlying Class A common shares with 30 days of the closing date and make its best effects to have the Registration declared effective at the earliest date. In the event such Registration is not continuously effective during the period such shares are subject to transfer restrictions under the U.S. federal securities laws, then (subject to certain exceptions) the holders are entitled to receive liquidated damages equal to 2.0% of the purchase price of the Preferred Stock per months.

Anti-dilution	In the event the Company issues at any time while Preferred Stock are still outstanding Common Stock or any type of securities giving rights to Common Stock at a price below the Issue Price, the Company agrees to extend full-ratchet anti-dilution protection to the investors.	In the event the Company issues at any time while Preferred Stock are still outstanding Common Stock or any type of securities giving rights to Common Stock at a price below the Issue Price, the Company agrees to extend full-ratchet anti-dilution protection to the investors.

The accounting for the long warrants issued with the preferred stock was determined under the guidance of SFAS 133, FASB FSP No. 150-1, FASB FPS No 150-5 and Emerging Issues Task Force (“EITF”) No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock. Accordingly, the warrants are treated as derivatives and classified as a liability. The long term warrants are recorded at fair value, based on the Black-Scholes and Binomial pricing models, and revalued each reporting period with the change in fair value recorded as other income (expense). Since the long term warrants and the conversion feature were deemed to be embedded derivatives, the Company recorded the fair value of all the embedded derivatives at the transaction date as a liability. The total fair value of these liabilities reduced the book value of the preferred at the date of the sale. The redemption value of the preferred stock of is accreted as preferred stock dividends over the redemption period, which resulted in an accretion of $508 during the period.

In connection with the issuance of the Preferred Stock A and Preferred Stock B, the Company paid professional fees, placement agent fees and associated expenses amounting to $1,843. These professional fees, placement agent fees and associated expenses were recorded by the Company as a reduction of the Preferred Stock.

NOTE 14. COMMON STOCK

On September 4, 2003, the Company issued 3,300,000 shares of Class A Common Stock for an aggregate purchase amount of $1,650,000 or $0.50 per share. The shares were issued pursuant to an exemption provided by Section 4(2) of the Securities Act. The purchasers were also issued warrants to purchase 1,650,000 shares of the Company’s Class A Common Stock, which have a term of 5 years at an exercise price of $0.99 per share. As of June 25, 2006, all such warrants had been exercised.

On October 7, 2003, the Company issued 850,000 shares of Class A Common Stock for an aggregate purchase amount of $425,000 or $0.50 per share. The shares were issued pursuant to an exemption provided by Section 4(2) of the Securities Act. The purchasers were also issued warrants to purchase 425,000 shares of the Company’s Class A Common Stock, which have a term of 5 years and an exercise price of $0.979 per share. As of June 25, 2006, warrants to purchase 25,000 shares of Class A Common Shares were outstanding.

NOTE 15. WARRANTS

During the year ended December 25, 2005, warrant holders relating to the September 2003 and October 2003 private placement transactions exercised their warrants to purchase 1,650,000 and 400,000 shares of Class A Common Stock at exercise prices of $0.99 to $0.979, respectively. Accordingly, the excess of the exercise price over the par value of the Common Stock (amounting to $2,025,000) was recorded as additional paid-in capital. As of December 31, 2005, the Company had not received the proceeds from warrants exercised to purchase 49,647 shares of Class A Common Stock and has recorded a stockholder receivable. Legal action to recover such receivable has been commenced by the Company.

In connection with the issuance of Series A Preferred Stock, as part of the compensation to the placement agent, five-year warrants to purchase 378,947 shares of Class A Common Stock at an exercise price of $1.04 per share were also issued. The warrants issued to the placement agent contained a cashless exercise provision. The Company estimated the per share value of the warrants using the Black-Scholes pricing model with the following assumptions:

	Warrants Issued to Private Placement Agent

Expected life (in years)		5
Expected volatility		40	%
Risk-free interest rate		4	%
Dividend yield		0	%
Estimated fair value per share	$	0.43
Aggregate value of the warrants	$	163,000

In connection with the issuance of Series B Preferred Stock, as part of the compensation to the placement agent, five-year warrants to purchase 356,250 shares of Class A Common Stock at an exercise price of $1.76 per share were also issued. The warrants issued to the private placement agent contained a cashless exercise provision. The Company estimated the per share value of the warrant using the Black-Scholes pricing model with the following assumptions:

	Warrants Issued to Private Placement Agent

Expected life (in years)		5
Expected volatility		98.8	%
Risk-free interest rate		3.6	%
Dividend yield		0	%
Estimated fair value per share	$	1.13
Aggregate value of the warrants	$	403,000

The following table summarizes activity regarding the Company’s outstanding warrants:

	Shares		Weighted Average Exercise Price

Outstanding at December 25, 2003		2,075,000	$	0.9883
Issued		--		--
Exercised		--		--
Forfeited/Cancelled		--		--
Outstanding at December 25, 2004		2,075,000		0.9883
Issued		6,861,842		1.3889
Exercised		2,327,368		0.9945
Forfeited/Cancelled		--		--
Outstanding at December 25, 2005		6,609,474		1.4020
Issued		--		--
Exercised		101,579		1.0400
Forfeited/Cancelled		--		--
Outstanding at June 25, 2006		6,507,895		1.4076
Warrants exercisable at December 25, 2005		6,609,474		1.4020
Warrants exercisable at June 25, 2006		6,507,895		1.4076

The number of shares of Class A Common Stock issuable under warrants related to the private placements and the respective exercise prices are summarized as follows:

	Shares of Class A Common Stock Issuable Under Warrants		Exercise Price

October 2003 private placement	25,000	$	0.979

July 2005 private placement
6-year warrants	3,157,895		1.04

December 2005 private placement
6-year warrants	2,968,750		1.76
5-year warrants	356,250		1.76

NOTE 16. STOCK-BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment,” which established standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The Company adopted the requirements of SFAS No.123R during the fiscal year ended 2005. In November 2004, options to purchase 400,000 shares of Class A Common Stock were issued to Peter Mak, the Company’s Chief Financial Officer, at an exercise price of $1.00 per share with a term of 10 years. The market price of the Class A Common Stock as of the grant date was $0.64 per share. As of June 25, 2006, all of these options were exercised.

On June 22, 2005, options to purchase an additional 600,000 shares of Class A Common Stock were issued to the same officer at an exercise price of $1.20 per share with a term of 10 years. The market price of the Class A Common Stock as of the grant date was $1.00 per share. As of June 25, 2006, all of these options were exercised.

On January 20, 2006, options to purchase an additional 2,000,000 shares of Class A Common Stock were issued to the same officer at an exercise price of $1.60 per share with a term of 6 years. The market price of the Class A Common Stock as of the grant date was $1.54 per share. As of June 25, 2006, none of these options were exercised. The Company recorded compensation expense of $2,320,000 based on an estimated fair value of the options of $1.16 per share on January 20, 2006. The per share fair value of the stock options granted has been estimated using the Black-Scholes option-pricing model with the following assumptions:

	January 20, 2006

Life (years)		6
Dividend yield		None
Risk - free interest rate		4.36	%
Volatility		89	%

The following table summarizes outstanding options as at June 25, 2006 and related weighted average fair value and life information:

	Options Outstanding			Options Exercisable
Range of Exercise Price Per Share	Number Outstanding at June 25, 2006	Weighted Average Fair Value	Weighted Average Remaining Life (Years)	Number Exercisable at June 25, 2006	Weighted Average Exercise Price

$ 1.60	2,000,000	$ 1.60	5.5	2,000,000	$ 1.60

NOTE 17. RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

Particulars of significant transactions between New Dragon Asia Corp. and related companies are summarized below (in thousands):

	Three months ended June 25,				Six months ended June 25,
	2006		2005		2006		2005
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Pre-determined annual fee charged by joint venture partners:
Shandong Longfeng Group Company (a)	$	19	$	18	$	38	$	36
Shandong Longfeng Flour Company Limited (b)		9		9		18		18
	$	28	$	27		56		54

(a)

Shandong Longfeng Group Company is a joint venture partner of the Company and the parent company.

(b)

Subsidiary of Shandong Longfeng Group Company.

The amounts due to New Dragon Asia Food Limited (the parent company) and other related parties which are primarily joint venture partners are unsecured and non-interest bearing. Balances are the result of normal commercial transactions.

NOTE 18. TAXATION

The PRC subsidiaries within the Company are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. The group companies that are incorporated under the International Business Companies Act of the British Virgin Islands are exempt from payment of the British Virgin Islands income tax. Substantially all of the Company’s income was generated in the PRC, which is subject to PRC income taxes at rates ranging from 24% to a statutory rate of 33%. Four of the PRC subsidiaries of the Company are eligible to be exempt from income taxes for a two-year period and then subject to a 50% reduction in income taxes for the next three years, starting from their first profitable year. Several PRC subsidiaries receive preferential tax rates in regions in which they operated and are also entitled to partial tax refunds from those tax bureaus.

New Dragon Asia Corp. is Delaware corporation with wholly owned operating subsidiaries, as a result, we are not subject to PRC tax for the activities at the Delaware company level. Costs or expenses incurred at the Delaware company level, such as the stock-based compensation and the amortization of financing costs and contra-account related to Series A Preferred Stock and Series B Preferred Stock, could not be used to offset any income derived from PRC when measuring the PRC income tax liabilities. As of June 25, 2006 and December 25, 2005, there were no material deferred tax assets or deferred tax liabilities.

NOTE 19. BUSINESS COMBINATION AND SIGNIFICANT ESTABLISHMENT

Delta Link Limited & Chengdu Plant

On February 24, 2006, the Company acquired 100% of the equity interest shares of Delta Link Ltd. (“Delta Link”) for a cash consideration of $3,300,000. Delta Link is a holding company, which owns a 90% equity interest in a noodle manufacturing facility in Chengdu, Sichuan Province. The Chengdu Plant serves the western China market.

This acquisition has been accounted for using the purchase method pursuant to SFAS No. 141, “Business Combinations.” The consolidated financial statements include the results of operations of these acquired companies commencing as of the acquisition date. No pro forma information is presented due to the immaterial effect of this acquisition on the consolidated result of operations.

In connection with the acquisition, the assets acquired and the liabilities assumed from Delta Link and the Chengdu Plant were recorded at their fair values on the consolidated balance sheet. Based on the initial purchase price allocation, the Company recorded goodwill in the amount of approximately $125,000.

The long-lived assets and goodwill are subject to periodic review to determine if impairment has occurred and, if so, the amount of such impairment. If the Company determines that impairment exists, the Company will be required to reduce the carrying value of the impaired assets by the amount of impairment and to record a corresponding charge to operations in the period of impairment.

Allocation of initial purchase consideration (in thousands):

Acquisition consideration	$	3,300

Accounts receivable		62
Property, machinery and equipment		2,167
Land use rights		1,056
Accounts payable		(13	)
Other payable and accruals		(97	)
Net assets value		3,175

Goodwill	$	125

Longyuan Packaging Plant

On January 10, 2006, the Company established New Dragon Asia (Long Kou) Packing Materials Company Limited, a wholly-owned subsidiary in Longkou, Shandong Province. NDAPM is principally engaged in the manufacturing and sale of packing materials, with a registered capital of $3,600,000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In addition to historical information, the matters discussed in this Form 10-Q contain forward-looking statements that involve risks or uncertainties. Generally, the words "believes," "anticipates," "may," "will," "should," "expect," "intend," "estimate," "continue," and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements. Readers should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 25, 2005, the Quarterly Reports on Form 10-Q filed by the Company and Current Reports on Form 8-K (including any amendments to such reports). References in this filing to the “Company”, “Group”, “we”, “us”, and “our” refer to New Dragon Asia Corp. and its subsidiaries.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that are reasonable could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Management believes that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.

Contractual Joint Ventures

A contractual joint venture is an entity established between us and another joint venture partner, with the rights and obligations of each party governed by a contract. Currently, we have established three contractual joint ventures with three Chinese partners in China. i.e. Shandong Longfeng Flour Co. Ltd., Shandong Longfeng Group Co. and Shandong Yukai Food Co., Ltd., with percentage of ownership ranging from 79.64% to 90%. Pursuant to each Chinese joint venture agreement, each Chinese joint venture partner is entitled to receive a pre-determined annual fee and is not responsible for any profit or loss, regardless of the ownership in the contractual joint venture. In view of such contracted profit sharing arrangement, the contractual joint ventures are regarded accounted for as 100% owned by the Company. Hence, the Company’s consolidated financial statements include the financial statements of the contractual joint ventures.

Revenue Recognition

Our revenues are generated from sales of flour and instant noodle. All of our revenue transactions contain standard business terms and conditions. We determine the appropriate accounting for these transactions after considering (1) whether a contract exists; (2) when to recognize revenue on the deliverables; and (3) whether all elements of the contract have been fulfilled and delivered. In addition, our revenue recognition policy requires an assessment as to whether collection is reasonably assured, which inherently requires us to evaluate the creditworthiness of our customers. Changes in judgments on these assumptions and estimates could materially impact the timing or amount of revenue recognition.

Shipping and Handling Costs

Shipping and handling costs are included in selling expenses for all periods presented.

Allowance for doubtful accounts

Management provides for an allowance for doubtful accounts for those third party trade accounts that are not collected within one year. We base our estimate (one year) on historical experience and on continuous monitoring of customers’ credit and settlement. We believe we have reasonable basis for making judgments on the allowance for doubtful accounts.

We normally grant up to 90 days credit to our customers. We monitor our allowance for doubtful accounts on a monthly basis. The significant provisions and write-offs during 2006 and 2005 reflect the estimates made by management approximate to the actual results. The net profit and loss impact of the provision and write-off on 2006 and 2005 are $244,000 and $118,000, respectively, which have an insignificant impact on the net income of both years.

Inventories valuation

Inventories are stated at the lower of cost, determined on a weighted average basis or net realizable value. Costs of work-in-progress and finished goods are composed of direct material, direct labor and an attributable portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose.

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (SFAS) No. 151, “Inventory Costs,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. We adopted SFAS No. 151 in the first quarter of 2006. The adoption of SFAS No. 151 did not have a material impact on our consolidated financial statements.

Accounting for Derivative Instruments

Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires all derivatives to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in our Series A & B Preferred Stock, are separately valued and accounted for on our balance sheet. The pricing models we use for determining fair values of our derivatives are a combination of the Black Scholes and Binomial Pricing Models. Valuations derived from this model are subject to ongoing internal and external review. The model uses market-sourced inputs such as interest rates, and option volatilities. Selection of these inputs involves management's judgment and may impact net income. The Company has obtained a valuation report from a valuation firm to support it estimates.

Stock-Based Compensation

On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. SFAS No. 123R was to be effective for interim or annual reporting periods beginning on or after June 15, 2005, but in April 2005 the SEC issued a rule that will permit most registrants to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period as required by SFAS No. 123R. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We have adopted the requirements of SFAS No. 123R for the fiscal year beginning on December 26, 2004, and recorded the compensation expense for all unvested stock options existing prior to the adoption in the first quarter of 2005.

Overview

Headquartered in Shandong Province, PRC, we are engaged in the milling, sale and distribution of flour and related products, including instant noodles and soybean-derived products, to retail and wholesale customers throughout China. With a well-known brand name called “LONG FENG”, we market our well-established product line through a countrywide network of over 200 key distributors and 16 regional offices in 27 Chinese provinces. We have seven manufacturing plants in the PRC with an aggregate annual production capacity of approximately 110,000 tons of flour and approximately 1.1 billion packets of instant noodles and 4,500 tons of Soybean powder.

Operations

We produce and market a broad range of wheat flour for use in bread, dumplings, noodles and confectionary products. Our flour products are marketed under the “Long Feng” brand name and sold throughout China at both wholesale and retail levels.

We provide a wide range of instant noodle products to our customers. Our products can be separated into two broad categories for selling and marketing purposes: (i) packet noodles for home preparation and (ii) snacks and cup noodles for outdoor convenience.

In late 2005, we started producing two types of soybean products - soybean protein powder and soybean powder. They are principally supplied to food and beverage manufactures.

We believe that we have a reputation in China for producing some of the highest quality food products. Our production plants operate to the highest level of hygiene and efficiency and all of our plants are certified under the ISO9002 standards. Most of our manufacturing equipment is purchased and imported from Switzerland, Japan and South Korea. We also use strict quality control systems, resulting in what we believe to be a favorable customer perception of the “Long Feng” brand.

Most of our products are regionally marketed and distributed throughout China. Our sales and marketing strategy focuses on maintaining strong distribution relationships by holding annual sales order meetings, regular distributor conferences and an excellent quality/price dynamic.

We believe our distribution system is the key to our continued success in developing the “Long Feng” brand as one of the leading domestic brands in China. We have more than 200 points of distribution in China, which are owned and managed by distributors. Most of our distributors have long-term relationships with us.

Our primary customer base for both our flour products and instant noodles consists of small retail stores in the rural areas throughout China, where, we believe that our brand has long been recognized as the highest quality available for the price. The rural market is rapidly growing, benefiting from increases in rural consumer income. We believe that brand loyalty by our customers is very strong in this sector. In addition to the small retail sector, we sell to larger supermarkets located in urban areas.

In addition to domestic sales, we export noodles to other countries such as South Korea, Australia, Malaysia and Indonesia. We also obtained HACCP (Hazard Analysis Critical Control Point) certification from CCIC Conformity Assessment Services Co. Ltd., a Chinese quality assurance examination authority, enabling the company to begin exports of instant noodles and soybean powder to Europe. From the second quarter of the year, we began export sales to Sweden and Greece. Export sales accounted for approximately 8% of our instant noodle sales for the first six months of fiscal 2006, similar to the same period in fiscal 2005.

We also receive orders for flour from certain KFC Corporation locations in China and KFC’s intermediary suppliers for flour. KFC requires rigorous quality control standards for its flour of at least the ISO9002 level. We believe that KFC’s orders reflect the brand reputation and quality of the Long Feng brand, as well as our commitment to international quality standards.

Significant establishments and acquisitions during the six months ended June 25, 2006

Acquisition of Delta Link Limited and Chengdu Manufacturing Plant

On February 24, 2006, we acquired a noodle manufacturing facility in Chengdu, Sichuan Province, for cash consideration of $3,300,000. The Chengdu Plant serves the Western China market.

Expansion of Longyuan Packing Plant

On January 10, 2006, we established New Dragon Asia (Long Kou) Packing Materials Company Limited (“NDAPM”), a wholly-owned subsidiary in Longkou, Shandong Province. NDAPM is principally engaged in the manufacturing and sale of packing materials, with a registered capital of $3,600,000. The expansion is planned to be the second phase of the development of Longkou City Longyuan Packing Materials Company Limited (“LCLPM”) , our 55% owned subsidiary. It was established as a separate entity in order to (i) acquire the remaining interests in LCLPM (45%) from the Chinese joint venture partner at net book value and (ii) enjoy a new income tax holiday. As of June 25, 2006, the transfer of the remaining 55% equity interest in LCLPM to NDAPM has been completed at net book value, and LCLPM has become a 100% owned subsidiary of NDAPM, which is indirectly owned 100% by us

Strategy

Our strategy for growth is to capitalize on our strong brand name and pursue strategic partnerships and acquisitions that will enhance our sales. The following are some of the key elements of our business growth strategy:

-	Acquire additional locations to increase our production capacity

-	Build strategic alliance with multinational food groups to enhance product range and capitalize on our China distribution network

Plans for expansion of the existing plants are expected to be funded through current working capital from ongoing sales. Acquisitions of plants will require an additional infusion of funds in the form of debt or equity, or a combination of both. However, there can be no assurance these funds will be available.

Competition

The flour industry in the PRC is very competitive. Our largest competitors are Shandong Guang Rao Ban Qiu Flour and Hebei Wu De Li Flour in the Northern market and Shenzhen Nanshun Flour in the Southern market.

The instant noodle segment in the PRC is also highly competitive. We compete against well-established foreign companies, and many smaller companies. Our largest competitors are the “Master Kang” brand manufactured by Tingyi (Cayman Island) Holdings Corporation and the “President” brand manufactured by Uni-President Group, both based in Taiwan. Both are focused predominately in the more developed and competitive urban markets.

Employees

We have approximately 1,500 employees. All of them are located in the seven plants and the Shenzhen executive office. We have maintained good relationships with our employees and no major disputes have incurred since our inception.

Currency Conversion and Exchange

Although the Chinese government regulations now allow convertibility of Renminbi (“RMB”) for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that RMB could be converted into U.S. dollars at that rate or any other rate.

Substantially all our revenue and expenses are denominated in RMB. Our RMB cash inflows are sufficient to service our RMB expenditure. For financial reporting purposes, we use U.S. dollars. The value of RMB against U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect our financial condition in terms of U.S. dollar reporting. To date, we have not engaged in any currency hedging transactions in connection with our operations.

Results of Operations

The following table sets forth, for the periods indicated, certain operating information expressed in U.S. dollars (in thousands):

	Six months ended June 25,						Three months ended June 25,
	2006 restated			2005			2006 restated			2005

Net revenue	$	22,640		$	17,275		$	11,544		$	8,993
Cost of goods sold		(18,614	)		(14,374	)		(9,372	)		(7,584	)
Gross profit		4,026			2,901			2,172			1,409
Selling and distribution expenses		(446	)		(682	)		(216	)		(561	)
General and administrative expenses
(Including Stock-based compensation of $2,320 for the six months ended June 25, 2006)		(3,309	)		(978	)		(552	)		(405	)
(Loss) on fair value adjustments to embedded derivatives		605			--			7,112			--
Income (loss) before income taxes and minority interest		2,002			2,308			9,520			1,238
Provision for income taxes		(634	)		(511	)		(376	)		(258	)
Net income (loss)		1,235			1,560			9,087			972
EBITDA*		4,705			2,654			2,817			1,516
EBITDA margin on revenue		21	%		15	%		24	%		17	%

* The Company uses EBITDA as an operating performance measure. EBITDA is defined as net earnings (loss) before interest, taxes, depreciation and amortization expense and in our case (Loss) gain on fair value adjustments to embedded derivatives. EBITDA is not a measure of operating performance under U.S. generally accepted accounting principles (“GAAP”) and should not be considered as an alternative or substitute for GAAP profitability measures such as operating earnings (loss) and net earnings (loss). EBITDA as an operating performance measure has material limitations since it excludes, among other things, the statement of operations impact of depreciation and amortization expense, interest expense and the provision (benefit) for income taxes, (Loss) gain on fair value adjustments to embedded derivatives and therefore does not necessarily represent an accurate measure of profitability, particularly in situations where a company is highly leveraged or has a disadvantageous tax structure. The Company uses a significant amount of capital assets and depreciation and amortization expense is a necessary element of the Company’s costs and ability to generate revenue and therefore its exclusion from EBITDA is a material limitation. The Company generally incurs significant income taxes each year and the provision (benefit) for income taxes is a necessary element of the Company’s costs and therefore its exclusion from EBITDA is a material limitation. As a result, EBITDA should be evaluated in conjunction with net earnings (loss) for a more complete analysis of the Company’s profitability, as net earnings (loss) includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to EBITDA. As EBITDA is not defined by GAAP, the Company’s definition of EBITDA may differ from and therefore may not be comparable to similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of the Company’s operating results as reported under GAAP.

The following table presents a reconciliation from net earnings, which is the most directly comparable GAAP operating performance measure, to EBITDA for the second quarters of 2006 and 2005:

	Three months ended June 25,					Six months ended June 25,
	2006			2005		2006			2005
Net income	$	9,087		$	972	$	1,235		$	1,560
Income tax		376			258		634			511
Interest expenses		(7	)		1		(23	)		1
Depreciation and amortization		473			285		1,144			582
Loss/ (gain) on fair value adjustments to embedded derivatives		(7,112	)		--		(605	)		--
Non-cash stock-based compensation		--			--		2,320			--
EBITDA	$	2,817		$	1,516	$	4,705		$	2,654

Six Months Ended June 25, 2006 Compared to Six Months Ended June 25, 2005

Net Revenue

Net revenue for the six months ended June 25, 2006 was $22,640,000, representing an increase of $5,365,000, or 31%, from $17,275,000 for the six months ended June 25, 2005. The increase was primarily due to the increase in market demand for our flour and instant noodles, together with the inclusion of results for the soybean products business.

Approximately 90% of the increase was due to the growth in market demand for flour and instant noodles, and the remaining 10% of the increase derived from the addition of the soybean products business. The selling prices for all our products remained stable.

Gross Profit

As a percentage of net revenue, gross profit increased to 18% for the six months ended June 25, 2006 from 17% for the six months ended June 25, 2005. The increase was primarily due to the decrease in the price of certain raw materials used in the manufacture of our products.

Selling and Distribution Expenses

Selling and distribution expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel and promotional expenses.

Selling and distribution expenses were $446,000 for the six months ended June 25, 2006, representing a decrease of $236,000 from $682,000 for the corresponding period of 2005. The decrease was primarily due to the cost controls implemented by us.

As a percentage of net revenue, selling and distribution expenses decreased to 2% in the six months ended June 25, 2006 from 4% in the corresponding period in 2005 as a result of cost controls. To control costs, we have continued to more effectively staff our facilities, restrict traveling costs and develop a more efficient sales methodology.

General and Administrative Expenses

General and administrative expenses increased $2,331,000, or 238%, to $3,309,000 for the six months ended June 25, 2006 as compared to $978,000 for the six months ended June 25, 2005. The increase was primarily due to the stock-based compensation cost, which amounted to $2,320,000 and is non-cash in nature and non-recurring. The charge for stock-based compensation related to the granting of the options to purchase up to 2,000,000 shares of Class A Common Stock on January 20, 2006.

Income from Operations

Income from operations decreased $970,000, or 78%, to $271,000 for the six months ended June 25, 2006 as compared to $1,241,000 for the six months ended June 25, 2005. The decrease was primarily due to the stock-based compensation charged in 2006, which was non-cash.

Gain on Fair Value Adjustments to Embedded Derivatives

The Company issued Series A Preferred Stock in July 2005, together with 3,157,896 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $6 million. The Company also issued Series B Preferred Stock in December 2005, together with 2,968,750 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $9.5 million. The fair value of each instrument was recorded as a derivative liability on our balance sheet. The corresponding gain or loss, which was non-cash in nature, from changes in the fair values of these instruments was recorded in our statement of operation. For the six months ended June 25, 2006, the gain from variation of the fair value of these instruments was $605,000.

For the corresponding period of 2005, we did not issue any redeemable convertible preferred stock and there were no similar item occurred on the statements of operation.

VAT Refunds

VAT refund increased to $1,099,000 for the six months ended June 25, 2006 as compared to $795,000 for the six months ended June 25, 2005. This increase was primarily due to the tax refund from the municipal government to encourage foreign investment.

Net Income

Although our gross profit increased $1,125,000 for the six months ended June 25, 2006, net income decreased to $ $1,235,000 for the six months ended June 25, 2006 as compared to $1,560,000 for the six months ended June 25, 2005. Such change was primarily due to (i) the accretion of redeemable preferred stock during the period, which were mostly non-cash and (ii) the stock-based compensation charged in 2006 which was non-cash.

EBITDA

EBITDA increased $2,051,000, or 77%, to $4,705,000 for the six months ended June 25, 2006 as compared to $2,654,000 for the six months ended June 25, 2005. Such increase was in consistent with our business growth.

Three Months Ended June 25, 2006 Compared to Three Months Ended June 25, 2005

Net Revenue

Net revenue for the quarter ended June 25, 2006 was $11,544,000, representing an increase of $2,551,000, or 28%, from $8,993,000 for the quarter ended June 25, 2005. The increase was primarily due to the increase in market demand for our flour and instant noodles , together with the inclusion of results for the soybean products business .

Gross Profit

As a percentage of net revenue, gross profit increased to 19% for the quarter ended June 25, 2006 from 16% for the quarter ended June 25, 2005. The increase was primarily due to the decrease in the price of raw materials used in the manufacture of our products.

Selling and Distribution Expenses

Selling and distribution expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel and promotional expenses.

Selling and distribution expenses were $216,000 for the quarter ended June 25, 2006, representing a decrease of $345,000 from $561,000 for the corresponding quarter of 2005. The decrease was primarily due to the cost controls implemented by us.

As a percentage of net revenue, selling and distribution expenses decreased to 2% in the quarter ended June 25, 2006 from 6% in the corresponding period in 2005 as a result of cost controls. To control costs, we have implemented our plan for more effective staffing of our facilities, restricted traveling costs and developed a more efficient sales methodology.

General and Administrative Expenses

General and administrative expenses increased $147,000, or 36%, to $552,000 for the quarter ended June 25, 2006 as compared to $405,000 for the quarter ended June 25, 2005. The increase was primarily due to the increase in professional fees on services including fees for investor relations, legal and accounting advice.

Income from Operations

Income from operations increased $961,000, or 217%, to $1,404,000 for the three months ended June 25, 2006 as compared to $443,000 for the three months ended June 25, 2005. The increase was primarily due to the contribution by the newly acquired plants, including a soybean plant, a distribution company, the Chengdu plant and the expansion of the Longyuan packing plant, which did not exist in the corresponding quarter of 2005.

Gain on Fair Value Adjustments to Embedded Derivatives

The Company issued Series A Preferred Stock in July 2005, together with 3,157,896 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $6 million. The Company also issued Series B Preferred Stock in December 2005, together with 2,968,750 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $9.5 million. The fair value of each instrument was recorded as a derivative liability on our balance sheet. The corresponding gain or loss, which was non-cash in nature, from changes in the fair values of these instruments was recorded in our statement of operation. For the three months ended June 25, 2006, the gain from variation of the fair value of these instruments was $7,112,000.

For the corresponding period of 2005, we did not issue any redeemable convertible preferred stock and there were no similar item occurred on the statements of operation.

VAT Refunds

VAT refund increased to $998,000 for the quarter ended June 25, 2006 as compared to $795,000 for the quarter ended June 25, 2005. This increase was primarily due to the tax refund from the municipal government to encourage foreign investment.

Net Income

Net income increased $8,115,000, or 835% to $9,087,000 for the quarter ended June 25, 2006 as compared to $972,000 for the quarter ended June 25, 2005. Such increase was primarily due to (1) the growth of our business and (2) gain derived from variation of derivative instruments.

EBITDA

EBITDA increased $1,301,000, or 86%, to $2,817,000 for the three months ended June 25, 2006 as compared to $1,516,000 for the three months ended June 25, 2005. Such increase was in consistent with our business growth.

Financial Condition, Liquidity and Capital Resources

Our primary liquidity needs are to purchase inventories and fund accounts receivable and capital expenditures. We have financed our working capital requirements through collections from customers and advances from related companies, together with proceeds received from financing transactions.

Our working capital decreased $13,190,000 to $13,490,000 at June 25, 2006 as compared to $26,680,000 at December 25, 2005, which was primarily due to the fair value of embedded derivatives on the Series A & B Preferred Stock being classified as a current liability.

Cash and cash equivalents were $12,523,000 as of June 25, 2006, a decrease of $1,809,000 from December 25, 2005, which was primarily due to the expansion of the Longyuan packing plant.

Net cash provided by operating activities for the six months ended June 25, 2006 was $5,140,000, which was primarily due to the increase of sales in the six months. Also, the decreased cost of wheat contributed to higher cash flow from operations. Net cash provided by financing activities of $1,073,000 for the six months ended June 25, 2006 was mainly due to the additional capital derived from the exercise of stock options.

Net cash used in investing activities for the six months ended June 25, 2006 was $8,354,000, which primarily resulted from the acquisition of the Chengdu Plant and the expansion of the Longyuan packing plant.

Off-Balance Sheet Arrangements

We have never entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Contractual Obligations and Commercial Commitments

On July 11, 2005, we issued 6,000 shares of Series A Preferred Stock, convertible into an aggregate of 6,315,789 shares of Class A Common Stock at a conversion price of $0.95 per share, raising $6.0 million in gross proceeds.

On December 22, 2005, we issued 9,500 shares of Series B Preferred Stock, convertible into an aggregate of 5,937,500 shares of Class A Common Stock at a conversion price of $1.60 per share, raising $9.5 million in gross proceeds.

The key terms of the Series A Preferred Stock and Series B Preferred Stock are as follows:

	Series A Preferred Stock	Series B Preferred Stock

Preferred Dividend	7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.	7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.

Redemption	July 11, 2010 Beginning on the 24th month following closing and each month thereafter, the Company shall redeem 1/37th of the face value of the Preferred Stock in either cash or Class A Common Stock valued at 90% of the volume-weighted current market price.	December 22, 2010 Beginning at the end of the 24th month following closing and on each third monthly anniversary of that date (quarterly) thereafter, the Company shall redeem 1/13th of the face value of the Preferred Stock in either cash or Class A Common Stock valued at 90% of the volume-weighted current market price.

Mandatory Conversion	The Company may at any time force the conversion of the Preferred Stock if the volume-weighted current market price of the Class A Common Stock exceeds 300% of the then applicable conversion price.	The Company may at any time force the conversion of the Preferred Stock if the volume-weighted current market price of the Class A Common Stock exceeds 200% of its price at issuance of the Preferred Stock.

Registration	The Company shall file to register the underlying Class A common shares within 30 days of the closing date and make its best effects to have the Registration declared effective at the earliest date. In the event such Registration is not continuously effective during the period such shares are subject to transfer restrictions under the U.S. federal securities laws, then (subject to certain exceptions) the holders are entitled to receive liquidated damages equal to 2.0% of the purchase price of the Preferred Stock per month.	The Company shall file to register the underlying Class A common shares with 30 days of the closing date and make its best effects to have the Registration declared effective at the earliest date. In the event such Registration is not continuously effective during the period such shares are subject to transfer restrictions under the U.S. federal securities laws, then (subject to certain exceptions) the holders are entitled to receive liquidated damages equal to 2.0% of the purchase price of the Preferred Stock per month.

Anti-dilution	In the event the Company issues at any time while Preferred Stock are still outstanding Common Stock or any type of securities giving rights to Common Stock at a price below the Issue Price, the Company agrees to extend full-ratchet anti-dilution protection to the investors.	In the event the Company issues at any time while Preferred Stock are still outstanding Common Stock or any type of securities giving rights to Common Stock at a price below the Issue Price, the Company agrees to extend full-ratchet anti-dilution protection to the investors.

As of June 25, 2006, we had long-term debt obligations that resulted from the mandatorily redeemable convertible preferred stock and had operating leases for manufacturing and warehouse facilities expiring at various dates through February 2009 and other commitments and long-term liabilities through August 2049 as follows:

		Payment Obligations By Period
		2006 (a)		2007		2008		2009		2010		Thereafter		Total
		(In thousands)

Mandatorily redeemable convertible preferred stock	$	--	$	545	$	3,796	$	3,796	$	4,045	$	--	$	12,182
Operating lease obligations		31		62		62		10		--		--		165
Acquisition of property, plant and equipment		128		--		--		--		--		--		128
Pre-determined annual fee charged by joint venture partners		55		111		111		111		111		3,877		4,376
Total		214		718		3,969		3,917		4,156		3,877		16,851

(a) Remaining 6 months in 2006.

Reconciliation of the outstanding payment obligations of mandatorily redeemable convertible preferred stock:

		(In thousands)
Aggregated balance as of the issue date	$	15,500
Partial redemption of Series A Preferred Stock in 2005		1,900
Partial redemption of Series A & B Preferred Stock in 2006		1,418
	$	12,182

Recent Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140”, that provides guidance on accounting for separately recognized servicing assets and servicing liabilities. In accordance with the provision of SFAS No. 156, separately recognized servicing assets and servicing liabilities must be initially measured at fair value, if applicable. Subsequent to initial recognition, the company may use either the amortization method or the fair value measurement method to account for servicing assets and servicing liabilities within the scope of this Statement. SFAS No. 156 is effective as of the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company will adopt SFAS No. 156 in fiscal year 2007. The adoption of this Statement is not expected to have a material effect on the Company’s consolidated financial statements.

RISK FACTORS

The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that the Company currently deemed immaterial also may impair the Company’s business operations. If any of the following risks occur, the Company’s business prospects, financial condition, operating results and cash flows could be adversely affected in amounts that could be material.

We have never paid dividends on our Class A Common Stock.

We have never declared or paid any dividends on our Class A Common Stock. The declaration and payment in the future of any cash or stock dividends on the Class A Common Stock will be at the discretion of our Board of Directors and will depend upon a variety of factors, including our ability to service our outstanding indebtedness, if any, and to pay dividends on securities ranking senior to the Class A Common Stock, including the shares of our outstanding preferred stock, our future earnings, if any, capital requirements, financial condition and such other factors as our Board of Directors may consider to be relevant from time to time. Factors including, but not limited to, outstanding indebtedness, payment of dividends on securities ranking senior to the Class A Common Stock, decreases in our future earning, increases in capital requirements, and negative results of our financial conditions may restrict our ability to declare or pay any dividends on our Class A Common Stock in the future. We currently intend to retain our future earnings to support operations and therefore do not expect to declare or pay any dividends on our Class A Common Stock in the foreseeable future.

We are controlled by our majority shareholder, which is controlled by our Chairman.

We are controlled by our major shareholder, which is controlled by our Chairman, Mr. Lu. As of June 25, 2006, Mr. Lu owns 100% of the equity interests of New Dragon Asia Food Ltd, which is our majority shareholder. As a result, Mr. Lu through his equity ownership effectively exercises control over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership might also have the effect of delaying or preventing a change in control of us that may not be viewed as beneficial by other shareholders.

Our primary source of funds for dividends and other distributions from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties, and our ability to pay dividends or make other distributions to our shareholders are negatively affected by those restrictions and uncertainties

We are a holding company established in the state of Florida and conduct our core business operations through our operating subsidiaries, Mix Creation Ltd., Rich Delta Ltd. and Keen General Ltd. and their respective subsidiaries in China (collectively, the “Subsidiaries”). As a result, our profits available for distribution to our shareholders are dependent on the profits available for distribution from the Subsidiaries. If the Subsidiaries incur debt on their own behalf, the debt instruments may restrict their ability to pay dividends or make other distributions, which in turn would limit our ability to pay dividends on our shares. Under the current PRC laws, because we are incorporated in the State of Florida, our PRC subsidiaries are each regarded as a wholly foreign-owned enterprise in China. Although dividends paid by foreign invested enterprises, such as wholly foreign-owned enterprises and Sino-foreign joint ventures, are not subject to any PRC corporate withholding tax, the PRC laws permit payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant aspects, such as the use of different principles for recognition of revenues and expenses. In addition, distribution of additional equity interests by any of our PRC subsidiaries to us (which is credited as fully paid through capitalization of the PRC subsidiaries’ undistributed profits) requires additional approval of the PRC government due to an increase in our registered capital and total investment in the subsidiary. Under the current PRC laws, each of our subsidiaries is required to set aside a portion of its net income each year to fund designated statutory reserve funds. These reserves are not distributable as cash dividends. As a result, our primary internal source of funds for dividend payments from the subsidiaries are subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders. Moreover, any transfer of funds from us to the subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds between us and the subsidiaries could restrict our ability to act in response to changing market conditions.

Recent regulations relating to offshore investment activities by PRC residents may adversely affect our business and prospects

On September 8, 2006, several agencies of the PRC government issued a new regulation concerning restrictions on investments in China through special purpose companies incorporated overseas and the listing of the shares of those companies in overseas markets. The regulation contains a number of provisions relating to the acquisition of Chinese domestic companies which involve “important industries” and may affect the national economic safety or result in the transfer of actual control rights of any company having “famous brands” or any “old established Chinese brands,” and require that the parties to any such transaction report to the Ministry of Commerce for approval. Additionally, any foreign company directly or indirectly controlled by Chinese companies or individuals used as a vehicle for public listing in an overseas stock market will need China Securities Regulatory Commission approval in connection with such listing. As it is uncertain how this new regulation will be interpreted or implemented, we cannot predict how this regulation will affect our business operations or future strategies. For example, we may be subject to a more stringent review and approval process with respect to our acquisition activities, which may adversely affect our business and prospects.

RISKS RELATED TO OUR BUSINESS

Our business may experience adverse effects from competition in the noodle, flour and soybean product markets.

The noodle, flour and soybean product markets in the PRC are highly competitive. Competition in these markets takes many forms, including the following:

-	establishing favorable brand recognition;

-	developing products sought by consumers;

-	implementing appropriate pricing;

-	providing strong marketing support; and

-	obtaining access to retain outlets and sufficient shelf space.

Many of our competitors are larger and have greater financial resources, including our primary competitors, the manufactures of each of the brand names “Master Kang” and “President”. We may not be able to compete successfully with such competitors. Competition could cause us to lose our market share, increase expenditures or reduce pricing, each of which could have a material adverse effect on our business and financial results.

An inability to respond quickly and effectively to new trends would adversely impact our competitive position.

Our failure to maintain our technological capabilities or to respond effectively to technological changes could adversely affect our ability to retain existing business and secure new business. We will need to constantly seek out new products and develop new solutions to maintain in our portfolio. If we are unable to keep current with new trends, our competitors’ technologies or products may render us noncompetitive and our products obsolete.

Increases in prices of main ingredients and other materials could adversely affect our business.

The main ingredients that we use to manufacture our products are wheat, soybeans and eggs. We also use paper products, such as corrugated cardboard, as well as films and plastics, to package our products. The prices of these materials have been, and we expect them to continue to be, subject to volatility. We may not be able to pass price increases in these materials onto our customers, which could have an adverse effect on our financial results.

We are subject to risks associated with joint ventures and third party agreements.

We conduct certain of our milling and sales operations through joint ventures established with certain Chinese parties. Any deterioration of these strategic relationships may have an adverse effect on our operation. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

We may have limited legal recourse under Chinese law if disputes arise under our agreements with joint ventures or third parties. The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the government’s experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to product liability claims and product recalls, which could negatively impact its profitability.

We sell food products for human consumption, which involves risks such as product contamination or spoilage, product tampering and other adulteration of food products. We may be subject to liability if the consumption of any of its products causes injury, illness or death. In addition, we will voluntarily recall products in the event of contamination or damage. A significant product liability judgment or a widespread product recall may negatively impact our profitability for a period of time depending on product availability, competitive reaction and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that company products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.

We have limited business insurance coverage.

The insurance industry in China is still in an early stage of development. Insurance companies in China offer limited business insurance coverage. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, management has determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.

We have a limited concentration of credit risk.

Concentration of credit risk with respect to customer receivables is limited due to the large number of customers comprising our customer base, and their dispersion across China. In addition, we perform ongoing credit evaluations of each customer’s financial condition and maintain reserves for potential credit losses. Such losses in the aggregate have not exceeded management’s expectations.

We may experience risks resulting from our plans for expansion.

We have acquired several companies and businesses and may continue to acquire companies in the future. Entering into an acquisition entails many risks, any of which could harm our business, including: (a) diversion of management’s attention from other business concerns; (b) failure to integrate the acquired company with our existing business; (c) additional operating expenses not offset by additional revenue; and (d) dilution of our stock as a result of issuing equity securities.

If we are unable to implement our acquisition strategy, we may be less successful in the future. A key component of our growth strategy is accomplished by acquiring additional flour and noodle factories and, if our recent acquisition of a soybean business proves successful, our acquisition strategy may expand to include future acquisitions of soybean business. While there are many such companies, we may not always be able to identify and acquire companies meeting our acquisition criteria on terms acceptable to us. Additionally, financing to complete significant acquisitions may not always be available on satisfactory terms. Further, our acquisition strategy presents a number of special risks to us that we would not otherwise contend with absent such strategy, including possible adverse effects on our earnings after each acquisition, diversion of management's attention from our core business due to the special attention that a particular acquisition may require, failure to retain key acquired personnel and risks associated with unanticipated events or liabilities arising after each acquisition, some or all of which could have a material adverse effect on our business, financial condition and results of operations.

RISKS ASSOCIATED WITH DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF CHINA.

We are subject to the risks associated with doing business in the People’s Republic of China.

As most of our operations are conducted in the PRC, we are subject to special considerations and significant risks not typically associated with companies operating in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. Our results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Although the majority of productive assets in the PRC are owned by the Chinese government, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:

-	We will be able to capitalize on economic reforms;

-	The Chinese government will continue its pursuit of economic reform policies;

-	The economic policies, even if pursued, will be successful;

-	Economic policies will not be significantly altered from time to time; and

-	Business operations, in China will not become subject to the risk of nationalization.

Economic reform policies or nationalization could result in a total investment loss in our Class A Common Stock.

Since 1979, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.

Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government has taken measures to curb this excessively expansive economy. These measures include restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets. These measures may adversely affect our manufacturing operations.

To date, reforms to China's economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China's economic system will continue or that we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation and changes in the rate or method of taxation.

On November 11, 2001, China signed an agreement to become a member of the World Trade Organization (“WTO”), the international body that sets most trade rules, further integrating China into the global economy and significantly reducing the barriers to international commerce. China's membership in the WTO was effective on December 11, 2001. China has agreed upon its accession to the WTO to reduce tariffs and non-tariff barriers, remove investment restrictions and provide trading and distribution rights for foreign firms. The tariff rate reductions and other enhancements will enable us to develop better investment strategies. In addition, the WTO's dispute settlement mechanism provides a credible and effective tool to enforce members' commercial rights. Also, with China's entry to the WTO, it is believed that the relevant laws on foreign investment in China will be amplified and will follow common practices.

The Chinese legal system is not fully developed and has inherent uncertainties that could limit the legal protections available to investors.

The Chinese legal system is a system based on written statutes and their interpretation by the Supreme People's Court. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, the PRC government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. Two examples are the promulgation of the Contract Law of the PRC to unify the various economic contract laws into a single code, which went into effect on October 1, 1999, and the Securities Law of the People’s Republic of China, which went into effect on July 1, 1999. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and their non-binding nature, interpretation and enforcement of these laws and regulations involve uncertainties. In addition, as the Chinese legal system develops, changes in such laws and regulations, their interpretation or their enforcement may have a material adverse effect on our business operations.

Enforcement of regulations in China may be inconsistent.

Although the Chinese government has introduced new laws and regulations to modernize its securities and tax systems on January 1, 1994, China does not yet possess a comprehensive body of business law. As a result, the enforcement, interpretation and implementation of regulations may prove to be inconsistent and it may be difficult to enforce contracts.

We may experience lengthy delays in resolution of legal disputes.

As China has not developed a dispute resolution mechanism similar to the Western court system, dispute resolution over Chinese projects and joint ventures can be difficult and there is no assurance that any dispute involving our business in China can be resolved expeditiously and satisfactorily.

We may experience an impact of the United States Foreign Corrupt Practices Act on our business.

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits Unites States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. We have attempted to implement safeguards to prevent and discourage such practices by our employees and agents. We cannot assure you, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

Impact of governmental regulation on our operations.

We may be subjected to liability for product safety that could lead to a product recall. Our operations and properties are subject to regulation by various Chinese government entities and agencies. As a producer of food products, our operations are subject to production, packaging, quality, labeling and distribution standards. Our production and distribution facilities are also subject to various local environmental laws and workplace regulations.

We believe that our current legal and environmental compliance programs adequately address such concerns and that we are in compliance with applicable laws and regulations. However, compliance with, or any violation of, current and future laws or regulations could require material expenditures or otherwise adversely affect our business and financial results.

We may be liable if the consumption of any of our products cause injury, illness or death. We may also be required to recall certain of our products that become contaminated or are damaged. We are not aware of any material product liability judgment against us. However, a product liability judgment or a product recall could have a material adverse effect on our business or financial results.

It may be difficult to serve us with legal process or enforce judgments against our management or us.

All of our assets are located in China. In addition, all of our directors and officers are non-residents of the United States, and all, or substantial portions of the assets of such non-residents, are located outside the United States. As a result, it may not be possible to effect service of process within the United States upon such persons. Moreover, there is doubt as to whether the courts of China would enforce:

-	Judgments of United States courts against us, our directors or our officers based on the civil liability provisions of the securities laws of the United States or any state; or

-	Original actions brought in China relating to liabilities against non-residents or us based upon the securities laws of the United States or any state.

The Chinese government could change its policies toward private enterprise or even nationalize or expropriate it, which could result in the total loss of your investment.

Our business is subject to significant political and economic uncertainties and may be adversely affected by political, economic and social developments in China. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice. Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business. Nationalization or expropriation could even result in the total loss of our investment in China and in the total loss of your investment.

If relations between the United States and China worsen, our stock price may decrease and we may have difficulty accessing U.S. capital markets.

At various times during recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could adversely affect the market price of our Class A Common Stock and our ability to access U.S. capital markets.

The Chinese economic, political and social conditions as well as government policies could affect our business.

All of our business, assets and operations are located in China. The economy of China differs from the economies of most developed countries in many respects, including:

-	Government involvement

-	Level of development

-	Growth rate

-	Control of foreign exchange; and

-	Allocation of resource

The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China are still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

The economy of China has experienced significant growth in the past 20 years, but growth has been uneven both geographically and among various sectors of the economy. The Chinese government has implemented various measures from time to time to control the rate of economic growth. Some of these measures benefit the overall economy of China, but may have a negative effect on us. For example, our operating results and financial condition may be adversely affected by:

-	Changes in the rate or method of taxation

-	Imposition of additional restrictions on currency conversion and remittances abroad

-	Reduction in tariff or quota protection and other import restrictions; and

-	Changes in the usage and costs of state-controlled transportation services

Fluctuations in the value of the Chinese Renminbi relative to foreign currencies could affect our operating results.

Substantially all our revenues and expenses are denominated in the Chinese Renminbi. However, we use the United States dollar for financial reporting purposes. The value of Chinese Renminbi against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The Chinese government recently announced that it is valuing the exchange rate of the Chinese Renminbi against a number of currencies, rather than just exclusively to the United States dollar. Although the Chinese government has stated its intention to support the value of the Chinese Renminbi, we cannot assure you that the government will not revalue it. As our operations are primarily in China, any significant revaluation of the Chinese Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert United States dollars into Chinese Renminbi for our operations, appreciation of this currency against the United States dollar could have a material adverse effect on our business, financial condition and results of operation. Conversely, if we decide to convert our Chinese Renminbi into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the Chinese Renminbi would be reduced. To date, we have not engaged in any hedging transactions in connection with our operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We may be exposed to changes in financial market conditions in the normal course of business. Market risk generally represents the risk that losses may occur as a result of movements in interest rates and equity prices. We currently do not use financial instruments in the normal course of business that are subject to changes in financial market conditions.

Currency Fluctuations and Foreign Currency Risk

The majority of our operations are conducted in the PRC except for some minor export business and limited overseas purchases of raw materials. Most of our sales and purchases are conducted within the PRC in Chinese Renminbi (“R MB”). Hence, the effect of the fluctuations of exchange rate is considered minimal to our business operations.

Although the Chinese government regulations now allow convertibility of RMB for current account transactions, significant restrictions still remain such as complicated document inspection, limited foreign current balance. Hence, such translations should not be construed as representations that RMB could be converted into U.S. dollars at that rate or any other rate.

Interest Rate Risk

We do not have significant interest rate risk, as our debt obligations are primarily short-term in nature, with fixed interest rates.

Credit Risk

We have not experienced significant credit risk as most of our customers are long-term customers with good payment records. Our receivables are regularly monitored by our credit manager.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of December 25, 2005, the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to us and our consolidated subsidiaries, and was made known to others within those entities, particularly during the period when this report was being prepared.

Changes in internal controls over financial reporting

There were no significant changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended June 25, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Other Information

In August 2004, we appointed a consulting firm to assist the management team to strengthen and to document our internal controls and processes with the objective of full compliance with the Sarbanes - Oxley Act. This project is scheduled to be completed in late 2006.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There have been no material changes in our business, operations or prospects that would require a change to the Risk Factor disclosure included in our most recent Annual Report on Form 10-K that have not already been disclosed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit Number		Description

31.1		Certification of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-15(E) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13A-14(A)/15D-15(E) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.

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.


	NEW DRAGON ASIA CORP.

Dated: September 28, 2006	By:	/s/ Li Xia Wang
		Name: Li Xia Wang
		Title: Chief Executive Officer



Dated: September 28, 2006	By:	/s/ Peter Mak
		Name: Peter Mak
		Title: Chief Financial Officer