U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-QSB

     [X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
          ACT OF 1934

          For  the quarterly period ended March 31, 2006

                                       OR

     [ ]  TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
          ACT OF 1934

                  For the transition period from _____ to _____

                         Commission file number 0-27937

                           DRAGON PHARMACEUTICAL INC.
        (Exact name of small business issuer as specified in its charter)


                Florida                                   65-0142474
    (State or other jurisdiction of            (IRS Employer Identification No.)
    incorporation or organization)



                      1055 West Hastings Street, Suite 1900
                           Vancouver, British Columbia
                                 Canada V6E 2E9
                    (Address of principal executive offices)

                            (604) 669-8817 (Issuer's
                                telephone number)

                  (Former address if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be  filed by  Section  13 or 15(d) of the  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 [ ]

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

Number of shares of common stock outstanding as of March 31, 2006: 62,878,004


<PAGE>


                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements


                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                   AS AT MARCH 31, 2006 AND DECEMBER 31, 2005
                       (UNAUDITED) Expressed in US Dollars
                        (Basis of Presentation - Note 1)



                                    CONTENTS



     PAGE 3         CONSOLIDATED  BALANCE  SHEETS  AS  AT  MARCH  31,  2006  AND
                    DECEMBER 31, 2005

     PAGE 4         CONSOLIDATED  STATEMENTS  OF  OPERATIONS  AND  COMPREHENSIVE
                    INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

     PAGE 5         CONSOLIDATED  STATEMENTS  OF  STOCKHOLDERS'  EQUITY  FOR THE
                    YEARS ENDED MARCH 31, 2006 AND DECEMBER 31, 2005

     PAGE 6         CONSOLIDATED  STATEMENTS  OF CASH FLOWS FOR THE YEARS  ENDED
                    MARCH 31, 2006 AND 2005

     PAGES 7 - 24   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       2

<PAGE>
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>

                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                   AS AT MARCH 31, 2006 AND DECEMBER 31, 2005
                       (UNAUDITED) Expressed in US Dollars
                        (Basis of Presentation - Note 1)


                                                                     ASSETS
                                                                     ------
                                                                                                                        December 31,
                                                                               Notes           March 31, 2006               2005
                                                                             ----------      -------------------      --------------
CURRENT ASSETS
  Cash and cash equivalents                                                     18        $           1,530,159    $    1,311,378
  Restricted cash                                                              11,18                  1,853,955         3,327,829
  Accounts receivable, net of allowances                                         2                    9,986,162         7,906,720
  Inventories, net                                                               3                   14,108,221        14,131,735
  Prepaid expenses                                                                                    1,261,108         1,316,688
                                                                                             -------------------      --------------
      Total Current Assets                                                                           28,739,605        27,994,350
                                                                                             -------------------      --------------

 PROPERTY AND EQUIPMENT, NET                                                    4,9                  69,964,853        69,227,688
 OTHER ASSETS
  Intangible assets, net                                                         6                    3,234,007         3,367,066
  Investments -cost                                                                                      12,446            12,392
  Goodwill                                                                                              965,000           965,000
                                                                                             -------------------      --------------
      Total Other Assets                                                                              4,211,453         4,344,458
                                                                                             -------------------      --------------
TOTAL ASSETS                                                                              $         102,915,911    $   101,566496
------------                                                                                 ===================      ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                                                        $           7,130,543    $    6,476,539
  Accrued retirement benefits                                                    7                       84,470            90,714
  Other payables and accrued liabilities                                         8                   20,157,901        17,866,466
  Loans payable - short-term                                                     9                   16,027,380        13,479,554
  Notes payable                                                                 10                    1,853,955         3,327,829
  Due to related companies                                                      11                       62,553            61,993
                                                                                             -------------------      -------=------
      Total Current Liabilities                                                                      45,316,802        41,303,095
                                                                                             -------------------      --------------

LONG-TERM LIABILITIES
  Long term accounts payable                                                    12                   10,045,185        12,216,832
  Long term retirement benefits                                                  7                      562,860           620,396
  Loans payable - long-term                                                      9                   12,842,133        14,596,396
                                                                                             -------------------      --------------
      Total Long-Term Liabilities                                                                    23,450,178        27,433,624
                                                                                             -------------------      --------------
TOTAL LIABILITIES                                                                                    68,766,980        68,736,719
                                                                                             -------------------      --------------

COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' EQUITY
  Authorized: 200,000,000 common shares at par value of $0.001 each
  Issued and outstanding: 62,878,004 common shares                                                       62,878            62,878
  Additional paid-in capital                                                                         24,408,348        24,317,830
  Retained earnings                                                                                   6,193,404         5,099,891
  Reserves                                                                                            2,628,008         2,628,008
  Accumulated other comprehensive income                                                                880,222           750,102
  Due from stockholders                                                                                (23,929)           (28,932)
                                                                                             -------------------      --------------
       Total Stockholders' Equity                                                                    34,148,931        32,829,777
                                                                                             -------------------      --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                $         102,915,911    $  101,566,496
------------------------------------------                                                   ===================      ==============

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

                                       3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>

                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                            AND COMPREHENSIVE INCOME
               FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
                       (UNAUDITED) Expressed in US Dollars

                                                               Note             2006                 2005
                                                              -------      ---------------      ----------------

NET SALES                                                       13      $      16,637,377    $       11,828,663

COST OF SALES                                                                  12,407,835             8,619,484
                                                                           ---------------      ----------------

GROSS PROFIT                                                                    4,229,542             3,209,179
                                                                           ---------------      ----------------
OPERATING EXPENSES
Selling expense                                                                 1,593,756             1,143,967
General and administrative expenses                                             1,681,840             1,004,141
Depreciation and amortization                                                     289,737               243,932
                                                                           ---------------      ----------------
      Total Operating Expenses                                                  3,565,333             2,392,040
                                                                           ---------------      ----------------

INCOME FROM OPERATIONS                                                            664,209               817,139

OTHER INCOME (EXPENSE)
Interest expense                                                12              (896,580)             (241,051)
Other income                                                  14(A)             1,477,180                11,084
Funds Released by Chinese Government Liquidator               14(B)                     -               885,864
Other expense                                                                     (7,260)              (35,534)
                                                                           ---------------      ----------------
Total other income                                                                573,340               620,363
                                                                           ---------------      ----------------
INCOME BEFORE TAXES                                                             1,237,549             1,437,502

INCOME TAX EXPENSE                                                              (144,036)             (196,746)
                                                                          ---------------      ----------------

NET INCOME                                                                      1,093,513             1,240,756
OTHER COMPREHENSIVE INCOME
Foreign currency translation                                                      130,120                     -
                                                                           ---------------      ----------------

COMPREHENSIVE INCOME                                                    $       1,223,633    $        1,240,756
                                                                           ===============      ================

Earnings  per share - basic and diluted                                 $            0.02    $             0.02
                                                                           ===============      ================
Weighted average number of shares outstanding during the
year - basic and diluted                                                       62,878,004            60,427,871
                                                                           ===============      ================


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

</TABLE>

                                        4
<PAGE>
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>     <C>    <C>    <C>

                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND THE YEAR ENDED DECEMBER 31, 2005
                       (UNAUDITED) Expressed in US Dollars



                                                                                                  Accumulated
                                             Common Stock     Additional                             other
                                        ---------------------   Paid-In    Retained                  compre-    Due from
                                          Shares     Amount     Capital    Earnings   Reserves   hensive loss Stockholder   Total
                                        ----------  --------- ----------- ----------- ---------- ------------ ---------- ----------
Balance, December 31, 2004,             44,502,004  $44,502   $13,983,002  $       -  $7,562,432  $       -   $(52,149)  $21,537,787
adjusted for the effect of
recapitalization of reverse
acquisition (Note 5)

Reverse acquisition (Note 5)            18,376,000   18,376     7,919,370          -           -          -          -    7,937,746

Related party debt settled for
equity (Note 17)                                 -        -     2,415,458          -           -          -          -    2,415,458

Notes receivable - stockholders                  -        -             -          -           -          -     23,217       23,217
Comprehensive income (loss)

- foreign currency translation                   -        -             -          -           -      750,102        -      750,102
Transfer from appropriated
earnings - to retained earnings                                            5,204,022   (5,204,022)          -        -            -
              - to liabilities                   -        -             -          -      (17,103)          -        -      (17,103)
Transfer from retained earnings for
reserves (Note 16(B))                            -        -             -   (286,701)      286,701          -        -            -
Net income for the year ended
December 31, 2005                                -        -             -    182,570             -          -        -      182,570
                                        ----------  --------- ----------- -----------   ---------- ---------- ---------- ----------
Balance, December 31, 2005              62,878,004  $  62,878  24,317,830  5,099,891     2,628,008   750,102   (28,932)  32,829,777
Notes receivable - stockholders                  -          -           -          -             -         -     5,003        5,003
Comprehensive income (loss)
 - foreign currency translation                  -          -           -          -             -   130,120         -      130,120
Stock compensation expense                       -          -      90,518          -             -         -         -       90,518
Net income for the period                        -          -           -  1,093,513             -         -         -    1,093,514
                                        ----------  --------- ----------- -----------   ---------- ---------- ---------- ----------
Balance, March 31, 2006                 62,878,004  $  62,878 $24,408,348 $ 6,193,404   $2,628,008  $ 880,222  $(23,929) $34,148,931
                                        ==========  ========= =========== ===========   ========== ========== ========== ===========


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

                                        5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>


                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
                       (UNAUDITED) Expressed in US Dollars

                                                                                                        2006            2005
                                                                                                  --------------  ---------------
 CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
   Net income                                                                                     $    1,093,513  $     1,240,756
   Adjustments to reconcile net income to net cash provided by (used in) operating activities:
     Depreciation and amortization                                                                     1,509,512        1,410,985
     Provision for doubtful accounts                                                                     160,823           12,610
     Stock compensation expense                                                                           90,518                -
     Provision for obsolete inventories                                                                        -          476,583
     Gain on disposal of cell line (Note 14(A))                                                       (1,000,000)               -
      Proceed on disposition of assets                                                                    27,658                -
      Funds Released by Chinese Government Liquidator (Note 14)                                                -         (745,828)
   Changes in operating assets and liabilities, net of effect of reverse acquisition (Note 5)
       Accounts receivable                                                                            (2,200,960)        (725,437)
       Inventories                                                                                        84,850          146,990
       Value added tax receivable                                                                              -          162,443
       Prepaid expenses                                                                                   60,960         (142,364)
       Other receivables                                                                                       -         (214,722)
     Accounts payable                                                                                    (43,682)          90,780
     Other payables and accrued expenses                                                                 637,531          160,585
                                                                                                   --------------  ---------------
         Net Cash Provided By (Used In) Operating Activities                                             893,065         1,873,381
                                                                                                   --------------  ---------------

 CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
   Purchase of property and equipment                                                                 (1,876,998)         (782,134)
   Proceeds on disposition of assets                                                                     527,658                 -
   Cash and cash equivalents acquired in connection with reverse acquisition  (Note 5                          -         2,103,481
                                                                                                  --------------   ---------------
          Net Cash Provided By (Used In) Investing Activities                                         (1,349,340)       1,321,347
                                                                                                  --------------   ---------------

 CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
   Proceeds from loans payable                                                                           669,516           603,865
   Due to related companies                                                                               (3,605)       (2,946,138)
   Due from stockholder                                                                                    5,009           175,999
                                                                                                  --------------   ---------------
         Net Cash Provided By (Used In)  Financing Activities                                            670,920        (2,319,915)
                                                                                                  --------------   ---------------

 LOSS ON TRANSLATION OF FOREIGN CURRENCY                                                                   4,136                 -
                                                                                                  --------------   ---------------

 NET INCREASE IN CASH AND CASH EQUIVALENTS                                                               218,781           874,813
 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                      1,311,378           910,425
                                                                                                  --------------   ----------------

 CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                       $    1,530,159   $     1,785,238
                                                                                                  ==============   ================

 Cash paid during the period for interest expense                                                 $      416,429   $       245,373
                                                                                                  ==============   ================
 Cash paid during the period for income taxes                                                     $       98,877   $       166,495
                                                                                                  ==============   ================


SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During  March  2005,  $2,415,458  of loans  payable  to an entity  related  to a
director of the Company was converted into equity of the Company (Note 17).

The Company capitalized  interest of $39,163 and $79,012 during the three months
ended March 31, 2006 and 2005, respectively.

The Company recognized  non-cash imputed interest of $508,292 and $nil the three
months ended March 31, 2006 and 2005, respectively.

</TABLE>

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

                                       6
<PAGE>

                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                       (UNAUDITED) Expressed in US Dollars

NOTE 1    BASIS OF PRESENTATION

          (A) The accompanying  unaudited interim  consolidated  balance sheets,
          statements  of  operations,   stockholders'   equity  and  cash  flows
          reflected all adjustments,  consisting of normal recurring adjustments
          and  other  adjustments,  that  are,  in the  opinion  of  management,
          necessary for a fair  presentation  of the  financial  position of the
          Company,  at March 31, 2006,  and the results of  operations  and cash
          flows for the interim periods ended March 31, 2006 and 2005.

          The accompanying  unaudited interim consolidated  financial statements
          have  been  prepared  in  conformity  with  U.S.   generally  accepted
          accounting principles,  which contemplate  continuation of the Company
          as a going concern. The Company has a current liabilities in excess of
          current assets, however, the Company has developed and is implementing
          a plan to decrease  its debt and increase  its working  capital  which
          will allow the Company to continue operations.

          To meet these objectives,  the Company plans to seek additional equity
          through the conversion of some of its liabilities and expects to raise
          funds  through  a  private  investment  in order to  support  existing
          operations and expand the range and scope of its business. The Company
          has  also  significantly   increased  production  levels  to  generate
          additional cash flow under contracted supply agreements.  In addition,
          the Company  intends to continue to renegotiate  and extend loans,  as
          required, when they become due, as has been done in the past. There is
          no assurance  that such  additional  funds will be  available  for the
          Company on  acceptable  terms,  if at all. If  adequate  funds are not
          available or not  available on  acceptable  terms,  the Company may be
          required to scale back or abandon some activities. Management believes
          that actions  presently  taken provide the opportunity for the Company
          to continue as a going concern. The Company's ability to achieve these
          objectives  cannot be determined at this time.  These conditions raise
          substantial  doubt about the Company's  ability to continue as a going
          concern.  These  financial  statements do not include any  adjustments
          that might result from this uncertainty.

          The accompanying unaudited consolidated financial statements have been
          prepared in accordance  with the  instruction for Form 10-QSB pursuant
          to the rules and  regulations  of Securities  and Exchange  Commission
          and,  therefore,  do not include all  information  and notes  normally
          provided  in  audited  financial  statements  and  should  be  read in
          conjunction with the Company's  consolidated  financial statements for
          the year  ended  December  31,  2005  included  in the  annual  report
          previously filed on Form 10-KSB.

          The results of operations  for the interim  periods  presented are not
          necessarily  indicative  of the  results to be  expected  for the full
          year.

                                      7
<PAGE>

                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                       (UNAUDITED) Expressed in US Dollars

          (B) In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
          Stock-Based  Compensation".  SFAS 123(R) establishes standards for the
          accounting for  transactions  in which an entity  exchanges its equity
          instruments for goods or services. This Statement focuses primarily on
          accounting  for  transactions  in which  an  entity  obtains  employee
          services in share-based  payment  transactions.  SFAS 123(R)  requires
          that the fair  value  of such  equity  instruments  be  recognized  as
          expense  in  the  historical  financial  statements  as  services  are
          performed. Prior to SFAS 123(R), only certain pro-forma disclosures of
          fair value were required.

          SFAS 123(R) was adopted by the Company using the modified  prospective
          transition  method beginning  January 1 2006.  Accordingly  during the
          three  months  ended March 31,  2006 the  Company  recorded a non-cash
          stock based compensation  expense for awards granted prior to, but not
          yet  vested,  as of  January  1,  2006,  as if the fair  value  method
          required  for pro forma  disclosure  under FAS 123 were in effect  for
          expense recognition  purposes.  This resulted in $90,518 being charged
          to income during the current period, whereas $1,077,381 was charged on
          a pro forma basis in the prior period (Note 16(C)).  The effect of the
          adoption  of  SFAS  123(R)  on the  Company's  consolidated  financial
          statements  of the current  period is a  reduction  in the income from
          continuing  operations,  income  before income taxes and net income of
          $90,518.  The  adoption of  SFAS123(R)  had no effect on the cash flow
          from  operations,  cash flow from  financing  activities and basic and
          diluted earnings per share.

          In November 2004, the FASB issued SFAS No. 151,  "Inventory  Costs--an
          amendment of ARB No. 43, Chapter 4", which is the result of the FASB's
          project  to  reduce   differences   between  U.S.  and   international
          accounting  standards.  SFAS No. 151  requires  idle  facility  costs,
          abnormal  freight,  handling  costs,  and amounts of wasted  materials
          (spoilage) be treated as current-period  costs. Under this concept, if
          the costs  associated  with the actual level of spoilage or production
          defects are greater than the costs associated with the range of normal
          spoilage or defects, the difference would be charged to current-period
          expense, not included in inventory costs.

          SFAS No. 151 was adopted by the Company  beginning January 1 2006. The
          adoption  of SFAS No.  151 did not  have an  impact  on the  Company's
          consolidated financial statements during the current period and is not
          expected to have an effect in the future.

NOTE 2    ACCOUNTS RECEIVABLE

          Accounts  receivable at March 31, 2006 and December 31, 2005 consisted
          of the following:
<TABLE>
<CAPTION>
<S>     <C>                                                                        <C>                     <C>
                                                                              March 31, 2006          December 31, 2005
                                                                           --------------------      -------------------

          Trade and other receivables                                      $         10,651,810      $         8,409,047
          Less: allowance for doubtful accounts                                         665,648                  502,327
                                                                           --------------------      -------------------
          Accounts receivable, net                                         $          9,986,162      $         7,906,720
                                                                           ====================      ===================

          For the period ended March 31, 2006, the Company  recorded a provision
          for doubtful  accounts of $160,823 in the  Consolidated  Statements of
          Operations compared to $112,610 for the period ended March 31, 2005.

                                       8
<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                       (UNAUDITED) Expressed in US Dollars

NOTE 3    INVENTORIES

          Inventories  at March 31, 2006 and December 31, 2005  consisted of the
          following:

                                                                                 March 31, 2006          December 31, 2005
                                                                             --------------------      -------------------
          Raw materials                                                    $            3,132,224    $           4,144,900
          Work-in-progress                                                              6,432,757                6,280,283
          Finished goods                                                                4,792,534                4,523,663
                                                                             --------------------      -------------------
                                                                                       14,357,515               14,948,846
          Less: provision for obsolescence                                                249,294                  817,111
                                                                             --------------------      -------------------
                                                                           $           14,108,221    $          14,131,735
                                                                             ====================      ===================
</TABLE>

          For the period ended March 31, 2006, the Company  disposed of obsolete
          inventories  resulting  in a recovery of $507,820 in the  Consolidated
          Statements  of  Operations   compared  to  a  provision  for  obsolete
          inventories of $476,583 for the period ended March 31, 2005.

 NOTE 4   PROPERTY AND EQUIPMENT

          The following is a summary of property and equipment at March 31, 2006
          and December 31, 2005:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>

                                                                        March 31, 2006
                                                  -----------------------------------------------------------
                                                                           Accumulated            Net Book
                                                        Cost              Depreciation             Value
                                                   ----------------     ------------------     ---------------
          Plant and equipment                    $       46,869,453   $          8,489,255   $      38,380,198
          Land use rights and buildings                  21,363,673                848,691          20,514,982
          Motor vehicles                                    969,210                150,299             818,911
          Furniture and office equipment                  3,076,960              1,324,011           1,752,949
          Leasehold improvements                              8,487                  2,342               6,145
          Construction in progress                        8,491,668                      -           8,491,668
                                                   ----------------     ------------------     ---------------

                                                $        80,779,451   $         10,814,598   $      69,964,853
                                                   ================     ==================     ===============

</TABLE>
                                       9
<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                       (UNAUDITED) Expressed in US Dollars
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>
                                                                     December 31, 2005
                                                  ---------------------------------------------------------
                                                                         Accumulated            Net Book
                                                       Cost              Depreciation            Value
                                                   ---------------     -----------------     ---------------
         Plant and equipment                     $      46,673,710   $         7,350,550   $      39,323,160
         Land use rights and buildings                  21,312,872               743,593          20,569,279
         Motor vehicles                                    752,919               218,136             534,783
         Furniture and office equipment                  3,066,099             1,252,221           1,813,878
         Leasehold improvements                          1,020,949             1,018,504               2,445
         Construction in progress                        6,984,143                     -           6,984,143
                                                   ---------------     -----------------     ---------------

                                                $      79,810,692   $        10,583,004   $      69,227,688
                                                   ===============     =================     ===============
</TABLE>

          Depreciation expense for periods ended the March 31, 2006 and 2005 was
          $1,370,948 and $1,280,960, respectively. Land use rights and equipment
          with a net book value of $33.1 million are pledged as  collateral  for
          $22.3 million in loans payable (Note 9)

NOTE 5    ACQUISITION OF ORIENTAL WAVE HOLDINGS LIMITED

          The Company  completed the acquisition of Oriental Wave on January 12,
          2005 whereby the Company issued  44,502,004  common shares in exchange
          for all of the issued and  outstanding  shares of Oriental  Wave.  The
          acquisition  represented an important  strategic step in strengthening
          the  competitive  position of the Company.  The  transaction  has been
          approved by the Company's shareholders and the regulatory authorities,
          who also  approved  an  increase in the  authorized  share  capital to
          200,000,000 common shares.

          This transaction  resulted in the former shareholders of Oriental Wave
          owning  68.35% of the issued and  outstanding  shares of the  combined
          entity as of January 12, 2005.  Accounting  principles  applicable  to
          reverse acquisition has been applied to record the acquisition.  Under
          this  basis  of  accounting,   Oriental  Wave  is  the  acquirer  and,
          accordingly,   the   consolidated   entity  is   considered  to  be  a
          continuation  of  Oriental  Wave with the net  assets  of the  Company
          deemed to have been  acquired and recorded at its fair market value of
          approximately $7.9 million.  The Statement of operations  includes the
          results of  Oriental  Wave for the year ended  December  31,  2005 and
          those of the Company from January 13 to December 31, 2005.


               The allocation of the net assets acquired is as follows:


               Cash and cash equivalents                          $   2,103,481
               Accounts receivable                                    1,527,554
               Inventories                                              549,189
               Prepaid and deposits                                     100,421
                                                                ----------------
               Total Current Assets                                   4,280,645
               Property and equipment                                   785,742

                                       10
<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars


               Intangible assets                                      3,380,222
               In-process research and development                      265,000
               Goodwill                                                 965,000
                                                                ----------------
               Total Assets                                           9,676,609
               Less accounts payables and accrued liabilities        (1,738,863)
                                                                ----------------
               Net assets acquired                                 $   7,937,746
                                                                ================

          The intangible assets consist of the production technology and license
          and customer  base acquired and are being  amortized  over a period of
          seven years. The in-process research and development costs of $265,000
          were  written-off  to other expense during the year ended December 31,
          2005, subsequent to the acquisition.

                                       11
<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars


NOTE 6    INTANGIBLE ASSETS

          The Company acquired  $603,865 in licenses from a company related to a
          director  in 2002 with the  balance  being  recorded  pursuant  to the
          reverse acquisition of Oriental Wave (Note 5).

          Intangible  assets  consist of the  following as of March 31, 2006 and
          December 31, 2005:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>

                                                                            March 31, 2006        December 31, 2005
                                                                           ------------------     -------------------


               Production technology                                       $        1,670,223     $         1,670,223
               Product licenses                                                     1,220,815               1,217,905
               Customer base                                                        1,160,000               1,160,000
                                                                           ------------------     -------------------

                                                                                    4,051,038               4,048,128
               Less: accumulated amortization                                         817,031                 681,062
                                                                           ------------------     -------------------

                                                                           $        3,234,007     $         3,367,066
                                                                           ==================     ===================

          Amortization  expense  for  periods  ended March 31, 2006 and 2005 was
          $138,564 and $130,025, respectively.

</TABLE>

                                       12

<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars


NOTE 7    ACCRUED RETIREMENT BENEFITS

          During July 2003,  the Company  acquired Land Use Rights and buildings
          from a  government  liquidator.  The  present  value  of  the  accrued
          retirement benefits assumed is recorded at March 31, 2006 and December
          31, 2005 as follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>

                                                                            March 31, 2006        December 31, 2005
                                                                          -------------------     -------------------
       Total liabilities assumed at closing date                       $          8,897,685    $          8,897,685
       Less: reduction of liability due to re-employment                        (4 ,949,474)            (4 ,949,474)
       Less:  net  present  value  of  liabilities   initially  not
        expected to be paid                                                        (615,304)                (615,304)
                                                                          -------------------     -------------------
       Present value of expected liabilities at closing date                       3,332,907               3,332,907
       Less:  amounts  paid  and  adjustment  for  liabilities  not
        expected to be paid                                                        2,685,577              2,621,797
                                                                          -------------------     -------------------
                                                                                     647,330                711,110
       Less: current portion                                                          84,470                 90,714
                                                                          -------------------     -------------------
                                                                       $             562,860   $            620,396
                                                                          ===================     ===================
</TABLE>

          Under the terms of the contract with the liquidator,  the Company will
          remain  contingently  liable for these  liabilities  until the date of
          retirement or re-employment for each employee (See Notes 15(D)

NOTE 8    OTHER PAYABLES AND ACCRUED LIABILITIES

          Other payables and accrued  liabilities at March 31, 2006 and December
          31, 2005 consist of the following:

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                         March 31, 2006          December 31, 2005
                                                                        ------------------       -------------------
          Machinery and equipment payable                               $        5,212,137       $         4,253,448
          Non-interest bearing demand loans                                      1,968,151                 1,416,357
          Current portion of long term payables                                  6,577,159                 7,157,013
          Accrued expenses                                                       1,021,296                 1,147,101
          Value added tax payables                                                  62,020                   277,052
          Income taxes payable                                                     190,406                   144,499
          Other taxes payable                                                      206,317                   159,809
          Deposits received from customers                                       4,920,415                 3,311,187
                                                                        ------------------       -------------------
                                                                        $       20,157,901       $        17,866,466
                                                                        ==================       ===================
</TABLE>
                                       13
<PAGE>

                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars


NOTE 9   LOANS PAYABLE

          The Loans payable, denominated in Renminbi Yuan, at March 31, 2006 and
          December 31, 2005are as follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>

                                                                                  March 31, 2006           December 31, 2005
                                                                                 ------------------       --------------------

       RMB 4.8 million Loan payable to a bank, interest rate of 8.874% per
        annum, guaranteed by an unrelated third
        party, due April 2006                                               $            597,386     $              594,796

       RMB 15,000,000 Loan payable to a bank, interest rate of 6.138% per annum,
        secured by property and equipment of
        $2.950.480, due April 2006                                                     1,866,833                  1,858,736

       RMB 30 million Loan payable to a bank, interest rate of 6.138% per annum,
        secured by property and equipment of
        $5,123,703, due May 2006                                                       3,733,665                  3,717,472

       RMB 5 million Loan payable to a bank, interest rate of 7.254% per annum,
        secured by property and equipment of
        $1,236,067, due September 2006                                                   622,278                    619,579

       RMB 1.6 million Loan payable to a bank, interest rate of 7.254% per
        annum, secured by property and equipment of
        $661,798, due September 2006                                                     209,085                    208,178

       RMB 52.3 million Loan payable to a bank, interest rate of 6.92% per
        annum, secured by property and equipment of
        $9,281,312, due November 2006                                                  6,509,023                  6,480,793

       RMB 20 million Loan payable to a bank, interest rate of 6.138% per annum,
        secured by property and equipment of
        $10,232,169, due January 2007                                                  2,489,110                          -

       RMB 55 million Loan payable to a bank, interest rate of 6.336% per annum,
        secured by property and equipment of
        $3,582,780, due April 2007                                                     6,845,053                  6,815,366

                                       14
<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                       (UNAUDITED) Expressed in US Dollars


        RMB 38 million  Loan  payable to a company,  non-interest
        bearing and unsecured, due June 30, 2007                                       4,730,158                  4,709,643

        RMB 10.18 million Loan payable to a company, non-interest bearing and
        unsecured, due December 31, 2007
                                                                                       1,266,922                  3,071,387
                                                                               ------------------       --------------------
                                                                                      28,869,513                 28,075,950
        Less current maturities                                                       16,027,380                 13,479,554
                                                                               -----------------        --------------------

                                                                               $      12,842,133        $         14,596,396
                                                                               =================        ====================
        Maturities are as follows:
                                 Fiscal year ended December 31,
                                              2006                                                      $        13,538,270
                                              2007                                                               15,331,243
                                                                                                        --------------------

                                                                                                        $        28,869,513
                                                                                                        ====================
</TABLE>

                                       15
<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars


N0TE 10   NOTES PAYABLE

          Shanxi  Weiqida  has in place a  banking  facility  where its bank has
          issued a number of bon-  interest  bearing notes payable to vendors of
          Shanxi  Weiqida  totaling  $1,853,955,  due between May and July 2006.
          These  notes,  are secured by  $1,853,955  in bank  deposits of Shanxi
          Weiqida  and the bank  deposits  may be used only for the  purpose  of
          repaying the notes.

NOTE 11   DUE TO RELATED PARTIES

          The amounts due to related  parties at March 31, 2006 and December 31,
          2005 are due to the  spouse  of a  shareholder  and  director  and are
          unsecured and non-interest bearing.

NOTE 12   LONG TERM ACCOUNTS PAYABLE

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>

                                                                             March 31,           December 31,
                                                                               2006                  2005
                                                                          --------------       ---------------
          Non interest  bearing  amounts  payable to
          contractors  related to the acquisition of plant
          and equipment.  The amounts have been  discounted
          using a rate of 6.5% as a result of term
          modifications  made in 2005. The  discount  has been
          applied  against  the cost of the  plant  and
          equipment acquired. Due dates range from April 30, 2007
          through December 31, 2008.                                     $   10,045,185        $   12,216,832
                                                                         ==============        ==============

          During the period the Company  accreted  interest  of  $508,292  (2005 $Nil).

          Future annual payments are as follows:

                                  2007                                  $    1,604,515

                                  2008                                       9,969,227
                                                                        ---------------
                                                                        $   11,573,742
                                                                        ===============

</TABLE>

                                       16
<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars

NOTE 13   SEGMENTS

          The  Company  operates  in  three  reportable  segments,   the  Pharma
          Division,  Chemical Division and Biotech Division. The Pharma Division
          produces chemical generic, mainly anti-infectious, drugs. The Chemical
          Division produces the bulk intermediate or ingredient to sell to other
          pharmaceutical  companies for further  processing and formulation into
          finished  products.  The Biotech Division  produces  Erythropoietin or
          EPO, an  injection  that  stimulates  red blood cell.  The  accounting
          policies of the  segments  are the same as described in the summary of
          significant   accounting  policies.   The  Company  evaluates  segment
          performance  based on gross  profit.  All  sales by  division  were to
          external  customers (see Note 18 also). As a result, the components of
          gross profit for one segment may not be comparable to another segment.
          The following is a summary of the Company's  segment  information  for
          the three  months  ended  March 31,  2006 and 2005 and as of March 31,
          2006 and December 31, 2005.
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>


                                                  Chemical             Pharma             Biotech
                                                  Division            Division           Division              Total
                                               ---------------     ---------------     --------------     ----------------
2006
Sales                                       $      11,475,377   $       4,564,245   $        597,755  $        16,637,377
Gross profit                                        2,218,876           1,578,208            432,458            4,229,542
Depreciation and amortization                       1,167,706             173,390            168,416            1,509,512
As at March 31, 2006
Total assets                                        77,567,977          17,895,309         7,452,625          102,915,911
Additions to long-lived assets                       1,813,213              10,267            53,518            1,876,998
Intangible assets                                       46,329             368,179         2,819,499            3,234,007

2005
Three months ended March 31, 2005
Sales                                       $        5,704,033   $       5,320,771   $       803,859  $        11,828,663
Gross profit                                            34,425           2,508,222           666,532            3,209,179
Depreciation and amortization                        1,057,587             153,804           199,594            1,410,985
As at December 31, 2005
Total assets                                       75, 831,748          17,601,551         8,133,197          101,566,496
Additions to long-lived assets                      10,238,939             116,961         1,800,151           12,156,051
Intangible assets                                       47,336             382,072         2,937,658            3,367,066

</TABLE>

                                       17
<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars

NOTE 14   OTHER INCOME

          (A) Cell Line Development
          -------------------------
          The Company has contracted with a European  Institute of Biotechnology
          to develop a high yield  proprietary cell line and production  process
          technology for the Company. Product from this advanced technology will
          be used by the  Company to enter the  European  market,  once  certain
          competitor's  patents expire. The total contracted cost to develop the
          cell  line was  $592,000  (EUROS  500,000)  of which  $355,000  (EUROS
          300,000) was unpaid.

          In,  January  2006,  the Company  disposed  of the cell line,  and all
          applicable  obligations  relating,  thereto,  being  developed for the
          Company  to enter  the  European  market.  The cell line was sold to a
          Company  controlled  by a  Director  of the  Company  who was also the
          President of the Company prior to the transaction. The cell line had a
          carrying value of $0 and was sold for $1 million,  resulting in a gain
          of $1 million.

          Government grants
          -----------------
          During the three  months  ended  March 31,  2006,  the Shanxi  Weiqida
          applied for, and received,  grants of $465,864 from the government for
          bringing in  investment  and new  technology  to Datong  city,  Shanxi
          Province.

          (B) Funds Released by Chinese Government Liquidator
          --------------------------------------------------
          In July 2003,  the Company,  through Shanxi  Weiqida,  acquired out of
          bankruptcy  the Land Use  Rights of a  state-owned  enterprise.  After
          entering  into this  transaction,  the  Company was  approached  by an
          unrelated  state  agency to  administer  certain  benefits  payable to
          former  employees  of the agency (the  government  liquidator)  as the
          Company had already  established an infrastructure to make payments to
          these   employees  for  settlement  of  liabilities   related  to  the
          transaction. As a result, during 2004, the Company received $1,751,208
          from the government liquidator,  for the settlement of human resources
          related expenses of the bankrupt enterprise. As well, during the first
          quarter of 2005, a separate  municipal  agency,  the Datong  Municipal
          Government, approved the transfer of a fund with a balance of $140,036
          originally  reserved for the employee  housing  welfare as part of the
          liquidation process of the state-owned  enterprise.  The two agencies,
          unrelated to the  acquisition,  allowed the Company to retain the cash
          balance of  $745,828 as well as the reserve of $140,036 as payment for
          services  provided by the Company.  As a result,  the Company recorded
          other income of $885,864  during the three months ended March 31, 2005
          year to reflect the above transactions.


NOTE 15   COMMITMENTS AND CONTINGENCIES

          (A) Employee Benefits
          ---------------------
          The full time  employees  of Shanxi  Weiqida are  entitled to employee
          benefits  including  medical care, worker  compensation,  unemployment
          insurance and pension benefits through a Chinese  government  mandated
          multi-employer  defined  contribution plan. The Company is required to
          accrue  for  those  benefits  based  on  certain  percentages  of  the
          employees'  salaries.  The total provision for such employee  benefits

                                       18
<PAGE>

                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars

          was  $130,927  and  $116,217 for the three months ended March 31, 2006
          and 2005, respectively.  The Company is required to make contributions
          to the  plans out of the  amounts  accrued  for  medical  and  pension
          benefits.  The  Chinese  government  is  responsible  for the  medical
          benefits and the pension liability to be paid to these employees.

          (B) Loan Guarantee
          ------------------
          The Company has  guaranteed a bank loan to a supplier in the amount of
          $2,489,000 (RMB20 million) due on July 16, 2006.  Interest on the loan
          is  charged  at 7.905%  and the bank has the right to seek  settlement
          from the  Company for payment  should the  supplier  fail to repay the
          loan. There is no recourse or possible recovery for the Company should
          the  suppliers  default on their bank  loans.  The  maximum  potential
          amount of future  payments  (undiscounted)  that the Company  could be
          required  to  make  is  $2,547,000  (RMB20.55  million).  The  Company
          provided the guarantees to these suppliers to maintain a good business
          relationship.

          The  Company has also  issued a  guarantee  to a bank as security  for
          loans to a third party  vendor of  $2,489,000  (RMB20  million) due on
          September 26, 2007 and $3,734,000  (RMB30  million) due on October 27,
          2007.  Interest  is charged at the bank's base rate plus 5.9475 %. The
          bank has the right to seek  settlement  from the  Company  for payment
          should the third  party  vendor  fail to repay the loan.  The  maximum
          potential  amount of future payments  (undiscounted)  that the Company
          could be  required  to make is $ 6,793,000  (RMB54.82  million).  This
          vendor has pledged assets totaling $8,743,000 (RMB70.2 million) to the
          Company for this guarantee.

          (C) Capital Commitments
          -----------------------
          According  to the  Articles  of  Association  of Shanxi  Weiqida,  the
          Company  has  to  fulfil   registered   capital  of  $19,704,877  (RMB
          159,018,360) within five years from December 16, 2003. As of March 31,
          2006,  the Company has  fulfilled  $15,037,562  (RMB  121,353,123)  of
          registered capital  requirement and has registered capital commitments
          of $4,667,316 (See Note 16(A)).

          (D) Contingent Employment Benefits
          ----------------------------------
          During  July 2003,  the Company  acquired  land and  buildings  from a
          government   liquidator  in  exchange  for  assuming   certain  future
          employment,  healthcare and land acquisition  costs of the factory and
          its  former  employees.  Under  the  terms  of the  contract  with the
          liquidator,  the  Company  will remain  contingently  liable for these
          liabilities until the earliest of date of retirement, re-employment or
          death for each employee. As of March 31, 2006, the Company has rehired
          679  former  employees,  246  employees  have  retired  and 129 former
          employees  remain  unemployed.  If the  Company  is unable to  provide
          continued  employment to these remaining  unemployed  individuals,  it
          will be liable to pay them each  approximately $55 per month until his
          or her date of retirement,  at age 60 or 50,  respectively,  or death,
          whichever comes first (See Note 7).

                                       19
<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars

          (E) Operating Leases
          --------------------
          (a)  The Company has entered into an  operating  lease  agreement  for
               their   administrative   offices  in  Vancouver   for  an  amount
               escalating from CDN$73,000 to CDN$78,000 (US$62,600 to US$66,500)
               per annum until March 31,  2011.  The Company has  subleased  its
               previous  office space which is leased until March 31, 2007.  The
               total minimum payments required under both leases are as follows:

               2006, balance of year                              $   195,115
               2007                                               $   111,996
               2008                                               $    64,038
               2009                                               $    65,941
               2010                                               $    66,416
               Thereafter                                         $    16,604
               ---------------------------------------------------------------
                                                                  $   520,110
               ===============================================================

          The Company anticipates  recovering $123,300 and $41,100 during fiscal
          2006 and 2007, respectively, under its sublease agreement.

                                       20
<PAGE>

                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars


NOTE 16   STOCKHOLDERS' EQUITY

          (A)  Capital Contribution (See note 15(C))
          ----------------------------------------

          On January 31, 2005 and on February 22, 2005 Oriental Wave paid Shanxi
          Weiqida  $479,988 and $198,682,  respectively,  towards its registered
          capital requirement under Chinese law.

          (B) Reserves
          ------------
          Pursuant  to PRC  regulations,  Shanxi  Weiqida  is  required  to make
          appropriations  to reserves funds,  comprising the reserve fund, staff
          welfare fund and  enterprise  expansion  fund,  based on after-tax net
          income  determined in accordance  with generally  accepted  accounting
          principles  of the  People's  Republic  of  China  (the  "PRC  GAAP").
          Appropriation  to the reserve fund should be at least 10% of the after
          tax net income  determined in  accordance  with the PRC GAAP until the
          reserve is equal to 50% of Shanxi Weiqida's  registered  capital.  The
          reserve  fund  is  established   for  covering  the  potential   loss.
          Appropriations  to the  staff  welfare  fund are at a  percentage,  as
          determined  by the Board of  Directors,  of the  after tax net  income
          determined in accordance  with the PRC GAAP. The staff welfare fund is
          established for the purpose of providing employee facilities and other
          collective benefits to the employees. Appropriations to the enterprise
          expansion  fund are made at the  discretion of the Board of Directors.
          The enterprise  expansion fund is established  for expanding  business
          operation. The reserve fund and enterprise expansion fund are recorded
          as part of shareholders' equity but are not available for distribution
          to  shareholders  other than in  liquidation;  while the staff welfare
          fund  is  recorded  as a  liability  and is not  for  distribution  to
          shareholders. The appropriations for reserves are made by the Board of
          Directors on an annual basis.

          (C) Stock Options
          ------------------
          The Company has adopted the 2005 Stock Option Plan,  effective  August
          13, 2005,  which  allows for the granting of options to Directors  and
          Employees  for a period of up to ten years.  The Company did not grant
          any options  during the three months ended March 31, 2006.  During the
          year ended  December  31,  2005,  the Company  granted  options to its
          directors  and  employees to purchase  5,920,000  shares at a weighted
          average price of $0.91 per share,  with  2,260,000  shares at exercise
          price of $1.18  (being  the  market  price at the  time)  expiring  on
          January  12,  2010 and  3,660,000  shares at  exercise  price of $0.74
          (being the market price at the time)  expiring on September  30, 2010.
          Options to purchase 4,320,000 shares were exercisable immediately with
          400,000  options  becoming  available  on January  12,  2006,  400,000
          options  becoming  available on September  30, 2006,  400,000  options
          becoming  available  on January  12,  2007 and the  balance of 400,000
          options vesting on September 30, 2007.


                                       21
<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars

          The following  summarizes stock option  information for the year ended
          March 31, 2006:

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>

          --------------------------------------------------------------------------------------------------------------
                                                                                                         Weighted
                                                                                  Shares                  Average
                                                                                                      Exercise Price
          --------------------------------------------------------------------------------------------------------------

              Options outstanding at December 31, 2004                              1,749,000            $   2.36
              Granted                                                               5,920,000            $   0.91
              Forfeited/cancelled                                                 (1,231,500)            $   2.93
          --------------------------------------------------------------------------------------------------------------

              Options outstanding at December 31, 2005                              6,437,500            $   0.92
              Cancelled                                                             (675,000)            $   0.80

          --------------------------------------------------------------------------------------------------------------

            Options outstanding at March  31, 2006                                 5,762,500             $   0.93
          ==============================================================================================================

                               Options Outstanding                                                  Options Exercisable
       ---------------------------------------------------------------------------        --------------------------------------
                                                   Weighted
                                                    Average            Weighted                                   Weighted
         Range of                                  Remaining            Average                                    Average
         Exercise               Number            Contractual          Exercise                   Number          Exercise
          Prices             Outstanding             Life                Price                 Exercisable          Price
       ---------------- ------------------- -------------------- ------------------        ----------------- --------------------
         $0.01 - $1.00           3,435,000         4.30                $0.74                      3,035,000         $0.73
         $1.01 - $2.00           2,327,500         3.59                $1.22                      1,927,500         $1.23
                                 ---------         ----                -----                      ---------         -----
                                 5,762,500         4.02                $0.93                      4,962,500         $0.93
                                 =========         ====                =====                      =========         =====

</TABLE>


          In December  2004, the FASB issued SFAS No.  123(R),  "Accounting  for
          Stock-Based  Compensation".  SFAS 123(R) establishes standards for the
          accounting for  transactions  in which an entity  exchanges its equity
          instruments for goods or services. This Statement focuses primarily on
          accounting  for  transactions  in which  an  entity  obtains  employee
          services in share-based  payment  transactions.  SFAS 123(R)  requires
          that the fair  value  of such  equity  instruments  be  recognized  as
          expense  in  the  historical  financial  statements  as  services  are
          performed. Prior to SFAS 123(R), only certain pro-forma disclosures of
          fair value were  required.  SFAS  123(R)  was  adopted by the  Company
          effective  as  of  the   beginning  of  fiscal  2006,  on  a  modified
          prospective basis,  whereby the Company records a non-cash stock based
          compensation based upon the fair value of the options at the time they
          are granted.  This  resulted in $90,518 being charged to income during
          there current period.

          The Company previously accounted for its stock-based compensation plan
          in accordance  with APB Opinion No. 25, under which no compensation is
          recognized  in  connection  with  options  granted  to  employees  and
          directors except if options are granted with a strike price below fair
          value of the  underlying  stock.  The Company  adopted the  disclosure
          requirements  SFAS No. 123,  Accounting for Stock-Based  Compensation.
          Accordingly,  the Company is required to calculate and present the pro
          forma effect of all awards granted. For disclosure purposes,  the fair
          value of each option  granted to an employee has been  estimated as of
          the date of grant using the  Black-Scholes  option  pricing model with

                                       22
<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars

          the following  assumptions:  risk-free interest rate of 5.5%, dividend
          yield 0%,  volatility of 90%, and expected lives of approximately 0 to
          5 years. The weighted average fair value of the options granted during
          the period was $0.69 for the options granted in January 2005 and $0.43
          for the  options  granted in  September  2005.  Based on the  computed
          option  values and the number of the options  issued,  had the Company
          recognized  compensation  expense in the prior  period  the  following
          would have been its effect on the  Company's  net income and  earnings
          per share:

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>

              --------------------------------------------------- ------------------- ----------------
              For the three months ended March 31,                       2006              2005
              --------------------------------------------------- ------------------- ----------------

               Net income for the period:
               - as reported                                            $1,093,513       $1,240,756
               - pro-forma                                              $1,093,513         $163,375
               ------------------------------------------------ ------------------- ----------------

               Basic and diluted income per share:
               - as reported                                                 $0.02            $0.02
               - pro-forma                                                   $0.02            $0.00
               ------------------------------------------------ ------------------- ----------------
</TABLE>

NOTE 17   RELATED PARTY TRANSACTIONS


          During March 2005, $2,415,458 of loans payable to an entity related to
          a director of the Company was converted into equity of the Company.

          See Notes 6, 11 and 14(A) also.

NOTE 18   CONCENTRATIONS AND RISKS

          64% and 85% of the Company's revenues for the three months ended March
          31, 20065 and 2005, respectively,  were derived from customers located
          in China.  The Company had sales of $4,784,861 in the Chemical Biotech
          Divisions to a customer in India,  representing  29% of the  Company's
          revenues  for the  three  months  ended  March  31,  2006.  99% of the
          Company's  assets at March 31, 2006 and December 31, 2005 were located
          in China.

          Sales  to  the  Company's   five  largest   customers   accounted  for
          approximately  54% and 33% of the Company's sales for the three months
          ended  March  31,  2006 and  2005,  respectively;  while  sales to the
          Company's  largest customer  accounted for  approximately  29% and 8%,
          respectively.  Amounts owing from one customer  represented  9% of the
          Company's  trade and other  receivables  at March 31, 2006 and 12 % of
          the Company's trade and other receivables at December 31, 2005.

          The  Company is exposed to the risk  arising  from  changing  interest
          rates. A detailed  analysis of the Company's  Loans Payable,  together
          with their respective  interest rates and maturity dates, are included
          in Note 9.

                                       23
<PAGE>
                  DRAGON PHARMACEUTICAL INC., AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
                      (UNAUDITED) Expressed in US Dollars

          The  majority  of the  Company's  assets,  liabilities,  revenues  and
          expenses are denominated in Renminbi,  which was tied to the US Dollar
          and is now tied to a basket of currencies of China's  largest  trading
          partners,  is not a freely convertible  currency.  The appreciation of
          the Renminbi  against the US Dollar would result in an increase in the
          assets,  liabilities,  revenues  and  expenses  of the  Company  and a
          foreign  currency gain included in comprehensive  income.  Conversely,
          the devaluation of the Renminbi  against the US Dollar would result in
          a decrease in the assets,  liabilities,  revenues  and expenses of the
          Company and a foreign currency loss included in comprehensive  income.
          At March 31,  2006,  approximately  US$1,393,327  of the cash and cash
          equivalents (December 31, 2005:  US$774,369) and all of the restricted
          cash are held in Renminbi.


                                       24
<PAGE>


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

Overview

     The following  discusses the Company's  financial  condition and results of
operations  for the three months  ended March 31, 2006 based upon the  Company's
interim unaudited  consolidated financial statements which have been prepared in
accordance with the United States generally accepted accounting  principles.  It
should be read in conjunction with the Company's  audited  financial  statements
and the notes thereto and other financial  information included in the Company's
Form 10-KSB for the fiscal year ended December 31, 2005.

     Incorporated in Florida, USA and headquartered in Vancouver,  B.C., Canada,
Dragon,  prior to the  acquisition  of  Oriental  Wave,  was formed to  develop,
market,   and  sell  biologics  such  as  Erythropoietin   (EPO)  in  China  and
international markets outside of China. Dragon manufactured and sold EPO through
its wholly-owned drug  manufacturing  company Nanjing Huaxin  Bio-pharmaceutical
Co., Ltd. ("Nanjing  Huaxin") located in Nanjing City, China,.  Nanjing Huaxin's
EPO has been approved and marketed in nine  countries  including  China,  India,
Egypt,  Brazil,  Ecuador,  the Dominican  Republic,  Trinidad-Tobago,  Peru, and
Kosovo.  Since August 2005, the Nanjing  Huaxin  facility was closed and the EPO
production  facility was  relocated  to Datong,  China.  The new EPO  production
facility is currently  located next to the Chemical  division facility of Shanxi
Weiqida.

     On January 12, 2005, the Company completed the acquisition of Oriental Wave
in a reverse  take-over  transaction.  Oriental  Wave,  through its wholly owned
subsidiary in China,  Shanxi Weiqida  Pharmaceutical  Ltd.  ("Shanxi  Weiqida"),
currently has five production  facilities in China:  four Chinese State Food and
Drug  Administration   (SFDA)  certified  GMP  (Good   Manufacturing   Practice)
production facilities consisting of a pharmaceutical  facility with a production
capacity of 610 million tablets and capsules, 80 million injectables, 47 million
sachets,  10 million  suppositories  and 180 tons of  sterilized  bulk drugs per
year, a chemical plant  producing  clavulanic acid with an annual capacity of 50
tons, a biotech facility  producing EPO and a pharmaceutical  facility producing
freeze-dry  injectables.  In  addition,  Oriental  Wave  has  a  fifth  facility
producing  7-ACA,  an  intermediate   for   Cephalosporin   antibiotics,   by  a
fermentation process.  7-ACA is an intermediate product and does not require GMP
certification  for the 7-ACA  production  facility.  Oriental  Wave has received
approval from the SFDA for 306 drugs, of which 86, mainly anti-infectious drugs,
are actively  exploited in China.  Dragon acquired all of the outstanding shares
of Oriental Wave from Mr. Yanlin Han, Mr. Zhanguo Weng, and Ms. Xuemei Liu. As a
result of the  acquisition,  Mr. Han, Mr. Weng, and Ms. Liu  collectively  owned
68.35% of Dragon's outstanding shares of common stock at the time of the closing
of the transaction.

     As a result of the  acquisition  of Oriental Wave,  Dragon has  transformed
into a diversified and growth oriented generic pharmaceutical company with three
key  business  divisions.  These  divisions  consist of a Biotech  division  for
biologics  products,  such as EPO, a Chemical  division for bulk  pharmaceutical
chemicals and  intermediates,  such as Clavulanic  Acid and 7-ACA,  and a Pharma
division for formulated drugs,  including  prescription,  over-the-counter drugs
and  sterilized  bulk drugs through two indirect  wholly-owned  subsidiaries  in
China, Shanxi Weiqida and Nanjing Huaxin.

     The Company, after the acquisition, has significantly increased the size of
operations  and now has five  manufacturing  facilities  in Datong city,  China,
approximately   1,800   employees,    an   additional   1,200   contract   sales
representatives  in China,  and 63 key  products  in 101  different  dosages and
presentations currently in the Chinese market.

                                       25
<PAGE>

Pharma Division

     The Pharma  Division's  operations  are located in the Datong  Economic and
Technology  Development  Zone,  Datong  City,  Shanxi  Province,  China.  Pharma
Division produces chemical generic,  mainly  anti-infectious,  drugs. The Pharma
Division currently holds approximately 319 product approvals from SFDA, of which
only 85 prescription, over-the-counter and sterilized bulk products in different
dosages and presentations  are currently  commercialized in China. At the end of
December,  2005, the Company  completed a new workshop for the  freeze-drying of
temperature  sensitive   pharmaceutical   products.   Among  these  products  is
Levofloxacin,  a product marketed by the Company whose production was outsourced
to a third  party  contract  manufacturer.  The  Pharma  Division  operates  its
business  strategies to focus on the expansion  and  development  of the Chinese
market by managing its product  portfolio and selecting  potential  products for
commercialization.

Chemical Division

         The Chemical Division's facilities are located on Datong Gongnong Road,
Datong City, Shanxi Province, China. The Chemical Division produces the bulk
pharmaceutical intermediates and API to sell to other pharmaceutical companies
for further processing and formulation into finished products. The Chemical
Division manages the production of Clavulanic acid and 7-ACA for both Chinese
and international markets. The designed production capacity for Clavulanic
Potassium and 7-ACA were 30 tons and 400 tons respectively. After the Company's
investment in the process optimization and technology improvement, the current
production capacity reaches 50 tons and 600 tons for Clavulanic Potassium and
7-ACA respectively. The production for Clavulanic Acid was started in January
2004 and the production of 7-ACA was started in July 2004. One of the key
products in Chemical Division is Clavulanic acid, a drug that combines with
antibiotics increase the effectiveness of the antibiotics. Dragon is currently
the only producer of Clavulanic acid in China. Another key product in the
Chemical Division is 7-ACA, an intermediate for Cephalosporin antibiotics. The
600-ton production capacity of 7-ACA positions Dragon among the main producers
in the world. The export of 7-ACA to India commenced in 2004. In 2004, Dragon's
Chemical Division entered into a 3-year long term supply agreement with a large
Indian pharmaceutical company and the Company currently set a target to sell 50%
of production to the Indian market. The Chemical Division operates its business
strategies to upgrade its technology in order to improve yields and lower
production cost, to develop 7-ACA and Clavulanic acid downstream bulk products,
and to apply for approvals in the US and EU to enter into European and North
American markets.

Biotech Division

     The Biotech  Division's  facility was  relocated to Datong,  China from its
original  production site in Nanjing City,  China at the end of December,  2005.
The new EPO production site is adjacent to the campus of the Chemical  division,
which already  includes the entire basic  infrastructure  such as power,  steam,
purified water supply and water treatment facilities.  The relocation of the EPO
production  site to Datong will allow the Company to  capitalize on the existing
production  infrastructure and the efficiency of unified operational management.
In the new facility,  it is  anticipated  that the capacity for bulk EPO will be
doubled to 120 grams and the capacity  for sterile  vialing will be tripled to 5
million vials.  The sole product of the Biotech  Division is  Erythropoietin  or
EPO, an injectable that stimulates red blood cell development.  Dragon's Biotech
Division  develops,   manufactures  and  markets  generic  EPO  with  China  and
developing  countries as the current core markets, and has already been approved
and  sold  in  9  countries:   China,  India,  Egypt,   Brazil,  Peru,  Ecuador,
Trinidad-Tobago,  Dominican Republic and Kosovo. Currently, Dragon's EPO is sold
only in countries where there is no patent  protection.  In the past, Dragon was
preparing to enter the European market with a new EPO product under  development
in Austria.  However, in January 2006, the Company sold the development contract
with the Austrian  partner to a related party for $1 million cash and assumption
of all obligations under the contract.

                                       26
<PAGE>

Critical Accounting Policies and Estimates and Recent Accounting Pronouncements

     The  accompanying  management's  discussion  and  analysis  of  results  of
operations  and  financial  condition  are based upon the Dragon's  consolidated
financial  statements,  which have been prepared in accordance  with  accounting
principles  generally  accepted  in the  United  States of America  (GAAP).  The
preparation of these financial  statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
and  expenses  and related  disclosure  of  contingent  assets and  liabilities.
Management  evaluates  estimates  on an  ongoing  basis.  Management  bases  its
estimates on historical  experiences  and various other factors and  assumptions
that are believed to be 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   materially  from  these   estimates  under  different   assumptions  or
conditions.

     A  summary  of  significant   accounting  policies  and  a  description  of
accounting  policies that are considered critical are described in Note 1 to the
Consolidated  Financial Statements contained in this report and in Note 1 to the
Dragon's  Annual Report on Form 10-KSB for the year ended  December 31, 2005. In
addition, a description of Recent Accounting Pronouncements is contained in Note
1(B) to the Consolidated  Financial  Statements  contained in this report and in
Note 1(U) to the Consolidated  Financial  Statements to the Corporation's Annual
Report on Form 10-KSB for the year ended December 31, 2005.

Results of Operations

Results of Operations for the Three Months Ended March 31, 2006 and 2005

     Sales.  Sales for the first quarter  ended March 31, 2006  increased 41% to
$16.64 million from $11.83 million for the same period in 2005.  $10.66 million,
or 64% of the sales for the first quarter in 2006 were  generated from the sales
of products in the Chinese  market,  and the remaining  5.98 million or 36% were
generated  from the  sales of  products  in the  international  markets.  $10.11
million, or 85.5% of the sales for the first quarter in 2005 were generated from
the sales of products in the Chinese market,  and the remaining $1.72 million or
14.5% were generated from the sales of products in international markets. In the
first quarter of 2006, $4.56 million,  or 27% of the sales, were from the Pharma
Division,  $11.48 million,  or 69% of sales were from the Chemical  Division and
$0.60  million,  or 4% of sales,  were from the Biotech  Division.  For the same
period in 2005,  45% of sales were from the Pharma  Division,  48% of sales were
from the Chemical Division and 7% of sales were from the Biotech  Division.  The
increase in sales  during the three  months  ended March 31, 2006 as compared to
the same period for the prior year was  primarily due to increases in sales from
the Chemical Division.

     Cost of sales for the three months ended March 31, 2006 was $12.41  million
compared to $8.62 million for the three months ended March 31, 2005. The cost of
sales is attributed to the production costs of Dragon's  pharmaceutical products
with the  increase in the cost of sales  related to the growth in  products  and
sales in the  Chemical  Division.  Gross  profit and gross  margin for the three
months ended March 31, 2006 were $4.23 million and 25% compared to $3.21 million
and 27% for the same period of 2005.  The slight  decrease  in gross  margin was
mainly due to the increase in sales of the  Chemical  Division  which  carried a
slightly lower gross margin than products from the other two divisions.

                                       27
<PAGE>

Divisional Sales and Gross Margin Analysis

     The Company's businesses are organized under three business divisions:  the
Pharma Division, the Chemical Division and the Biotech Division.

Pharma Division

     The  Pharma  Division's  sales for the  first  quarter  of 2006 were  $4.56
million,  accounting  for 27% of the total sales of the Company.  Comparatively,
the Pharma  division's  sales were $5.32  million  for the same  period in 2005,
contributing 45% of the total sales of the Company.  The lower sales were mainly
due to the reduction in the retail price of certain  prescription  drugs imposed
by the Chinese  government.  The lower contribution from the Pharma division was
also due to the tremendous  growth of the Chemical  division achieved during the
first  quarter  of 2006  compared  to 2005.  The  overall  gross  margin for the
division for the first quarter  decreased to 35%,  representing a 12 basis point
decline from the same period of 2005. The reduction in the retail price resulted
in the decrease in profit margin.


Chemical Division

     The  Chemical  Division's  sales for the first  quarter of 2006 were $11.48
million, representing a 101% increase from the sales of $5.70 million during the
same period in 2005. The increase is due to the continued  increase in export of
7-ACA outside China.

     The Chemical Division's gross margin for the first quarter of 2006 was 19%.
The gross margin for the division  increased from 1% in the  comparative  period
due to the significant  increase in production level especially for 7-ACA during
the first quarter of 2006 as compared to the same period of 2005.


Biotech Division

     The Biotech Division's sales for the three months ended March 31, 2006 were
$0.06 million or 4% of sales compared to $0.80 million,  or 7% of sales, for the
comparative  period.  The  decrease  was  due  to the  Company  not  having  any
international sales during the period as the new production facilities in Datong
have not yet received international orders outside China.


     Other  Income.  During  the  three  months  ended  March 31,  2006,  Dragon
recognized $0.57 million of Other Income.  This amount primarily  consisted of a
$1 million gain on the sale of the European  EPO cell line  development.  During
the quarter,  Dragon  disposed of the European EPO cell line, and all applicable
obligations relating,  thereto, being developed for Dragon to enter the European
market.  The European  EPO cell line was sold to AS Biotech AG, a Swiss  company
controlled  by Dr.  Alexander  Wick, a Director of Dragon who was also  Dragon's
President  prior to the  transaction.  The European EPO cell line had a carrying
value of $0 and was sold for $1 million and the  assumption  of all  obligations
under the agreement. In addition, during the quarter, the Company received $0.47
in Government  grants in China. This other income was offset in part by $0.90 in
interest expense.


     Expenses.  Total operating expenses were $3.57 million for the three months
ended March 31, 2006 compared to $2.40 million for the same period in 2005.  For
the three months ended March 31, 2006, the major category of operating  expenses
was  General  and  Administration  expenses  which  included  $0.62  million for
salaries,   compensation  and  benefits  (of  which  $0.09  was  non-cash  stock
compensation  as a result of stock  options  granted in the prior  year),  $0.17

                                       28
<PAGE>

million for travel  expenses,  bad debts  expense of $0.16and  $0.07 million for
rent compared to $0.46 million for salaries, compensation and benefits and $0.13
million for travel  expenses  for the three months of 2005.  Operating  expenses
also included selling expense of $1.50 million and depreciation and amortization
of $0.29  million.  The increase in operating  expenses of $1.17 million for the
three  months  ended March 31, 2006 as compared to the same period for the prior
year reflects the  additional  overhead  costs  associated  with the increase in
production and sales in the Chemical Division.

     Net Income.  Dragon had net income of $1.09  million  for the three  months
ended March 31, 2006 compared to net income of $1.24 million for the same period
in 2005. In addition, net income reflects other income of $1.47 million from the
gain on the sale of the  European EPO cell line  development  and the receipt of
Government grants in China. Shanxi Weiqida is currently subject to income tax at
an  incentive  tax rate,  at half of the normal tax rate,  for a period of three
years commencing in 2005.

     Basic Net Income Per Share. Dragon's net income per share has been computed
by  dividing  the net income for the period by the  weighted  average  number of
shares  outstanding  during the same  period.  Net income per share for both the
three  months  ended March 31, 2006 and 2005 was $0.02 per share.  The  weighted
average  number of shares  outstanding  during the three  months ended March 31,
2006  and  2005  were  62,878,004  and  60,427,871  shares,  respectively.   The
outstanding  common stock  options have no  significant  dilutive  effect on the
weighted average number of shares outstanding.

Liquidity and Capital Resources

     As of March 31, 2006, Dragon had current  liabilities of $45.32 million and
current  assets of $28.74  million,  including cash balance of $3.38 million and
accounts  receivables of $9.99 million.  The excess of current  liabilities over
current assets is mainly due to the Company  financiang  operations through bank
loans and  payables  and  investment  in the new EPO and  Freeze-dry  Injectable
workshops.

     The Company has developed and is  implementing  a plan to decrease its debt
and  increase  its  working  capital  which will allow the  Company to  continue
operations.

     To meet these  objectives,  the  Company  plans to seek  additional  equity
through the  conversion  of some of its  liabilities  and expects to raise funds
through a private investment in order to support existing  operations and expand
the  range  and  scope of its  business.  The  Company  has  also  significantly
increased  production  levels to generate  additional cash flow under contracted
supply agreements.  In addition,  the Company intends to continue to renegotiate
and extend  loans,  as  required,  when they become due, as has been done in the
past. There is no assurance that such additional funds will be available for the
Company on acceptable  terms,  if at all. If adequate funds are not available or
not available on acceptable  terms, the Company may be required to scale back or
abandon  some  activities.  Management  believes  that actions  presently  taken
provide the  opportunity  for the Company to  continue as a going  concern.  The
Company's ability to achieve these objectives cannot be determined at this time.

     As of March 31, 2006,  Dragon had current  liabilities  of  $45,316,802  as
follows:

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>

------------------------------------------------------------- ----------------------- ---------------------------
Accounts Payable                                                                                      $7,130,543
------------------------------------------------------------- ----------------------- ---------------------------
Accrued Retirement Benefits - current portion                                                            $84,470
------------------------------------------------------------- ----------------------- ---------------------------
Other Payables and Accrued Expenses                                                                  $20,157,901
------------------------------------------------------------- ----------------------- ---------------------------
Due to Related Companies                                                                                 $62,553
------------------------------------------------------------- ----------------------- ---------------------------
Notes payable                                                                                        $ 1,853,955
------------------------------------------------------------- ----------------------- ---------------------------
Loans Payable-Short Term:
Loan payable to a bank, interest rate of 8.874% per annum,
guaranteed by a third party, due April 2006                                 $597,386
------------------------------------------------------------- ----------------------- ---------------------------
Loan payable to a bank, interest rate of 6.138% per annum,
secured by property and equipment of $2,950,480, due April
2006                                                                      $1,866,833
------------------------------------------------------------- ----------------------- ---------------------------
                                       29
<PAGE>
------------------------------------------------------------- ----------------------- ---------------------------
Loan payable to a bank, interest rate of 6.138% per annum,
secured property and equipment of $5,123,703, due April 2006              $3,733,665
------------------------------------------------------------- ----------------------- ---------------------------
Loan payable to a bank, interest rate of 7.254% per annum,
secured by property and equipment of $1,236,067, due
September 2006                                                              $622,278
------------------------------------------------------------- ----------------------- ---------------------------
Loan payable to a bank, interest rate of 7.254% per annum,
secured by property and equipment of $661,798 due September 2006            $209,085
------------------------------------------------------------- ----------------------- ---------------------------
Loan payable to a bank, interest rate of 6.92% per annum,
secured by property and equipment of $9,281,312, due
November 2006                                                              6,509,023
------------------------------------------------------------- ----------------------- ---------------------------
Loan payable to a bank, interest rate of 6.138% per annum,
secured by property and equipment of $10,232,169, due
January 2007                                                               2,489,110
------------------------------------------------------------- ----------------------- ---------------------------
Loans Payable - Short Term Subtotal                                                                  $16,027,380
------------------------------------------------------------- ----------------------- ---------------------------
Total Current Liabilities                                                                            $45,316,802
------------------------------------------------------------- ----------------------- ---------------------------
</TABLE>

     The Accounts payable were incurred as part of the normal course of business
of Dragon while other payables and accrued expenses were incurred as part of the
investment in establishing the Chemical Division.

     As of March 31, 2006,  Dragon had outstanding  short-term  loans (less than
one  year  term)  totaling  $16.03  million.  Dragon  believes  that  it will be
successful  in the  renegotiating  loans  due based on the  assumption  that the
Company  has  enhanced  its ability to  generate  additional  cash flow from its
operation since the loans were originally  entered into, even though there is no
assurance of renewing the loan.  Since then,  the  Company's  Chemical  Division
commenced  production and began generating  revenues and cash flow.  Further, it
entered into a three-year long term supply contract with Aurobindo  Biopharma to
supply specified amounts of Clavulanic Acid and 7-ACA produced from its Chemical
Division.

Long-term Liabilities:

     At March 31, 2006,  Dragon had  long-term  liabilities  of  $23,450,178  as
follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>

        ---------------------------------------------------------------- ---------------- -----------------
        Long-term accounts payable                                                             $10,045,185
        ---------------------------------------------------------------- ---------------- -----------------
        Long-term retirement benefits                                                             $562,860
        ---------------------------------------------------------------- ---------------- -----------------
        Loan Payable - Long Term
        ---------------------------------------------------------------- ---------------- -----------------
        Loan payable to a bank, interest rate of 6.336% per annum,
        secured by property and equipment of $3,582,780, due April 2007        6,845,053
        ---------------------------------------------------------------- ---------------- -----------------
        Loan payable to a company, non-interest bearing and unsecured,
        due June 2007                                                          4,730,158
        ---------------------------------------------------------------- ---------------- -----------------
        Loan payable to a company, non-interest bearing and unsecured,
        due December 2007                                                      1,266,922
        ---------------------------------------------------------------- ---------------- -----------------
        Loan Payable - Long Term                                                               $12,842,133
        ---------------------------------------------------------------- ---------------- -----------------
        Total Long-term Liabilities                                                            $23,450,178
        ---------------------------------------------------------------- ---------------- -----------------
</TABLE>

     As of March 31,  2006,  the Company had  long-term  retirement  benefits of
$0.56 million, which was incurred in July 2003 when Shanxi Weiqida acquired land
and  buildings  from a government  liquidator  in exchange for assuming  certain
future employment,  healthcare and land acquisition costs of the factory and its
former  employees  during  July 2003.  The  Company is  required  to pay certain
minimum  wages  and  health  care  costs  until  the date of  their  employment,
retirement or death, whichever occurs first. The total amount of the liabilities
assumed on the closing date was $8.90 million,  which approximated the appraised
value of the land. As of March 31, 2006,  Shanxi Weiqida had employed 679 former
employees,  and 246 former employees have retired. Shanxi Weiqida has calculated
the  related  asset  value by  computing  the net  present  value of the  future

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<PAGE>

expected  payments to the remaining  129 employees  assuming an interest rate of
3%. As of March 31, 2006, 129 former employees of Datong Pharmaceutical remained
as the obligation of Dragon.

     Dragon  has  long-term   loans   payables  (one  to  two  years)   totaling
approximately  $12.84  million of which  $6.85  million  will be due April 2007,
$4.73 million will be due June 2007and $1.27 million due April 2007, in addition
to long-term  account  payables of $11.57 million which are due to be paid April
2007 through December 2008.

     During  the  three  months  ended  March  31,  2006,  Dragon  financed  its
operations, development of its new EPO and freeze-dry injectable facilities, and
increased  production level at its Chemical Division through operating revenues,
accounts  payables and short-term  loans.  The Company had  anticipated  that it
would increase its production level through an equity  financing,  however,  the
anticipated financing has taken longer than expected

Item 3.  Controls and Procedures

     We  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation of our management, including our Chief Executive Officer and Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of our
disclosure  controls and procedures (as defined by Exchange Act Rule  13a-15(e))
as of the end of the  quarter  pursuant  to Exchange  Act Rule  13a-15(b)),  and
concluded  that Dragon's  disclosure  controls and  procedures  are effective to
ensure that information  required to be disclosed in Dragon's reports filed with
the  Securities  and  Exchange  Commission  pursuant  to  the  Exchange  Act  is
accumulated and communicated to management,  including  Dragon's Chief Executive
Officer and Chief Financial Officer.  Based upon that evaluation,  as of the end
of the period  covered by this  report,  the Chief  Executive  Officer and Chief
Financial  Officer  concluded that Dragon's  disclosure  controls and procedures
were effective in recording,  processing,  summarizing and reporting information
required to be  disclosed  by Dragon  within the time  periods  specified in the
Securities and Exchange Commission's rules and forms.

     There have been no changes in our internal control over financial reporting
that  occurred  during  such  quarter  that  have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.


                           PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

     The Company is not currently involved in any legal proceedings.

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

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<PAGE>

Item 5.   Other Information.

          None

Item 6.   Exhibits and Reports on Form 8-K.

          Exhibits.

          Exhibit No.

          31.1      Certification by the Principal Executive Officer Pursuant to
                    Section 302 of the Sarbanes-Oxley Act.

          31.2      Certification by the Principal  Accounting  Officer Pursuant
                    to Section 302 of the Sarbanes-Oxley Act.

          32        Certification  by  the  Principal  Executive  and  Financial
                    Officers Pursuant to Section 906 of the Sarbanes-Oxley Act.

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<PAGE>


                                   SIGNATURES

In accordance with 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.

                           DRAGON PHARMACEUTICAL INC.



                                                     (registrant)




Date:  May 15, 2006                                  /s/ Yanlin Han
                                                     ---------------------------
                                                     Yanlin Han
                                                     Chief Executive Officer



Dated: May 15, 2006                                  /s/ Garry Wong
                                                     ---------------------------
                                                     Garry Wong
                                                     Chief Financial Officer


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