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 June 30, 2005

                                       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 [ ]

Number of shares of common stock outstanding as of June 30, 2005:  62,878,004

<PAGE>


                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements




                           DRAGON PHARMACEUTICAL INC.
                                AND SUBSIDIARIES
                        CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE QUARTER ENDED JUNE 30, 2005
                       (UNAUDITED) Expressed in US Dollars



                                    CONTENTS


PAGE       3        CONSOLIDATED BALANCE SHEETS AS AT JUNE 30, 2005 AND DECEMBER
                    31, 2004

PAGE       4        CONSOLIDATED  STATEMENTS  OF  OPERATIONS  AND  COMPREHENSIVE
                    INCOME FOR THE THREE AND SIX MONTHS  ENDED JUNE 30, 2005 AND
                    2004

PAGE       5        CONSOLIDATED  STATEMENTS  OF  STOCKHOLDERS'  EQUITY  FOR THE
                    PERIODS ENDED JUNE 30, 2005 AND DECEMBER 31, 2004

PAGE       6        CONSOLIDATED  STATEMENTS  OF CASH  FLOWS FOR THE SIX  MONTHS
                    ENDED JUNE 30, 2005 AND 2004

PAGES   7 - 31      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 2005


<PAGE>
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>
                                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                                           CONSOLIDATED BALANCE SHEETS
                                    AS AT JUNE 30, 2005 AND DECEMBER 31, 2004
                                       (UNAUDITED) Expressed in US Dollars



                                                        ASSETS
                                                        ------                                                    RESTATED
                                                                                                                  (NOTE 20)
                                                                                                                 December 31,
                                                                        Note             June 30, 2005               2004
                                                                     ----------       ------------------      -----------------
CURRENT ASSETS
  Cash and cash equivalents                                               18          $        1,355,481    $          910,425
  Accounts receivable, net of allowances                                  2                    8,699,818             6,675,298
  Inventories, net                                                        3                   17,600,990            16,623,906
  Value added tax receivable                                                                           -               162,443
  Prepaid expenses                                                                               754,955               911,228
                                                                                      ------------------      -----------------
      Total Current Assets                                                                    28,411,244            25,283,300
                                                                                      ------------------      -----------------

 PROPERTY AND EQUIPMENT, NET                                              4                   64,607,495            62,396,316

 OTHER ASSETS
  Intangible assets, net                                                  6                    2,497,682               432,769
  Other receivables                                                                            1,868,305             2,213,842
  Investments -cost                                                                               12,077                12,077
                                                                                      ------------------      -----------------
      Total Other Assets                                                                       4,378,064             2,658,688
                                                                                      ------------------      -----------------

TOTAL ASSETS                                                                          $       97,396,803    $       90,338,304
------------
                                                                                      ==================      =================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                                                         $   4,583,421    $        3,047,485
  Accrued retirement benefits                                             7                       95,327               114,432
  Other payables and accrued liabilities                                  8                   18,613,368            17,705,163
  Notes payable - short-term                                              9                    6,845,410            12,884,057
  Due to related companies                                                11                     892,206             4,660,984
                                                                                      ------------------      -----------------
      Total Current Liabilities                                                               31,029,732            38,412,121
                                                                                      ------------------      -----------------

LONG-TERM LIABILITIES
  Long term accounts payable                                              10                  21,712,222            21,873,147
  Long term retirement benefits                                           7                      720,891               870,321
  Notes payable - long-term                                               9                   12,958,938             6,316,426
  Due to related companies                                                11                           -             1,328,502
                                                                                      ------------------      -----------------
      Total Long-Term Liabilities                                                             35,392,051            30,388,396
                                                                                      ------------------      -----------------

TOTAL LIABILITIES                                                                             66,421,783            68,800,517
                                                                                      ------------------      -----------------

COMMITMENTS AND CONTINGENCIES (Note 14)

STOCKHOLDERS' EQUITY
  Authorized: 200,000,000 common shares at par value of $0.001 each
  Issued and outstanding: 62,878,004 (December 31, 2004: 44,502,004)
   common shares                                                                                  62,878                44,502
  Additional paid-in capital                                                                  22,138,830            13,983,002
  Retained earnings                                                                            1,237,416                     -
  Reserves                                                                                     7,562,432             7,562,432
  Accumulated other comprehensive (loss)
                                                                                                    (911)                    -
  Due from stockholder
                                                                                                 (25,625)              (52,149)
                                                                                       ------------------      -----------------
       Total Stockholders' Equity                                                              30,975,020           21,537,787
                                                                                       ------------------      -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                             $       97,396,803      $    90,338,304
------------------------------------------                                             ==================      =================

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

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


                                           DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                                              CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    AND COMPREHENSIVE INCOME
                                   FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
                                               (UNAUDITED) Expressed in US Dollars


                                                                                RESTATED            RESTATED            RESTATED
                                                                                (NOTE 20)            (NOTE 20)          (NOTE 20)
                                                          Three Months        Three Months             Six                 Six
                                                           Ended June         Ended June 30,        Months Ended       Months Ended
                                             Note           30, 2005               2004            June 30, 2005       June 30, 2004
                                            -------     ---------------     -----------------    ----------------     --------------

NET SALES                                     12        $   11,350,909      $      7,320,949     $    23,179,572      $  14,475,985

COST OF SALES                                                8,169,143             3,284,181          16,788,627          7,241,284
                                                        ---------------     -----------------    ----------------     --------------
GROSS PROFIT                                                 3,181,766             4,036,768           6,390,945          7,234,701
                                                        ---------------     -----------------    ----------------     --------------
OPERATING EXPENSES
Selling expense                                              1,285,282             1,109,338           2,429,249          1,918,241
General and administrative expenses                          1,208,585               165,324           2,212,725            587,353
Depreciation and amortization                                  276,589                82,029             520,521             94,487
                                                        ---------------     -----------------    ----------------     --------------
      Total Operating Expenses                               2,770,456             1,356,691           5,162,495          2,600,081
                                                        ---------------     -----------------    ----------------     --------------

INCOME FROM OPERATIONS                                         411,310             2,680,077           1,228,450          4,634,620

OTHER INCOME (EXPENSE)
Interest expense
                                                             (315,568)               (3,689)           (556,619)            (18,304)
Other income
                                                                28,416                50,627              39,500             50,627
Funds Released by Chinese Government
  Liquidator                                  13                     -                     -             885,864                 -
Other expense                                                    1,548              (36,231)            (33,987)            (36,231)
                                                        ---------------     -----------------    ----------------     --------------
Total Other Income (Expenses)                                (285,604)                10,707             334,758             (3,908)
                                                        ---------------     -----------------    ----------------     --------------
INCOME FROM OPERATIONS BEFORE TAXES                            125,706             2,690,784           1,563,208          4,630,712

INCOME TAX EXPENSE                           1(M)            (129,046)             (352,410)           (325,792)           (352,410)
                                                        ---------------     -----------------    ----------------     --------------
NET INCOME (LOSS)                                              (3,340)             2,338,374           1,237,416          4,278,302
OTHER COMPREHENSIVE INCOME
Foreign currency translation loss                               (911)                  -                   (911)                  -
                                                        ---------------     -----------------    ----------------     --------------
COMPREHENSIVE INCOME (LOSS)                             $      (4,251)      $      2,338,374     $     1,236,505      $   4,278,302
                                                        ===============     =================    ================     ==============
Earnings  per share - basic and diluted              $            0.00   $              0.05  $             0.02   $          0.10
                                                        ===============     =================    ================     ==============
Weighted average number of shares
outstanding during the period - basic and
diluted                                                     62,878,004            44,502,004          61,659,706          44,502,004
                                                        ===============     =================    ================     ==============


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 STATEMENT OF STOCKHOLDERS' EQUITY
            FOR THE PERIODS ENDED JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars




                                    Common Stock       Additional                              Accumulated
                                --------------------    Paid-In      Retained                 other compre-  Due from
                                  Shares      Amount    Capital      Earnings     Reserves    hensive loss  Stockholder     Total
                                ----------  --------  ------------ -------------  ----------  ------------  ----------  ------------
Balance, December 31, 2003,     44,502,004    44,502   $ 7,841,363   $ 6,054,864  $1,286,784  $          -  $(228,148)  $ 14,999,365
adjusted for the effect of
recapitalization of reverse
acquisition (Note 5(B))

Registered capital appropriation          -        -     6,141,639   (6,141,639)           -             -          -              -

Notes receivable - stockholders           -        -             -            -            -             -    175,999        175,999
Net income for the year ended
December 31, 2004                         -        -             -    6,362,423            -             -          -      6,362,423
Transfer from retained earnings
for appropriated statutory and
staff welfare reserves                    -        -             -   (6,275,648)   6,275,648             -          -              -
                                ----------  --------  ------------ -------------  ----------  ------------  ----------  ------------
Balance, December 31, 2004      44,502,004  $ 44,502    13,983,002             -   7,562,432             -    (52,149)    21,537,787

Reverse acquisition (Note
5(B))                           18,376,000    18,376     5,740,370             -           -             -          -      5,758,746
Related party debt exchanged
for equity                               -         -     2,415,458             -           -             -          -      2,415,458

Notes receivable -
stockholders                             -         -             -             -           -             -      26,524        26,524

Comprehensive income (loss)
 - foreign currency translation          -         -             -             -           -
(911)                 -              (911)

Net income for the six months
ended June 30, 2005                     -          -             -     1,237,416          -              -           -     1,237,416
                                ----------  --------  ------------  ------------  ----------    -----------  ---------- ------------
Balance, June 30, 2005          62,878,004  $ 62,878  $ 22,138,830  $  1,237,416  $7,562,432     $    (911) $  (25,625)  $30,975,020
                                ==========  ========  ============  ============  ===========   ===========  ========== ============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                        5

<PAGE>
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>
                                           DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
                                               (UNAUDITED) Expressed in US Dollars

                                                                                                  RESTATED               RESTATED
                                                                                                 (NOTE 20)               (NOTE 20)
                                                                                                    2005                   2004
                                                                                            -------------------    -----------------
 CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                                $    1,237,416        $     4,278,302
   Adjustments to reconcile net income to net cash provided by (used in) operating
     activities:
     Depreciation and amortization                                                                2,870,284                881,627
     Allowance for doubtful accounts                                                                 12,610                182,500
     Provision for (recovery from) obsolete inventories                                            (286,181)               274,219
    Funds Released by Chinese Government Liquidator(Note 13)                                       (745,828)                     -
   Changes in operating assets and liabilities, net of effect of reverse acquisition
     (Note 5(B)), (increase) decrease in:
       Accounts receivable                                                                         (655,011)            (1,965,861)
       Inventories                                                                                 (105,338)            (3,047,576)
       Value added tax receivable                                                                   162,443                      -
       Prepaid expenses                                                                             256,694               (663,388)
       Other assets                                                                                 345,537                      -
       Deposits                                                                                           -                993,474
     Increase (decrease) in:
     Accounts payable                                                                               981,036              1,988,828
     Other payables and accrued expenses                                                            277,817              5,331,009
                                                                                            -------------------   ------------------
         Net Cash Provided By (Used In) Operating Activities                                      4,351,479              8,253,134
                                                                                            -------------------   ------------------

 CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                                            (3,977,853)           (15,248,865)
   Cash acquired in connection with reverse acquisition  (Note 5(B))                              2,103,481
                                                                                            -------------------    -----------------
          Net Cash Provided By (Used In) Investing Activities                                    (1,874,372)           (15,248,865)
                                                                                            -------------------    -----------------

 CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from notes payable                                                                       26,524              7,246,377
   Due to related companies                                                                      (2,681,821)              (270,046)
   Due from stockholder                                                                             603,865                183,365
                                                                                            -------------------    -----------------
         Net Cash Provided By (Used In)  Financing Activities                                    (2,051,432)             7,159,696
                                                                                            -------------------    -----------------

 (GAIN) LOSS ON CASH HELD IN FOREIGN CURRENCY                                                        19,381                      -
                                                                                            -------------------    -----------------

 NET INCREASE IN CASH AND CASH EQUIVALENTS                                                          445,056                163,965

 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                   910,425                515,791
                                                                                            -------------------    -----------------

 CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                  $     1,355,481        $      679,756
                                                                                            ===================    =================

 Cash paid during the period for interest expense                                            $       561,528        $       18,304
                                                                                            ===================    =================
 Cash paid during the period for income taxes                                                $       366,563        $            -
                                                                                            ===================    =================

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.

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       6

<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

     (A) Organization and Basis of Presentation

     Pursuant  to a share  purchase  agreement,  dated  June  11,  2004,  Dragon
     Pharmaceutical  Inc.  (the  "Company")  acquired  100%  of the  issued  and
     outstanding  shares of Oriental Wave Holding Limited  ("Oriental  Wave") by
     issuing  44,502,004  common  shares of the Company.  This  transaction  was
     completed  on  January  12,  2005 and has been  accounted  for as a reverse
     acquisition (See Note 5(B)).  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. The Statement of operations includes the
     results of Oriental  Wave for the six months  ended June 30, 2005 and those
     of the Company from January 13 to June 30, 2005.

     Oriental Wave was  incorporated in the British Virgin Islands on January 7,
     2003. Shanxi Weiqida  Pharmaceutical  Company Limited ("Shanxi Weiqida"), a
     People's  Republic of China limited  liability  company was incorporated on
     January 22, 2002.  Shanxi  Weiqida is  principally  engaged in research and
     development,  manufacturing,  and selling of pharmaceutical products in the
     People's Republic of China ("PRC").

     During  2003,  Shanxi  Weiqida's   shareholders  exchanged  100%  of  their
     ownership  of Shanxi  Weiqida for 50,000  shares of  Oriental  Wave under a
     reorganization  plan. The transfer was accounted for as a reorganization of
     entities under common control as the companies were  beneficially  owned by
     identical   shareholders  and  share  common   management.   The  financial
     statements  have  been  prepared  as if  the  reorganization  had  occurred
     retroactively.

     The consolidated  financial  statements include the accounts of the Company
     and its 100% owned  subsidiaries:  Oriental Wave,  Shanxi  Weiqida,  Allwin
     Newtech Ltd., Sanhe Kailong  Bio-pharmaceutical  Co., Ltd.,  Nanjing Huaxin
     Bio-pharmaceutical  Co. Ltd.  ("Huaxin"),  Allwin  Biotrade Inc. and Dragon
     Pharmaceuticals  (Canada) Inc.. All significant  intercompany  balances and
     transactions have been eliminated upon consolidation.

     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  annual  financial  statements for the year ended December 31,
     2004 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
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars


     (B) Use of Estimates

     In preparing  consolidated  financial  statements in  conformity  with U.S.
     generally accepted  accounting  principles,  management is required to make
     estimates and  assumptions  that affect the reported  amounts of assets and
     liabilities and the disclosure of contingent  assets and liabilities at the
     date of the  financial  statements  and revenues  and  expenses  during the
     reported period. Actual results could differ from those estimates.

     (C) Cash and Cash Equivalents

     For purposes of the cash flow statements,  the Company considers all highly
     liquid investments with original  maturities of three months or less at the
     time of purchase to be cash equivalents.

     (D) Accounts Receivable

     The Company  extends  unsecured  credit to its  customers  in the  ordinary
     course of business but mitigates the associated risks by performing  credit
     checks and actively  pursuing past due accounts.  An allowance for doubtful
     accounts is established  and recorded based on  management's  assessment of
     the credit history with the customer and current relationships with them.

     (E) Investments

     During the twelve  months  ended  December  31,  2004,  the Company made an
     investment in a private company of $12,077. The investment  represents less
     than 1% of the total equity outstanding of the private company  outstanding
     as of June 30, 2005. The private company  investment is carried at cost and
     written  down to  fair  market  value  when  indications  exist  that  this
     investment  has other than  temporarily  declined in value.  As of June 30,
     2005, no impairment in the value of the investment has been recorded.

     (F) Inventories

     Inventories  are  stated at the lower of cost or market  value,  cost being
     determined on a first-in,  first-out method. The Company provides inventory
     allowances based on excess and obsolete inventories  determined principally
     by customer demand and product expiration dates.

                                       8
<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

     (G) Property and Equipment

     Property and equipment are stated at cost, less  accumulated  depreciation.
     Expenditures for additions,  major renewals and betterments are capitalized
     and  expenditures  for  maintenance  and  repairs are charged to expense as
     incurred.

     Depreciation is provided on a straight-line  basis, less estimated residual
     value over the assets  estimated  useful lives.  The estimated useful lives
     are as follows:

               Buildings                             50 Years
               Plant and machinery                   10 Years
               Motor vehicles                        8 Years
               Furniture, fixtures and
               equipment                             5 Years
               Leasehold improvements                Term of lease (5 -10 years)

     Land use rights are stated at cost, less accumulated amortization. The land
     use rights are amortized  over the term of the relevant  rights of 50 years
     from the date of acquisition.

     Depreciable  assets are reviewed for impairment  whenever events or changes
     in  circumstances  indicate that the carrying amount may not be recoverable
     based on projected  undiscounted  cash flows  associated with the assets. A
     loss is  recognized  for the  difference  between  the fair  value  and the
     carrying amount of the assets.  Fair value is determined  based upon market
     quote, if available, or is based on valuation techniques.

     (H) Fair Value of Financial Instruments

     The  carrying   amount  of  the  Company's   cash  and  cash   equivalents,
     receivables,  investments and notes and other payables  approximates  their
     fair  value.  The fair  value of the notes  payables  are  estimated  using
     discounted cash flow analysis,  based upon the Company's  current borrowing
     rates, and approximate their carrying value.

     (I) Intangible Assets

     Intangible  assets  represent  licenses and permits for the  production and
     sales  of  pharmaceutical   products  in  China  and  are  amortized  on  a
     straight-line basis over ten years.

     Intangible   assets   are  tested  for   impairment   whenever   events  or
     circumstances  indicate that a carrying amount may not be  recoverable.  An
     impairment  loss would be recognized  when the carrying  amount of an asset
     exceeds the estimated un-discounted cash flows used in determining the fair
     value of the assets.  The amount of the  impairment  loss to be recorded is
     calculated by the excess of the assets  carrying value over its fair value.
     Fair value is generally determined using a discounted cash flow analysis.

                                       9

<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

     (J) Revenue Recognition

     The Company recognizes revenue from the sale of pharmaceutical  products at
     the time when  title to the  products  transfers,  the  amount is fixed and
     determinable,  evidence of an agreement exists,  and the customer bears the
     risk of loss, net of estimated  provisions  for returns,  rebates and sales
     allowances.  Revenues are recognized  only when the Company has transferred
     to the customer the significant risk and rewards of ownership of the goods.

     (K) Advertising Costs

     Advertising  costs are expensed as incurred.  Advertising  expense  totaled
     $7,854  and  $13,041  for the six  months  ended  June 30,  2005 and  2004,
     respectively  and $6,873 and  $11,882 for the three  months  ended June 30,
     2005 and 2004, respectively.

     (L) Research and Development

     Research and development  costs related to both present and future products
     are expensed as incurred.  Total  expenditures  on research and development
     charged to selling,  general and administrative expenses for the six months
     ended June 30, 2005 and 2004 were  $67,201 and  $96,756,  respectively  and
     $54,891  and  $44,518  for the three  months  ended June 30, 2005 and 2004,
     respectively.

     (M) Income Taxes

     The Company  accounts  for income  taxes under the  Statement  of Financial
     Accounting  Standards No. 109,  "Accounting  for Income Taxes"  ("Statement
     109").  Under  Statement  109,  deferred  tax  assets and  liabilities  are
     recognized  for the future tax  consequences  attributable  to  differences
     between the financial  statement  carrying  amounts of existing  assets and
     liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
     liabilities  are  measured  using  enacted  tax rates  expected to apply to
     taxable  income  in the  years in which  those  temporary  differences  are
     expected to be recovered  or settled.  Under  Statement  109, the effect on
     deferred tax assets and  liabilities of a change in tax rates is recognized
     in income in the period  that  includes  the  enactment  date.  The Company
     located its factories in a special economic region in China.  This economic
     region  allows  foreign  enterprises a two-year  income tax exemption  from
     central  government  tax  beginning  in the first year  after  they  become
     profitable,  being the year  commencing  on January 1, 2003 to December 31,
     2004 and a 50% income tax reduction for the  following  three years,  being
     2005 to 2007. The Company was approved as a wholly owned foreign enterprise
     in October 2002.

                                       10

<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars


     (N) Foreign Currency Translation

     The  functional  currency of the majority of the business of the Company is
     the Chinese Renminbi ("RMB"), however, the Company reports in U.S. dollars.
     The  operating  accounts of the  Company  which are  maintained  in RMB are
     translated  to U.S.  dollars  at  US$1.00 = RMB 8.28  during  the six month
     period.   Transactions   denominated  in  currencies  other  than  RMB  are
     translated into United States dollars using period end exchange rates as to
     assets and  liabilities  and  average  exchange  rates as to  revenues  and
     expenses.  Capital  accounts are  translated at their  historical  exchange
     rates when the capital transaction occurred. Net gains and losses resulting
     from  foreign  exchange  translations  are  included in the  statements  of
     operations and stockholder's equity as other comprehensive gain (loss).

     (O) Other Comprehensive Income

     The foreign currency translation gain or loss resulting from translation of
     the  financial  statements  expressed  in RMB to  United  States  Dollar is
     reported as other comprehensive  income in the statements of operations and
     stockholders' equity.

     (P) Segments

     The  Company  operates in three  reportable  segments,  Chemical  Division,
     Pharma Division and Biotech Division.

     (Q) Earnings Per Share

     Earnings per share are computed using the weighted average number of shares
     outstanding  during the period.  Diluted  earnings per share, as determined
     using the treasury method, is equal to the basic income per share as common
     stock equivalents  consisting of options to acquire 3,128,000 common shares
     that are  outstanding  at June 30,  2005  are not  significantly  dilutive,
     however, they may be dilutive in future.

     (R) Reclassifications

     Certain  2004  balances  have  been  reclassified  to  conform  to the 2005
     presentation.

     (S) Stock Based Compensation

     The  Company  adopted  the  disclosure-only   provisions  of  Statement  of
     Financial  Accounting  Standards  No.  123  (SFAS  123),   "Accounting  for
     Stock-based  Compensation",  as  amended by SFAS No.  148  "Accounting  for
     Stock-based Compensation - Transition and Disclosure - An amendment of SFAS
     No. 123". SFAS 123 encourages,  but does not require,  companies to adopt a
     fair value based  method for  determining  expense  related to  stock-based
     compensation. The Company continues to account for stock-based compensation
     issued to  employees  and  directors  using the  intrinsic  value method as

                                       11
<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

     prescribed  under  Accounting   Principles  Board  Opinion  (APB)  No.  25,
     "Accounting for Stock Issued to Employees" and related Interpretations.

     (T) Recent Accounting Pronouncements

     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 will be effective for inventory  costs incurred during
     fiscal years  beginning  after June 15, 2005.  The adoption of SFAS No. 151
     does not have an impact on the Company's consolidated financial statements.

     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)
     shall be effective for the Company as of the beginning of the first interim
     or annual  reporting  period that  begins  after  December  15,  2005.  The
     adoption  of this new  accounting  pronouncement  does not have a  material
     impact on the Company's consolidated financial statements.

     In May 2005, the FASB issued  Statement of Financial  Accounting  Standards
     SFAS No. 154,  "Accounting Changes and Error Corrections,  a replacement of
     APB  Opinion  No.  20  and  FASB   Statement  No.  3."  SFAS  154  requires
     retrospective  application  to  prior  periods'  financial  statements  for
     changes in accounting  principle,  unless it is  impracticable to determine
     either the period-specific  effects or the cumulative effect of the change.
     SFAS  154 also  requires  that  retrospective  application  of a change  in
     accounting  principle  be  limited to the  direct  effects  of the  change.
     Indirect effects of a change in accounting  principle,  such as a change in
     non-discretionary  profit-sharing  payments  resulting  from an  accounting
     change,  should be recognized in the period of the accounting change.  SFAS
     154 also requires that a change in depreciation, amortization, or depletion
     method for long-lived, non-financial assets be accounted for as a change in
     accounting estimate effected by a change in accounting principle.  SFAS 154
     is  effective  for  accounting  changes and  corrections  of errors made in
     fiscal years beginning after December 15, 2005. Early adoption is permitted
     for  accounting  changes and  corrections  of errors  made in fiscal  years
     beginning after the date this Statement is issued. The adoption of this new

                                       12
<PAGE>

                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

     accounting   pronouncement   does  not  have  a  material   impact  on  its
     consolidated financial position, results of operations or cash flows.

NOTE 2  ACCOUNTS RECEIVABLE

     Accounts receivable at June 30, 2005 and December 31, 2004 consisted of the
     following:

                                                                   RESTATED
                                                                   (NOTE 20)
                                              June 30, 2005    December 31, 2004
                                              --------------   -----------------
       Trade and other receivables            $   9,138,155     $    6,799,872
       Less: allowance for doubtful accounts        438,337            124,574
                                              --------------   -----------------
        Accounts receivable, net              $   8,699,818     $    6,675,298
                                              ==============   =================

     For the six months  ended June 30, 2005 and 2004,  the Company  recorded an
     allowance for doubtful accounts of $12,610 and $182,500,  respectively,  in
     the Consolidated Statement of Operations.

NOTE 3  INVENTORIES

     Inventories  at June 30,  2005  and  December  31,  2004  consisted  of the
     following:

                                                                   RESTATED
                                                                   (NOTE 20)
                                              June 30, 2005    December 31, 2004
                                              --------------   -----------------

       Raw materials                          $   4,421,108    $   4,287,604
       Work-in-progress                          11,301,810       10,994,088
       Finished goods                             3,123,854        2,302,073
                                              --------------   -----------------
                                                 18,846,772       17,583,765
       Less: provision for obsolescence
             and impairment                       1,245,782          959,859
                                              --------------   -----------------
                                              $  17,600,990    $  16,623,906
                                              ==============   =================

     For the three and six  month  periods  ended  June 30,  2005 , the  Company
     recorded a recovery from the provision for obsolete inventories of $762,764
     and $286,181,  respectively,  in the  Consolidated  Statement of Operations
     compared to provisions  for obsolete  inventories  of $274,219 and $274,219
     for the three and six month periods ended June 30, 2004.


                                       13
<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars


NOTE 4  PROPERTY AND EQUIPMENT

     The  following is a summary of property and  equipment at June 30, 2005 and
     December 31, 2004:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>
                                                                        June 30, 2005
                                                  -----------------------------------------------------------
                                                                          Accumulated            Net Book
                                                       Cost              Depreciation             Value
                                                  ----------------     ------------------     ---------------
        Plant and equipment                   $       44,766,348   $          5,431,081   $      39,335,267
        Land and buildings                            18,809,157                548,005          18,261,152
        Motor vehicles                                   773,792                187,610             586,182
        Furniture and office equipment                 2,965,415                955,101           2,010,314
        Leasehold improvements                         1,083,534              1,058,355              25,179
        Idle equipment                                   555,339                455,339             100,000
        Construction in progress                       4,289,401                      -           4,289,401
                                                  ----------------     ------------------     ---------------

                                               $       73,242,986   $          8,635,491   $      64,607,495
                                                  ================     ==================     ===============

                                                            December 31, 2004 RESTATED (NOTE 20)

                                                  ---------------------------------------------------------
                                                                        Accumulated            Net Book
                                                       Cost             Depreciation            Value
                                                  ---------------     -----------------     ---------------
        Plant and equipment                    $      41,154,014   $         2,293,918   $        38,860,096
        Land and buildings                            18,552,438               370,169            18,182,269
        Motor vehicles                                   611,261                55,166               556,095
        Furniture and office equipment                 2,499,188               392,511             2,106,677
        Construction in progress                       2,691,179                     -             2,691,179
                                                  ---------------     -----------------     ---------------

                                               $      65,508,080   $         3,111,764   $        62,396,316
                                                  ===============     =================     ===============
</TABLE>

     Depreciation expense for six month periods ended the June 30, 2005 and 2004
     was $2,587,248 and $851,434  respectively.  Depreciation  expense for three
     month periods ended the June 30, 2005 and 2004 was  $1,280,980 and $488,649
     respectively.

                                       14

<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

NOTE 5 ACQUISITIONS

     (A) Land Use Rights

     During July 2003, the Company acquired Land Use Rights and buildings from a
     government  liquidator in exchange for assuming certain future  employment,
     healthcare  and Land Use Rights  acquisition  costs of the  factory and its
     former employees. The agreement requires the Company to pay certain minimum
     wages and health care costs until the date of their employment,  retirement
     or death,  whichever  occurs first.  The maximum amount of the  liabilities
     assumed on the closing date was $8,897,685 which approximates the appraised
     value of the Land Use Rights  acquired.  The  Company  has  calculated  the
     related  asset value by computing  the  estimated  fair value of the future
     expected payments to the remaining  employees  assuming an interest rate of
     3% and has  recorded  the Land Use  Rights at  $3,332,907  (See Notes 7 and
     14(D)).  Subsequent to the  acquisition the Company rehired a number of the
     former  employees,  reducing the expected  future  payments  required.  The
     Company has accounted  for the reduction of the  obligation by reducing the
     amount of Land Use Rights recorded.  The cost of Land Use Rights as at June
     30, 2005 and December 31, 2004 is as follows:

                                                                     RESTATED
                                                                     (NOTE 20)
                                                  June 30,           December
                                                  2005               31, 2004
                                             ---------------- -----------------
        Original Cost recorded                $    3,332,907   $    3,332,907
        Less: reduction of future accrued
        retirement benefit                         1,163,387        1,135,238
                                             ---------------- -----------------
        Cost of Land Use Rights               $    2,169,520   $    2,197,669
                                             ================  =================

     The Land Use Rights have been  reduced by $28,149  during the period  ended
     June 30, 2005 and will be reduced in the future should  payments be further
     reduced due to additional former employees being rehired.

     (B) Oriental Wave Holding 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.

                                       15
<PAGE>

                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars


     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. The Statement of operations includes the
     results of Oriental  Wave for the six months  ended June 30, 2005 and those
     of the Company from January 13 to June 30, 2005.

     The preliminary allocation of the net assets acquired is as follows:

            Cash and short term securities                      $   2,103,481
            Accounts receivable                                     1,382,119
            Inventories                                               585,565
            Prepaid and deposits                                      100,421
                                                                --------------
            Total Current Assets                                    4,171,586
            Fixed Assets                                              867,742
            Intangible and other assets, net                        2,349,222
                                                                --------------
                           Total Assets                             7,388,550
            Less accounts payables and accrued liabilities         (1,629,804)
                                                                ---------------
            Net assets acquired                                 $   5,758,746
                                                                ===============

     A summarized  statement of  operations  for the Company for the twelve days
     ended January 12, 2005 is as follows:

            Sales                                               $     145,435
                                                                --------------
            Gross Profit                                              109,059
                                                                --------------
            Total operating expenses                                  166,881
                                                                --------------
            Loss for the period                                 $    (57,822)
                                                                ==============

     Pro-forma financial information,  assuming the acquisition occurred January
     1, 2004, are as follows:

     For the six months ended June 30,                           RESTATED
                                                                 (NOTE 20)
                                          2005                      2004
                                ---------------------     --------------------
     Sales                             23,325,007               16,262,400
                                =====================     ====================
     Gross profit                       6,500,003                8,579,619
                                =====================     ====================
     Net income                        1,1982,934                3,640,875
                                =====================     ====================
     Earnings per share                   $  0.02                  $  0.06
                                =====================     ====================

                                       16
<PAGE>

                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

NOTE 6  INTANGIBLE ASSETS

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

     Intangible assets consist of the following as of June 30, 2005 and December
     31, 2004:

                                                                   RESTATED
                                                                   (NOTE 20)
                                             June 30, 2005     December 31, 2004
                                         ------------------    -----------------

       Licenses                            $    2,951,814      $     603,865
       Less: accumulated amortization             454,132            171,096
                                         ------------------    -----------------
                                           $    2,497,682      $     432,769
                                         ==================    =================

     Amortization expense for the six month periods ended June 30, 2005 and 2004
     was $283,036 and $30,193,  respectively.  For the three month periods ended
     June 30, 2005 and 2004,  amortization  expense was  $153,011  and  $15,097,
     respectively.

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 June 30, 2005 and December 31, 2004 as follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>
                                                                                                      RESTATED
                                                                                                      (NOTE 20)
                                                                              June 30, 2005        December 31, 2004
                                                                          -------------------     -------------------
       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  not expected to be
        paid                                                                       (615,304)               (615,304)
                                                                          -------------------     -------------------
       Present value of expected liabilities                                      3,332,907               3,332,907
       Less: amounts paid and liabilities not expected to be paid                 2,516,689               2,348,154
                                                                          -------------------     -------------------
                                                                                    816,218                 984,753
       Less: current portion                                                         95,327                 114,432
                                                                          -------------------     -------------------
                                                                       $            720,891   $             870,321
                                                                          ===================     ===================
</TABLE>

                                       17
<PAGE>

                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars


       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 5(A) and 13.

NOTE 8 OTHER PAYABLES AND ACCRUED LIABILITIES


     Other  payables and accrued  liabilities  at June 30, 2005 and December 31,
     2004 consist of the following:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>
                                                                                                      RESTATED
                                                                                                      (NOTE 20)
                                                                              June 30, 2005        December 31, 2004
                                                                          -------------------     -------------------
       Machinery and equipment payable                               $          6,316,335     $          7,050,243
       Accrued expenses                                                         7,826,102                6,360,198
       Value added tax payables                                                   279,178                     -
       Income taxes payable                                                       170,321                  166,495
       Other taxes payable                                                        108,471                  121,054
       Deposits received from customers                                         3,912,961                4,007,173
                                                                        ------------------       -------------------
                                                                     $         18,613,368     $         17,705,163
                                                                        ==================       ===================
</TABLE>


                                       18
<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

NOTE 9  NOTES PAYABLE

     Balance at June 30, 2005 and December 31, 2004:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>
                                                                                                          RESTATED
                                                                                                         (NOTE 20)
                                                                             June 30, 2005          December 31, 2004
                                                                         ------------------       --------------------
       Note  payable  to a  bank,  interest  rate of  6.372%  per          $      420,290           $        420,290
       annum, guaranteed by a third party, due June 2005 (*)

       Note  payable  to a  bank,  interest  rate of  6.372%  per
       annum, guaranteed by a third party, due June 2005 (*)                      386,473                    386,473

       Note  payable  to a  bank,  interest  rate of  8.874%  per
       annum, guaranteed by a third party, due July 2005 (**)                     603,865                          -

       Note  payable  to a  bank,  interest  rate of  6.138%  per
       annum,  secured  by  fixed  assets  of  $5,047,038,   due
       November 2005                                                            3,623,188                  3,623,188

       Note payable to a bank, interest rate of 6.039% per annum, secured by
       leasehold land and fixed assets, due
       April 2005                                                                       -                  8,454,106

       Note payable to a bank, interest rate of 6.039% per annum, secured by
       leasehold land and fixed assets of
       $3,192,237, due April 2006                                               1,811,594                          -

       Note payable to a bank,  interest rate of 5.76% per annum,
       secured by fixed assets of $9,996,803, due November 2006                 6,316,426                  6,316,426

       Note payable to a bank, interest rate of 6.039% per annum, secured by
       leasehold land and fixed assets of
       $3,860,503, due April 2007                                               6,642,512                          -

                                                                         ------------------       --------------------
                                                                               19,804,348                 19,200,483
       Less current maturities                                                  6,845,410                 12,884,057
                                                                         ------------------       --------------------
                                                                          $    12,958,938         $        6,316,426
                                                                         ==================       ====================
</TABLE>
                                       19
<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

     * The  Company  is in  the  process  of  renegotiating  and  extending  the
     repayment  term on the Notes  Payable  due in June 2005 but the process has
     been  extended  due to  additional  information  being  required  from  the
     guarantor  of the Notes.  In the  meantime,  the Company  has  subsequently
     repaid  $120,773  in July 2005 and  $299,517  in August 2005 and intends to
     further repay $386,473 in September  2005. The Company intends to re-borrow
     the full amount of the Notes once the guarantor has been re-approved by the
     bank.

     ** The  Note  payable  due in  July  2005  has  been  renegotiated  and the
     repayment term extended to October 2005.

       Maturities are as follows:

               Fiscal year ended December 31,
                          2005                          $   5,033,816
                          2006                              8,128,020
                          2007                              6,642,512
                                                      -------------------
                                                        $  19,804,348
                                                      ===================

NOTE 10    LONG TERM ACCOUNTS PAYABLE

     Long term accounts  payable balances at June 30, 2005 and December 31, 2004
     is the final payment of  construction  contracts which had been finished as
     of December 31, 2004.  According to the contract terms,  the final payments
     on the contracts will be settled as follows:

                                                                     RESTATED
                                                                     (NOTE 20)
                                                                    December 31,
                                                    June 30, 2005       2004
                                                    -------------   ------------
                Settlement Arrangement

       Accounts payable due July to November, 2006  $ 21,712,222    $ 21,873,147
                                                    =============   ============

                                       20
<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

NOTE 11    DUE TO RELATED PARTIES

     The amounts due to related party at June 30, 2005 and December 31, 2004 are
     unsecured and non-interest bearing:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>
                                                                                                       RESTATED
                                                                                                      (NOTE 20)
                                                                           June 30, 2005          December 31, 2004
                                                                         ------------------       -------------------

       Due to a company owned by a stockholder and
        director due March 2006                                          $              -         $       1,328,502

       Due to a company owned by a  stockholder and
        director due March 2006                                                    892,206                4,660,984
                                                                         ------------------       -------------------
                                                                                   892,206                5,989,486
       Less: current maturities                                                    892,206                4,660,984
                                                                         ------------------       -------------------
                                                                         $               -        $       1,328,502
                                                                         ==================       ===================
</TABLE>

NOTE 12   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.  Substantially  all assets and
     operations of the Company are located in China,  which is considered as one
     geographic  location  in an economic  environment  with  similar  risks and
     returns.  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 income  from  operations.  All  intercompany
     transactions  between  segments  have been  eliminated.  As a  result,  the
     components  of operating  income for one segment may not be  comparable  to
     another  segment.  The  following  is a summary  of the  Company's  segment
     information for the periods ended June 30, 2005 and 2004 and as of June 30,
     2005 and December 31, 2004.

                                       21
<PAGE>

                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                      (UNAUDITED) Expressed in US Dollars
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>
                                                  Chemical             Pharma             Biotech
                                                  Division            Division           Division               Total
                                               ---------------     ---------------     --------------     -------------------
2005
Three months ended June 30, 2005
Sales                                       $       4,880,013   $       5,686,800   $        784,096   $          11,350,909
Gross profit                                          184,473           2,410,184            587,109               3,181,766
Depreciation and amortization RESTATED
(NOTE 20)
                                                    1,059,381             184,907            215,011               1,459,299
Six months ended June 30, 2005
Sales                                              10,584,046          11,007,571          1,587,955              23,179,572
Gross profit                                          218,898           4,918,407          1,253,640               6,390,945
Depreciation and amortization RESTATED
(NOTE 20)
                                                    2,116,968             338,711            414,605               2,870,284

As at June 30, 2005
Total assets
RESTATED (NOTE 20)
                                                    69,819,365          22,129,522         5,447,916              97,396,803
Additions to long-lived assets                       3,860,225              84,541             4,938               3,949,704
Intangible assets                                            -             402,575         2,095,107               2,497,682

2004
Three months ended June 30, 2004
Sales                                                  533,785           6,787,164                 -               7,320,949
Gross profit                                           121,318           3,915,450                 -               4,036,768
Depreciation and amortization                          369,700             134,046                 -                 503,746

Six months ended June 30, 2004
Sales                                                1,383,570          13,092,415                 -              14,475,985
Gross profit                                           449,491           6,785,210                 -               7,234,701
Depreciation and amortization                          604,481             277,146                 -                 881,627

As at December 31, 2004
Total assets
RESTATED (NOTE 20)
                                                    66,726,390          23,611,914                 -              90,338,304
Additions to long-lived assets                      27,295,156             852,773                 -              28,147,929
Intangible assets                                            -             432,769                 -                 432,769

</TABLE>
                                       22
<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars


NOTE 13  OTHER INCOME - 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.  (Please also
     refer to Note 5(A)) 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 current period to reflect the above transactions.

NOTE 14 COMMITMENTS AND CONTINGENCIES

     (A) Employee Benefits

     The full time employees of Shanxi Weiqida are entitled to employee benefits
     including  medical  care,  welfare  subsidies,  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 was $86,744 and $204,532 for the six
     month  periods ended June 30, 2005 and 2004,  respectively  and $29,473 and
     $62,802  for the  three  month  periods  ended  June  30,  2005  and  2004,
     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.


                                       23
<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

     (B) Loan Guarantee

     The Company has  guaranteed  bank loans to two  suppliers  in the amount of
     $181,000 (RMB1.5 million) due on August 11, 2005 (repaid subsequent to June
     30, 2005) and $2,415,000  (RMB20 million) due on July 16, 2005 (extended to
     July 16, 2005  subsequent to July 16, 2006).  Interest on the loan due July
     16, 2006 is charged at 7.905% and the bank has the right to seek settlement
     from the  Company  for payment  should the two  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 $2,614,274.  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  $2,415,000  (RMB20  million) due on September  26,
     2007 and $3,623,000  (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 $ 6,861,101.
     This vendor has pledged assets totaling $8,484,000 (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 fulfill registered capital of $19,205,116 (RMB 159,018,360)  within five
     years  from  December  16,  2003.  As of June 30,  2005,  the  Company  has
     fulfilled  $14,656,174 (RMB 121,353,123) of registered capital  requirement
     and has registered capital commitments of $4,548,942 (See Note 15(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 June 30, 2005,
     the Company has rehired 655 former  employees,  236 employees  have retired
     and 163 former  employees  remain  unemployed.  If the Company is unable to
     provide continued employment to these individuals, it will be liable to pay
     each former employee  approximately  $49 per month until his or her date of
     retirement, at age 60 or 50, respectively,  or death, whichever comes first
     (See Notes 5 & 7).

                                       24
<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

     (E) Operating Leases

     The Company has entered into  operating  lease  agreements  with respect to
     Huaxin's production plant in Nanjing,  China for an amount of RMB 2,700,000
     (US$326,217) per annum until June 11, 2009 and the Company's administrative
     offices  in  Vancouver  for  an  amount   escalating  from  CDN$200,000  to
     CDN$230,000  (US$127,000 to US$146,000) per annum until March 31, 2007. The
     Company decided to close the facility in Nanjing,  effective July 31, 2005,
     and build a new facility in Datong,  China at the site of the manufacturing
     facilities  of Oriental Wave which is expected to be completed by September
     30,  2005.  The  Company has  renegotiated  the  termination  of its lease,
     without  penalty,  though  the  Company  may  be  required  to  pay  up  to
     approximately RMB 580,000 ($70,000) relating to severance and benefit costs
     associated  with the  closure,  of which RMB 500,000  (US$60,000)  has been
     accrued at June 30, 2005.  Minimum  payments  required under the agreements
     are as follows:


                 2005                              $ 119,174
                 2006                                188,202
                 2007                                 47,400
        -----------------------------------------------------
                 Total                              $354,776
        =====================================================

     (F) 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 cost of development is $648,800 (EUROS 500,000)
     of which $387,600 (EUROS 300,000) remains unpaid at June 30, 2005.

NOTE 15   STOCKHOLDERS' EQUITY

     (A) Capital Contribution (See note 14(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 statutory surplus reserve,
     statutory public welfare fund and discretionary  surplus reserve,  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 statutory  surplus  reserve should be at least 10% of

                                       25
<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

     the after tax net income  determined in accordance  with the PRC GAAP until
     the  reserve  is  equal to 50% of the  Company's  registered  capital.  The
     transfer to this reserve must be made before  distribution  of dividends to
     shareholders. Except for the reduction for losses incurred, any other usage
     should  not  result  in  this  reserve  balance  falling  below  25% of the
     registered capital. Appropriations to the statutory public welfare fund are
     at 5% to 10% of the after tax net income  determined in accordance with the
     PRC GAAP. The statutory  public welfare fund is established for the purpose
     of  providing  employee  facilities  and other  collective  benefits to the
     employees   and   is   non-distributable   other   than   in   liquidation.
     Appropriations  to  the  discretionary  surplus  reserve  are  made  at the
     discretion of the Board of Directors.  These reserves are not available for
     distribution to owners under general operating conditions.

     (C) Stock Options

     The Company has adopted the 2001 Stock Option Plan,  effective December 17,
     2001,  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 year ended  December 31, 2004.  During the period ended June 30,
     2005,  the  Company  granted  options to its  directors  and  employees  to
     purchase  2,260,000  shares at a price of $1.18 per share (being the market
     price  at the  time),  expiring  January  12,  2010.  Options  to  purchase
     1,460,000 shares were exercisable immediately with 400,000 options becoming
     available  January 12, 2006 and the balance of 400,000  options  vesting on
     January 12, 2007.

     The following summarizes stock option information for the period ended June
     30, 2005:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>
     --------------------------------------------------------------- -------------------- ------------------------
                                                                                                Weighted Average
                                                                              Shares             Exercise Price
     --------------------------------------------------------------- -------------------- ------------------------

              Options outstanding at December 31, 2003                       2,599,000                $   2.04
              Forfeited                                                       (705,000)               $   1.57
              Exercised                                                       (145,000)               $   0.50
     --------------------------------------------------------------- -------------------- ------------------------

              Options outstanding at December 31, 2004                       1,749,000                $   2.36
              Granted                                                        2,260,000                $   1.18
              Forfeited                                                       (919,500)               $   2.88

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

              Options outstanding at June 30, 2005                           3,089,500                $   1.34
     =============================================================== ==================== ========================
</TABLE>


                                       26
<PAGE>
                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

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

                               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             350,000         2.76                $0.68                        337,500         $0.68
         $1.01 - $2.00           2,439,500         4.34                $1.22                      1,639,500         $1.24
         $3.01 - $4.00             300,000         0.37                $3.13                        300,000         $3.13
                                   -------         ----                -----                        -------         -----
                                 3,089,500         3.78                $1.34                      2,277,000         $1.40
                                 =========         ====                =====                      =========         =====

</TABLE>

     The Company  accounts 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  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.  Based on the
     computed  option  values  and the  number of the  options  issued,  had the
     Company recognized  compensation expense, the following would have been its
     effect on the Company's net income:

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

               ------------------------------------------------ ------------------- ----------------
                                                                                       RESTATED
                                                                                       (NOTE 20)
               For the six months ended June 30,                              2005       2004
               ------------------------------------------------ ------------------- ----------------

               Net income for the period:
               - as reported                                            $1,237,416       $4,278,302
               - pro-forma                                                $ 90,972       $4,278,302
               ------------------------------------------------ ------------------- ----------------

               Basic and diluted income per share:
               - as reported                                               $0.02            $0.10
               - pro-forma                                                 $0.00            $0.10
               ------------------------------------------------ ------------------- ----------------
</TABLE>

                                       27

<PAGE>

                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

NOTE 16    INCOME TAXES

     Shanxi  Weiqida  and Huaxin are  subject to income  taxes in China on their
     taxable  income as  reported in their  statutory  accounts at a tax rate in
     accordance with the relevant income tax laws.

     Oriental  Wave,  Allwin  Newtech  Ltd.  and  Allwin  Biotrade  Inc  are BVI
     companies and are not subject to income taxes.  Dragon  Pharmaceutical Inc.
     and Dragon  Pharmaceutical  (Canada) Inc. are U.S. and Canadian  companies,
     respectively, and are subject to taxes in those jurisdictions.


NOTE 17    RELATED PARTY TRANSACTIONS

     See Notes 6 and 11.


NOTE 18    CONCENTRATIONS AND RISKS

     92.5% and 89% of the Company's  revenues for the three and six months ended
     June 30, 2005,  respectively,  were derived from customers located in China
     and 99% of its assets at June 30, 2005 are located in China. Comparatively,
     100% of the Company's  revenues  during the three and six months ended June
     30,  2004 were  derived  from  customers  located  in China and 100% of its
     assets were located in China.

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

     The majority of the Company's  assets,  liabilities,  revenues and expenses
     are  denominated  in  Renminbi  which is tied to the US Dollar and is not a
     freely convertible currency.  The deregulation of the Renminbi resulting in
     an  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 (See Note
     19(A)).  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 June 30, 2005,  approximately  US$1,148,000 of the
     cash and cash  equivalents  (December  31,  2004:  US$885,681)  are held in
     Renminbi.

                                       28
<PAGE>

                  DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars


NOTE 19    SUBSEQUENT EVENTS

     (A) Renminbi Appreciation

     On July 22, 2005, the Chinese government decided to no longer peg the value
     of the  Renminbi to the US dollar but rather to a basket of  currencies  of
     its  largest  trading  partners.  The  result  was an  appreciation  of the
     Renminbi of approximately 2% against the value of the US dollar. The effect
     of the revaluation will be an increase in the assets, liabilities, revenues
     and  expenses  of the  Company  and a foreign  currency  gain  included  in
     comprehensive income.

     (B) Notes payable extension

     The Company has  renegotiated,  repaid and extended  certain  notes payable
     subsequent to June 30, 2005 as described in Note 9.

NOTE 20 RESTATEMENT

     As a  result  of  a  review  of  its  accounting  policies  and  applicable
     accounting pronouncements,  the Company has concluded that the reduction of
     a future retirement benefit obligation related to the acquisition of a land
     use right from a former  state-owned  enterprise  in China by Oriental Wave
     Holding Limited  ("Oriental Wave") in July 2003, should have been accounted
     for as a reduction to the recorded cost of the land use right instead of as
     a non-operating gain from  extinguishment of debt, as previously  disclosed
     in Oriental Wave's 2004 financial statements.  As a result, Oriental Wave's
     2004 financial  statements  have been restated  retroactive to June 2004 to
     reflect such change in accounting treatment.

                                       29

<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars

     The  reduction of the future  retirement  benefit  obligation  during 2004,
     totaling $1,135,238 million,  which was recognized as a non-operating gain,
     has been  recorded as a reduction  to the cost of the land use right.  On a
     going  forward  basis,  any similar  reduction  of the  retirement  benefit
     obligation  will be treated as a reduction to the recorded cost of the land
     use right. The effect on the financial statements is as follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>
                                                           As at December 31, 2004
                                                   -------------------------------------
                                                                          Previously
                                                        Restated           Reported
                                                   -----------------   -----------------

         Current assets                                 $25,283,300         $25,283,300
         Property and equipment                          62,396,316          63,520,202
         Other assets                                     2,658,688           2,658,688
                                                   -----------------   -----------------

         Total assets                                  $ 90,338,304        $ 91,462,190
                                                   =================   =================

         Liabilities                                   $ 68,800,517        $ 68,800,517
                                                   -----------------   -----------------

         Share capital                                   14,027,504          14,027,504
         Retained earnings                                7,562,432           8,686,318
         Due from shareholder/comp loss                    (52,149)            (52,149)
                                                   -----------------   -----------------
         Total equity                                    21,537,787          22,661,673
                                                   -----------------   -----------------
         Total liabilities and equity                  $ 90,338,304        $ 91,462,190
                                                   =================   =================
</TABLE>
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>

                                           Three months ended June 30, 2004           Six months ended June 30, 2004
                                         -------------------------------------    ---------------------------------------
                                                                 Previously                                Previously
                                              Restated            Reported            Restated              Reported
                                         ------------------    ---------------    -----------------    ------------------

Net Sales                                      $ 7,320,949        $ 7,320,949         $ 14,475,985          $ 14,475,985
Cost of sales                                    3,284,181          3,284,181            7,241,284             7,241,284
                                         ------------------    ---------------    -----------------    ------------------
Gross profit                                     4,036,768          4,036,768            7,234,701             7,234,701
Operating expenses                               1,356,691          1,356,691            2,600,081             2,600,081
                                         ------------------    ---------------    -----------------    ------------------
Income from operations                           2,680,077          2,680,077            4,634,620             4,634,620

Other income (expense)                              10,707            845,244              (3,908)               830,629
                                         ------------------    ---------------    -----------------    ------------------
Income before taxes                              2,690,784          3,525,321            4,630,712             5,465,249
Income tax expense                                 352,410            352,410              352,410               352,410
                                         ------------------    ---------------    -----------------    ------------------

Net income                                     $ 2,338,374        $ 3,172,911          $ 4,278,302           $ 5,112,839
                                         ==================    ===============    =================    ==================

Net Income per share                              $   0.05           $   0.07             $   0.10              $   0.11
                                         ==================    ===============    =================    ==================
</TABLE>

                                       30
<PAGE>
                   DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
                       (UNAUDITED) Expressed in US Dollars


                                               Three months ended March 31, 2005
                                        ----------------------------------------
                                                                      Previously
                                                 Restated              Reported
                                        ------------------    ------------------

Net Sales                                     11,828,663            11,828,663
Cost of sales                                   8,619,484             8,619,484
                                        ------------------    ------------------
Gross profit                                    3,209,179             3,209,179
Operating expenses                              2,392,040             2,397,716
                                        ------------------    ------------------
Income from operations                            817,139               811,463
Other income (expenses)                           620,363               620,363
                                        ------------------    ------------------
Income before taxes                             1,437,502             1,431,826
Income tax expense                                196,746               196,746
                                        ------------------    ------------------

Net income                                      1,240,756             1,235,080
                                        =================     ==================

Net Income per share                         $       0.02        $         0.02
                                        =================     ==================






                                       31
<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 and six  months  ended  June 30,  2005  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,
2004. Due to the fact that Dragon's acquisition of Oriental Wave Holding Limited
("Oriental  Wave") on  January  12,  2005 is  deemed  to be a  reverse-take-over
transaction,   the  following  discussion  reflects  the  Company's  results  of
operations  for the three and six months  ended  June 30,  2005,  including  the
results of  Oriental  Wave for the full six months and the  results of  Dragon's
biotech  business  for  the  period  of  January  12,  2005 to  June  30,  2005.
Comparatively, the results of operations for the three and six months ended June
30, 2004 only reflected the Pharma and Chemical businesses of Oriental Wave.

     Incorporated in Florida, USA and headquartered in Vancouver,  B.C., Canada,
Dragon, prior to the acquisition of Oriental Wave, was formed for the purpose of
developing,  marketing and selling biologics such as  Erythropoietin  ("EPO") in
China and international  markets outside of China. Through its wholly-owned drug
manufacturing  company  Nanjing Huaxin  Bio-pharmaceutical  Co., Ltd.  ("Nanjing
Huaxin")  located in Nanjing City,  China,  Dragon  manufactures  and sells EPO.
Dragon's EPO has been approved and marketed in nine countries  including  China,
India, Egypt, Brazil, Ecuador,  Dominican Republic,  Trinidad-Tobago,  Peru, and
Kosovo.  In  addition,  we are  preparing  to enter  the  European  market  upon
obtaining product approval of our newly developed EPO products.

     On January 12, 2005, the Company or ("Dragon") completed the acquisition of
Oriental Wave Holding Ltd. ("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  three  production
facilities  in China:  two Chinese State Food and Drug  Administration  ("SFDA")
certified GMP production facilities consisting of a pharmaceutical facility with
a capacity of producing 1.6 billion tablets and capsules, 80 million injectables
and 10 million  suppositories per year and a chemical plant producing clavulanic
acid.  In addition,  Oriental  Wave has a third  facility  producing  7-ACA,  an
intermediate  for  Cephalosporin  antibiotics by a fermentation  process.  As an
intermediate,  the 7-ACA facility  doesn't require GMP  certification.  Oriental
Wave has a total of  approximately  306  drug  approvals  from the SFDA of which
about 66, mainly  anti-infectious  drugs,  were  actively  exploited in China in
2004.  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 date of the transaction.

     As  a  result  of  the  acquisition  of  Oriental  Wave,  Dragon  has  been
transformed  into a  diversified  and  growth  oriented  generic  pharmaceutical
company  with three key  business  units  consisting  of a Biotech  division for
biologics products,  such as Erythropoietin or EPO, a Chemical division for bulk
pharmaceutical chemical and intermediate such as Clavulanic Acid and 7-ACA and a
Pharma   division   for   formulated   drugs,    including    prescription   and
over-the-counter drugs, and sterilized bulk drugs. Through the acquisition,  the
Company has  significantly  increased  the size of  operations  and now has four
manufacturing  facilities  in China  (three  in Datong  city and one in  Nanjing
city),   approximately   1,800   employees,   with  over  1,200  contract  sales
representatives  in China,  and  approximately  58 key  products in 90 different

                                       32
<PAGE>
dosages and presentations  currently in the market. The Company now operates its
three business divisions:  a Pharma Division, a Chemical Division, and a Biotech
Division,  through  two  indirect  wholly-owned  subsidiaries  in China,  Shanxi
Weiqida    Pharmaceutical   Ltd.   ("Shanxi   Weiqida")   and   Nanjing   Huaxin
Bio-pharmaceutical Co., Ltd. ("Nanjing Huaxin"). The Company maintains its sales
network through 63 sales offices and over 1,200 sales representatives throughout
China for Pharma  products  sales and  marketing,  while it uses a direct  sales
model through the in-house sales  department to sell Chemical  products to other
domestic and  international  pharmaceutical  companies.  The  Company's  product
development  department  in  China  works  on R&D of new  generic  products  and
regulatory affaires of new products,  presentations,  and dosages approval,  and
cooperates  with  external  research  institutes  and  companies  to develop new
products as well. The Company's headquarters,  located in Vancouver, has finance
department  for  financial  reporting,  SEC  compliance,  corporate  finance and
investor  relations,  international sales department for international sales and
marketing, regulatory affairs department for international product approval, and
business development  department for exploring new business  opportunities.  The
Company also operates a European  office on product  development  of new EPO for
European  market,   Chemical  bulk  drugs  and  formulation  drugs,   technology
acquisition, and international sales.

Pharma Division

     Pharma Division's  operations are located in Datong Economic and Technology
Development Zone, Datong City, Shanxi Province,  China. Pharma Division produces
chemical generic, mainly anti-infectious, drugs. Pharma Division currently holds
approximately  306 product  approvals  from the Chinese drug approval  authority
(SFDA),  with which only 52 prescription,  Over-the-counter  and sterilized bulk
products are currently commercialized in China. The Company plans to build a new
workshop for the freeze-drying of temperature sensitive pharmaceutical products.
(See liquidity section) Among these products is Levofloxacin, a product marketed
by the  Company  whose  production  is  currently  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,
strengthen  R&D and  introduce  generic  drugs  with  potential  market  through
cooperation and acquisition, and conduct market research and product development
for preparing the launching of OTC product branding strategy.

Chemical Division

     The Chemical  Division's  operations  are located in Datong  Gongnong Road,
Datong  City,  Shanxi  Province,  China.  Chemical  Division  produces  the bulk
intermediate or ingredient to sell to other pharmaceutical companies for further
processing and formulation into finished products. The Chemical Division manages
the production of Clavulanic Acid, 7-ACA, and Abamectin for both the Chinese and
international  markets.  In  January  2004,  the  Chemical  Division  began  its
operation of a production  facility for  Clavulanic  Acid, and in July 2004, the
second production facility of the Chemical Division to produce 7-ACA started its
operation.  The third  production  facility for Abamectin  with planned  120-ton
production  capacity  is  currently  under  construction  and is  expected to be
completed  in the fourth  quarter of 2005.  One of the key  products in Chemical
Division is Clavulanic Acid, a drug that combines with antibiotics to fight drug
resistance.  Dragon is  currently  the sole  commercial  producer in China.  Two
Clavulanic Acid products were approved to export to India and initial quantities
of these two products to India has already started in 2004.  Another key product
in  the  Chemical   Division  is  7-ACA,  an  intermediate   for   Cephalosporin
antibiotics.  The 500-ton  production  capacity of 7-ACA makes  Dragon among the
main produces in the world. 7-ACA's export to India has already started in 2004.
In 2004,  Dragon's  Chemical  Division  entered  into a 3 year long term  supply
agreement with Aurobindo Pharma Limited,  an Indian  pharmaceutical  company, to
purchase 50% of the  products  from  Chemical  Division.  The Chemical  Division

                                       33
<PAGE>
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 DMF approvals in US and EU to enter
into international market.

Biotech Division

     The Biotech  Division's  operations are currently  located in Nanjing City,
Jiangsu   Province,   China.  The  sole  product  of  the  Biotech  Division  is
Erythropoietin  or EPO, an injection  that  stimulates  red blood cell, the best
selling drug in the world with a market size of US$10 billion in 2004.  Dragon's
EPO  is the  generic  version  of the  originator's  product.  Dragon's  Biotech
Division develops,  manufactures and markets generic biotech products with China
(72% of the divisional revenues in 2004) 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 only  competes in countries  where there is no
patent protection.  Dragon is in preparation to enter the European market with a
new EPO product  under  development  in Austria.  The Company is also building a
brand new EPO  production  facility in Datong city,  China and will relocate the
EPO production from its current facility in Nanjing city. The new EPO production
site 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,  is under  construction.  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  and the  capacity  for  sterile  filing  will be  tripled.  The Biotech
Division  operates  its business  strategies  to increase  market share  through
integration of sales network,  to increase the sales in surgical usage as one of
the two approved surgical indication  suppliers,  and to enter into European and
other developed countries market with product developed in Europe.

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 3 to the
Dragon's  Annual Report on Form 10-KSB for the year ended  December 31, 2004. In
addition, a description of Recent Accounting Pronouncements is contained in Note
1(T) to the Consolidated  Financial  Statements  contained in this report and in
Note 3(r) to the Consolidated  Financial  Statements to the Corporation's Annual
Report on Form 10-KSB for the year ended December 31, 2004.

                                       34
<PAGE>

Results of Operations

Results of Operations for the Three and Six Months Ended June 30, 2005 and 2004

     Sales.

     Sales for the three  months  period  ended June 30, 2005  increased  55% to
$11.35 million from $7.32 million for the same period in 2004. $10.50 million or
approximately  92% of the sales for the three months  period ended June 30, 2005
were  generated  from the  sales of  products  in the  Chinese  market,  and the
remaining  $0.85 million or  approximately  8% were  generated from the sales of
products in the  international  markets.  All sales for the three months  period
ended June 30,  2004 were  generated  from the sale of  products  in the Chinese
market.  In the three months ended June 30, 2005, $5.69 million or approximately
50% of the sales were from the Pharma  Division,  $4.88  million or 43% of sales
were from the Chemical Division,  and $0.78 million or 7% of sales were from the
Biotech Division. For the same period in 2004, 93% of sales were from the Pharma
Division  and 7% of  sales  were  from the  Chemical  Division  which  commenced
operation on January 1, 2004.

     Sales for the six months period ended June 30, 2005 increased 60% to $23.18
million  from  $14.48  million for the same  period in 2004.  $20.61  million or
approximately  89% of the sales for the six months  period  ended June 30,  2005
were  generated  from the  sales of  products  in the  Chinese  market,  and the
remaining  $2.57 million or  approximately  11% were generated from the sales of
products in the international markets. All sales for the six months period ended
June 30, 2004 were generated from the sale of products in the Chinese market. In
the six months period ended June 30, 2005,  $11.01 million or approximately  47%
of the sales were from the Pharma Division,  $10.58 million or 46% of sales were
from the  Chemical  Division,  and $1.59  million  or 7% of sales  were from the
Biotech Division. For the same period in 2004, 90% of sales were from the Pharma
Division  and 10% of sales  were  from the  Chemical  Division  which  commenced
operation  on January 1, 2004.  The  increase in sales  during the three and six
months ended June 30, 2005 as compared to the same period for the prior year was
primarily due to increase in sales from the Chemical and Biotech Division.

     Cost of sales for the three  months  ended June 30, 2005 was $8.17  million
compared  to $3.28  million  for the same  period of 2004.  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 June
30, 2005 were $3.18  million and 28%  compared to $4.04  million and 55% for the
same period of 2004.

     Cost of sales for the six  months  ended June 30,  2005 was $16.79  million
compared to $7.24  million for the same period of 2004.  Gross  profit and gross
margin  for the six  months  ended  June 30,  2005 were  $6.39  million  and 28%
compared to $7.23  million and 50% for the same period of 2004.  The decrease in
gross  margin was mainly due to a change in the  product  mix from the  previous
year.  The Chemical  Division,  whose  facilities  were brand new in 2004 and is
currently at the ramp up stage of the production which incurs higher  production
and operation  cost,  especially  depreciation  expenses,  increased the cost of
sales significantly during the three and six months ended June 30, 2005.

Divisional Revenues and Gross Margin Analysis

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

                                       35
<PAGE>

Pharma Division

     Pharma  Division's  revenues  for the three months ended June 30, 2005 were
$5.69  million,  accounting  for  50%  of the  total  revenues  of the  Company.
Comparatively, Pharma Division's revenues were $6.79 million for the same period
in  2004,  contributing  93% of  the  total  revenues  of  the  Company.  Pharma
Division's  revenues for the six months ended June 30, 2005 were $11.01 million,
accounting for 47% of the total revenues of the Company.  Comparatively,  Pharma
Division's   revenues  were  $13.09   million  for  the  same  period  in  2004,
contributing  90%  of the  total  revenues  of  the  Company.  The  lowering  of
percentage  of revenues  from the Pharma  division to the Company was due to the
tremendous  growth of the brand new Chemical  division achieved during the three
and six months  ended June 30, 2005.  The overall  gross margin for the division
for the three months ended June 30, 2005 was 42% as compared to 58% for the same
period of 2004, and the overall gross margin for the division for the six months
ended June 30, 2005 was 45% as compared to 52% for the same period of 2004.  The
lowering of revenues  and gross profit was mainly due to a change in product mix
with more new products  introduced  in the market and the reduction in prices of
certain prescription drugs due to increasing competition. The Company introduced
a number of new prescription and over-the-counter  drugs in the market at a more
competitive price initially in order to gain market awareness and market share.

Chemical Division

     Chemical  Division's revenues for the three months ended June 30, 2005 were
$4.88  million,  representing  a 814% increase from the revenues of 0.53 million
during the same period in 2004.  Chemical Division's revenues for the six months
ended June 30, 2005 were $10.58  million,  representing a 665% increase from the
revenues of $1.38 million during the same period in 2004. The increase is due to
the  introduction  of 7-ACA and the expansion of  Clavulanic  Acid sales outside
China.  The  Chemical  division  was new in 2004 as  only  the  Clavulanic  Acid
facility  had started  production  and the sales  during the first six months of
2004 were only made to Chinese  customers.  Since then, the Company  started the
pilot production of the 7-ACA  production  facility and the Company has received
export permits to sell two Clavulanic Acid products to the Indian market.

     Chemical  Division's  gross  margin for the three and six months ended June
30, 2005 was 4% and 2%, respectively,  compared to 23% and 32% for the three and
six months ended June 30, 2004, respectively.  The gross margin for the division
was low as the Company has  increased and expanded the  infrastructure,  and the
fixed manufacturing costs associated,  but is still in the process of ramping up
production to cost efficient levels. The initial Chemical Division production in
2004 was limited to Clavulanic  Acid and was produced with older,  smaller scale
production   infrastructure.   The  Company   constructed   the  new  production
infrastructure  (power, steam, purified water supply and water treatment) during
2004 as the old production infrastructure was insufficient to produce the amount
of Clavulanic Acid and 7-ACA desired.  The new facilities have greatly increased
production  capacity but also have significantly  higher fixed costs in the form
of depreciation cost ($1.06 million and $0.36 million for the three months ended
June 30, 2005 and 2004, respectively and $2.17 million and $0.60 million for the
six months  ended June 30, 2005 and 2004,  respectively)  of the new  facilities
constructed  and overhead of the  utilities  costs to power the new  facilities.
These  fixed  costs  represent  more  than a third  of the  cost of sales at the
current  production  levels  but  are  expected  to  fall  significantly,  on  a
percentage basis, when the anticipated production levels are achieved.

     Subsequent to the quarter end, the Company has increased the  production of
7-ACA from  approximately 30% to 80% of the full production  capacity which will
increase the sales of the Chemical Division.

                                       36
<PAGE>

Biotech Division

     Biotech  Division's  revenues  for the three and six months  ended June 30,
2005 were $0.78 million and $1.59 million, respectively,  representing 7% of the
Company's revenues for these periods.  Gross margin for the three and six months
ended  June 30,  2005  was at 75% and  79%,  respectively.  The  acquisition  of
Oriental  Wave by Dragon  completed on January 12, 2005 was  accounted  for as a
reverse-take-over  transaction.  As a result,  only  revenues  from the  Biotech
Division  from January 12, 2005 to June 30, 2005 were  included in the Company's
revenues  for the first  six  months of 2005 and no  revenues  from the  Biotech
Division were included in the 2004 financials.

     On a pro-forma  basis (assuming the  reverse-take-over  had occurred at the
beginning  of the  year),  for the three and six  months  ended  June 30,  2005,
Biotech Division's revenues were $0.78 million and $1.73 million,  respectively,
representing a 14% and 3% decrease,  respectively, from the same period of 2004.
The decrease in total sales for the three months ended June 30, 2005 mainly came
from the  decrease  in  international  sales  outside  of  China.  However,  the
international  sales  outside of China for the six month ended June 30, 2005 was
about the same as the same period of 2004,  while the 3% decrease in total sales
for the six month  ended June 30,  2005 was due to the  decrease  in China sales
compared to the same period of 2004.

     Biotech  Division's  pro-forma gross margin for the three months ended June
30, 2005 was 75%  compared to 79% for the same period of 2004.  The  decrease in
international  sales at higher gross margin contributes to the decrease of gross
margin for the three months  ended June 30, 2005.  For the six months ended June
30, 2005, Biotech Division's  pro-forma gross margin was 79% compared to 75% for
the same period of 2004. The  improvement of the gross margin for the six months
ended June 30, 2005 was due to a combination of a larger  percentage of sales to
overseas  customers at a higher  margin than the Chinese sales during the period
and no provision for inventory  obsolescence  as was recorded in the comparative
period.

     Other Income / Expense  During the three  months  ended June 30, 2005,  the
Company recognized other expense of $0.29 million, consisting mainly of interest
expense of $0.32 million, compared to other income of $0.01 million for the same
period of 2004.

     During the six months ended June 30,  2005,  the Company  recognized  $0.33
million of other income.  This amount primarily  consisted of $0.89 million from
funds   released  by  a  Chinese   Government   Liquidator   related  to  Datong
Pharmaceutical,  which was offset in part by interest  expense of $0.56 million.
The other expense for the six months ended June 30, 2004 was minimal.

     Expenses.  Total operating expenses were $2.77 million for the three months
ended June 30, 2005.  The major  category of operating  expenses was General and
Administration expenses of $1.21 million,  Selling expense of $1.29 million, and
Depreciation and Amortization expenses of 0.28 million. Total operating expenses
were $1.36 million for the three months ended June 30, 2004.  The major category
of operating expenses was General and Administration  expenses of $0.17 million,
Selling expense of $1.11 million, and Depreciation and Amortization  expenses of
0.08  million.  During the three  months  ended June 30,  2005,  the General and
Administration  expenses  included $0.48 million for salaries,  compensation and
benefits,  $0.16 million for travel and entertainment expenses and $0.11 million
for rent compared to $0.02million  for salaries,  compensation  and benefits and
$0.07 million for travel and entertainment  expenses,  and $0.01million for rent
for the same period of 2004.

                                       37
<PAGE>

     Total  operating  expenses were $5.16 million for the six months ended June
30,  2005.   The  major   category  of   operating   expenses  was  General  and
Administration expenses of $2.21 million,  Selling expense of $2.43 million, and
Depreciation  and  Amortization  expenses  of  $0.52  million.  Total  operating
expenses  were $2.60  million for the six months ended June 30, 2004.  The major
category of operating expenses was General and Administration  expenses of $0.59
million,  Selling expense of $1.92 million,  and  Depreciation  and Amortization
expenses of 0.09 million. During the six months ended June 30, 2005, the General
and  Administration  expenses included $1.07 million for salaries,  compensation
and  benefits,  $0.35  million for travel and  entertainment  expenses  and $0.2
million  for rent  compared  to $0.12  million for  salaries,  compensation  and
benefits  and $0.17  million for travel and  entertainment  expenses,  and $0.03
million for rent for the same period of 2004.

     The  increase  in  operating  expenses of $1.41  million and $256  million,
respectively,  for the three and six months  ended June 30,  2005 as compared to
the same period for the prior year  reflects the increased  overhead  related to
the  operations of both the Pharma and Chemical  Divisions in 2005  (compared to
just the Pharma Division and one of the two facilities of the Chemical  Division
in 2004) and the  addition  of the  Biotech  operations  and the head  office in
Vancouver.  In addition,  depreciation and amortization expense increased during
the three and six months ended June 30, 2005 due to the increase in fixed assets
of the Chemical Division in 2005.

     Net Income.  Dragon had a net loss of $0.003  million for the three  months
ended  June 30,  2005  compared  to a net income of $2.34  million  for the same
period in 2004. For the six months ended June 30, 2005,  Dragon had a net income
of $1.24 million compared to $4.28 million for the same period in 2004.

     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 the three
and six months ended June 30, 2005 was $0.00 and $0.02 per share,  respectively,
and for the three and six  months  ended  June 30,  2004 was $0.05 and $0.10 per
share,  respectively.  The weighted average number of shares  outstanding during
three  and six  months  ended  June 30,  2005  was  62,878,004  and  61,659,706,
respectively,  and was 44,502,004  shares during three and six months ended June
30, 2004.  The  outstanding  common stock options have no  significant  dilutive
effect on the weighted average number of shares outstanding.

     Dividends of the PRC subsidiary may only be distributed after allowance has
been made for i) recovery of losses,  if any; ii)  allocations  to the statutory
common reserve fund;  iii)allocations  to the statutory common welfare fund; and
iv)  allocations  to a  discretionary  common  reserve  fund if  approved by the
shareholders.  Under  current  regulation,  the minimum  and  maximum  aggregate
allocations  to the statutory  funds are 15% and 20%,  respectively,  of our net
income  determined in accordance with PRC accounting  rules.  However,  once the
aggregated  amount of statutory  common reserve fund equals 50% of the Company's
registered capital, no further  contributions to the fund need to be made. As at
June 30, 2005, the Company's  statutory  common reserve fund is $10.69  million,
44% of the Company's registered capital.

Liquidity and Capital Resources

     As of June 30, 2005,  Dragon had current  liabilities of $31.03 million and
current  assets of $28.41  million,  including cash balance of $1.36 million and
accounts  receivables of $8.70 million. Its working capital deficiency is mainly
due to the  additional  bank loan and  payables  incurred to finance its working
capital  requirement  for the Chemical  Division and  investment  in the new EPO
workshop and Freeze-dry workshop.

                                       38
<PAGE>

     As of June 30,  2005,  Dragon had current  liabilities  of  $31,029,733  as
follows:

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

        Accounts Payable                                                                      $4,583,421
        Accrued Retirement Benefits - current potion                                             $95,327
        Other Payables and Accrued Expenses                                                  $18,613,368
        Due to Related Companies                                                                $892,206
        Notes Payable-Short Term:
        Note payable to a bank, interest rate of 6.372% per annum,
                due June 2005                                                     $420,290
        Note payable to a bank, interest rate of 6.372% per annum,
                due June 2005                                                     $386,473
        Note payable to a bank, interest rate of 8.874% per annum,
                due July 2005                                                     $603,865
        Note payable to a bank, interest rate of 6.138% per annum,
                due November 2005                                               $3,623,188
        Note payable to a bank, interest rate of 6.039% per annum,
                due April 2006                                                  $1,811,594
        Notes Payable - Short Term Subtotal                                                   $6,845,410
        Total Current Liabilities                                                            $31,029,732
</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 June 30, 2005, Dragon had outstanding short-term notes (less than one
year term) totaling $6.85  million.  After $0.60 million  originally due in July
2005 was renewed and extended for three months to October  2005,  with a further
$0.81  million  originally  due in June 2005 in the process of renewing,  Dragon
believes that it will be successful in the  renegotiating  other notes due based
on the  assumption  that the  Company  has  enhanced  its  ability  to  generate
additional cash flow from its operation since the notes were originally  entered
into. 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.

                                       39
<PAGE>

Long-term Liabilities:

     At June 30,  2005,  Dragon had  long-term  liabilities  of  $35,392,050  as
follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>

        Long-term accounts payable                                                        $21,712,222
        Long-term retirement benefits                                                        $720,891
        Note Payable - Long Term
        Note payable to a bank, interest rate of 5.76% per
                annum, due November 2006                                 $6,316,426
        Note payable to a bank, interest rate of 6.039% per
                annum, due April 2007                                    $6,642,512
        Note Payable - Long Term                                                          $12,958,938
        Total Long-term Liabilities                                                       $35,392,051
</TABLE>

     As of June 30,  2005,  the Company  had  long-term  retirement  benefits of
$0.72million,  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 June 30, 2005,  Shanxi  Weiqida had employed 633 former
employees,  and 255 former employees have retired. Shanxi Weiqida has calculated
the  related  asset  value by  computing  the net  present  value of the  future
expected  payments to the  remaining  approximately  160  employees  assuming an
interest rate of 3%. As of June 30, 2005,  approximately 160 former employees of
Datong Pharmaceutical remained as the obligation of Dragon.

     Dragon  had  long-term   notes   payables  (one  to  two  years)   totaling
approximately  $12.96  million of which $6.32 million which will be due November
2006 and $6.64 million due April 2007, in addition to long-term account payables
of $21.71 million which will become due in 2006.

     During the six months ended June 30, 2005,  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, as discussed
below,  the anticipated  financing has taken longer than expected.  As a result,
Dragon was not able to increase its production  level as quickly as anticipated.
However,  during July 2005,  Dragon was able to increase its production level of
7-ACA,  one of the key  products of the Chemical  Division,  from 30% to 80% and
believes  that its sales of the Chemical  Division will  increase.  In addition,
certain  vendors of Shanxi  Weiqida have  indicated  that they intend to convert
their  receivables  into Dragon common stock.  Finally,  in August 2005,  Dragon
received  verbal  approval of an  approximately  $3.6  million  loan  subject to
completion  of loan  agreements.  Dragon  intends to seek  additional  equity to
improve its financial position.

     Further, as previously announced, Dragon intended to seek up to $25 million
through the sale of it equity  securities to  accredited  investors on a private
basis.  Dragon  has  engaged an  investment  bank in the U.S.  to raise  capital
through the sale of its equity securities which would enhance Dragon's financial
position.  The  process  to raise  additional  capital  has  taken  longer  than
anticipated.  However,  Dragon  is in  discussions  with  certain  institutional
investors  who may be  interested  in investing in Dragon.  No assurance  can be
given that Dragon will be able to raise  additional  capital through the sale of

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<PAGE>

its equity  securities  The  Company  has taken  steps to improve  its  negative
working capital and liquidity  position and believes that it will be successful.
However,  no assurance can be given that Dragon will be successful in completing
its plan.  In the event the Company is not  successful in improving its negative
working capital and liquidity  position,  the Company may required to reduce its
operations  or take  other  alternatives.  Accordingly,  Dragon's  business  and
operations will be adversely affected.

Restatement

     As a  result  of  a  review  of  its  accounting  policies  and  applicable
accounting  pronouncements,  the Company has  concluded  that the reduction of a
future retirement  benefit  obligation  related to the acquisition of a land use
right from a former  state-owned  enterprise  in China by Oriental  Wave Holding
Limited  ("Oriental  Wave") in July 2003,  should have been  accounted  for as a
reduction  to  the  recorded  cost  of  the  land  use  right  instead  of  as a
non-operating  gain from  extinguishment  of debt,  as  previously  disclosed in
Oriental  Wave's 2004 financial  statements.  As a result,  Oriental Wave's 2004
financial  statements  have been  restated to reflect such change in  accounting
treatment.

     The  reduction of the future  retirement  benefit  obligation  during 2004,
totaling $1,135,238  million,  which was recognized as a non-operating gain, has
been  recorded as a reduction  to the cost of the land use right  resulting in a
reduction of depreciation of expense of $11,352 during 2004. The Land Use Rights
have been further  reduced by $28,149 during the period ended June 30, 2005 and,
on a going  forward  basis,  any similar  reduction  of the  retirement  benefit
obligation  will be treated as a reduction to the recorded  cost of the land use
right.

     Since Oriental Wave's 2004 financial  results became the opening balance of
Dragon's 2005  financials due to the reverse merger in January 2005, the Company
has also restated its financial  statements for the three months ended March 31,
2005 to  reflect  the  impact  from the  restatement  of  Oriental  Wave's  2004
financial statements.  As a result of this restatement,  Dragon's net income for
the three months ended March 31, 2005  increased  by $5,676 to  $1,240,756,  and
total  assets  decreased by $1.12  million to $96.15  million at March 31, 2005,
equivalent to 1.15% of total assets prior to the restatement. Earnings per share
of $0.02 did not change for the three months ended March 31, 2005.

     The restatement involved the accounting treatment of a non-cash transaction
during the year ended  December  31, 2004 and the three  months  ended March 31,
2005. The  restatement did not have an effect on the cash flow or liabilities of
the Company. As a result of the restatement,  future  amortization  expense with
respect  to the  land  use  right  will  decrease  accordingly  over the 50 year
amortization period.

Item 3.  Controls and Procedures

     We  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation  of our  management,  including  our  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 our  second  fiscal  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.

                                       41
<PAGE>

     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

Item 5.   Other Information.

          None

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

          (a)  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.

          (b)  Reports on Form 8-K:

               (1)  Form  8-K  for  July  18,  2005  announcing  the  change  of
                    auditors.

               (2)  Form 8-K for May 19, 2005 announcing first quarter results.

               (3)  Form 8-K for April 8, 18, 2005  announcing a business update
                    and pro-forma financial data.


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                                   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:  September 21, 2005                  /s/ Yanlin Han
                                           ---------------------------
                                           Yanlin Han
                                           Chief Executive Officer



Dated:  September 21, 2005                 /s/ Garry Wong
                                           ---------------------------
                                           Garry Wong
                                           Chief Financial Officer

                                       43