United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                   FORM 10-QSB



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

                      For the quarter ended March 31, 2006



                         Commission File Number: 0-23485


                        DRAGON INTERNATIONAL GROUP CORP.
             (Exact name of registrant as specified in its charter)


     Nevada                                             98-0177646
     ------                                             ----------
 (State or other jurisdiction of                      (I.R.S. Employer
  incorporation or organization)                      Identification No.)



                                     Bldg 14
                    Suite A09, International Trading Center,
                                 29 Dongdu Road
                              Ningbo, China 315000
                    (Address of principal executive offices)

                               (86) 574-56169308
              (Registrant's telephone number, including area code)


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes[x] No [ ]

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

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 58,463,802 shares
at May 1, 2006

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x]


<PAGE>


            CAUTIONARY STATEMENT REGARDING FOWARD LOOKING INFORMATION


         This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of
the Securities and Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, as amended. These forward-looking statements are
subject to risks and uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the
results, performance or achievements expressed or implied by the forward-looking
statements. You should not unduly rely on these statements. Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts. They use words such as "anticipate," "estimate,"
"expect," "project," "intend," "plan," "believe," "project," "contemplate,"
"would," "should," "could," or "may." With respect to any forward-looking
statement that includes a statement of its underlying assumptions or bases, we
believe such assumptions or bases to be reasonable and have formed them in good
faith, assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material
depending on the circumstances. When, in any forward-looking statement, we
express an expectation or belief as to future results, that expectation or
belief is expressed in good faith and is believed to have a reasonable basis,
but there can be no assurance that the stated expectation or belief will result
or be achieved or accomplished. All subsequent written and oral forward-looking
statements attributable to us, or anyone acting on our behalf, are expressly
qualified in their entirety by the cautionary statements.



<PAGE>


                        DRAGON INTERNATIONAL GROUP CORP.
                                   FORM 10-QSB
                      QUARTERLY PERIOD ENDED MARCH 31, 2006
                                      INDEX



                                                                           Page

PART I - FINANCIAL INFORMATION

      Item 1 - Financial Statements

      Consolidated Balance Sheet
           March 31, 2006 (Unaudited)..........................................3
      Consolidated Statements of Operations (Unaudited)
           For the Three and Nine Months Ended March 31, 2006 and 2005.........4
      Consolidated Statements of Cash Flows (Unaudited)
           For the Nine Months Ended March 31, 2006 and 2005...................5

      Notes to Unaudited Consolidated Financial Statements................. 6-21

      Item 2 - Management's Discussion and Analysis or Plan of Operation...22-31

      Item 3 - Controls and Procedures........................................32


PART II - OTHER INFORMATION

      Item 1 - Legal Proceedings..............................................33

       Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds...33

      Item 3 - Default upon Senior Securities ................................33

      Item 4 - Submission of Matters to a Vote of Security Holders............33

      Item 5 - Other Information..............................................33

      Item 6 - Exhibits.......................................................33

      Signatures..............................................................34










                                       -2-


<PAGE>



                     DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
                                CONSOLIDATED BALANCE SHEET
                                      March 31, 2006
                                        (Unaudited)
<table>
<caption>

                                          ASSETS


                                                                                      <c>
CURRENT ASSETS:
    Cash                                                                                           $   1,066,411
    Cash - restricted                                                                                    267,573
    Accounts receivable (net of allowance for doubtful accounts of $203,131)                           5,057,488
    Inventories                                                                                        1,622,187
    Advances on purchases                                                                              1,369,751
    Other receivables                                                                                    467,150
    Prepaid expenses and other                                                                           136,933
                                                                                            ---------------------

        Total Current Assets                                                                           9,987,493

PROPERTY AND EQUIPMENT - Net                                                                           1,100,364
LAND USE RIGHTS - Net                                                                                  2,515,551
GOODWILL                                                                                                 490,651
                                                                                            ---------------------

        Total Assets                                                                                $ 14,094,059
                                                                                            =====================

                           LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Current portion of long-term debt                                                               $  2,885,683
    Convertible notes payable                                                                              6,438
    Accounts payable                                                                                   4,070,779
    Accrued expenses                                                                                   1,516,128
                                                                                            ---------------------

        Total Current Liabilities                                                                      8,479,028

LONG-TERM DEBT                                                                                            12,445
                                                                                            ---------------------

        Total Liabilities                                                                              8,491,473
                                                                                            ---------------------

STOCKHOLDERS' EQUITY:
    Preferred stock ($.001 Par Value; 25,000,000 Shares Authorized;
        No shares issued and outstanding)                                                                      -
    Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
        58,463,802 shares issued and outstanding)                                                         58,464
    Common stock issuable (6,000,000 shares)                                                               6,000
    Additional paid-in capital                                                                         6,893,249
    Retained earnings                                                                                   (538,473)
    Deferred compensation                                                                               (967,819)
    Other comprehensive income - foreign currency                                                        151,165
                                                                                            ---------------------

        Total Stockholders' Equity                                                                     5,602,586
                                                                                            ---------------------

        Total Liabilities and Stockholders' Equity                                                  $ 14,094,059
                                                                                            =====================

</table>
            See notes to unaudited consolidated financial statements
                                       -3-
<page>



                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)


<table>
<caption>

                                                         For the Three Months Ended           For the Nine Months Ended
                                                                   March 31,                           March 31,
                                                      ----------------  ----------------  ----------------   ----------------
                                                           2006              2005              2006               2005
                                                      ----------------  ----------------  ----------------   ----------------


                                                  <c>                <c>              <c>                  <c>
NET REVENUES                                              $ 4,706,959       $ 2,472,995      $ 14,198,378        $ 8,789,729

COST OF SALES                                               4,075,040         2,127,643        12,958,989          7,871,809
                                                      ----------------  ----------------  ----------------   ----------------

GROSS PROFIT                                                  631,919           345,352         1,239,389            917,920
                                                      ----------------  ----------------  ----------------   ----------------

OPERATING EXPENSES:
     Selling expenses                                         120,383           120,371           281,195            338,595
     General and administrative                               240,156           105,836           516,087            387,334
                                                      ----------------  ----------------  ----------------   ----------------

        Total Operating Expenses                              360,539           226,207           797,282            725,929
                                                      ----------------  ----------------  ----------------   ----------------

INCOME FROM OPERATIONS                                        271,380           119,145           442,107            191,991
                                                      ----------------  ----------------  ----------------   ----------------

OTHER INCOME (EXPENSE):
     Other income                                              71,155            27,943           275,868             57,856
     Debt issuance costs                                     (242,396)                -          (338,091)                 -
     Settlement of debt                                    (1,337,801)                -        (1,337,801)                 -
     Interest expense                                      (1,158,622)          (54,105)       (1,790,114)          (105,787)
                                                      ----------------  ----------------  ----------------   ----------------

        Total Other Income (Expense)                       (2,667,664)          (26,162)       (3,190,138)           (47,931)
                                                      ----------------  ----------------  ----------------   ----------------

INCOME (LOSS) BEFORE INCOME TAXES                          (2,396,284)           92,983        (2,748,031)           144,060

INCOME TAXES                                                   (4,232)               70            (1,431)           (49,213)
                                                      ----------------  ----------------  ----------------   ----------------

NET INCOME (LOSS) BEFORE MINORITY INTEREST                 (2,400,516)           93,053        (2,749,462)            94,847

MINORITY INTEREST IN LOSS OF SUBSIDIARY                        17,925                 -            16,641                  -
                                                      ----------------  ----------------  ----------------   ----------------

NET INCOME (LOSS)                                          (2,382,591)           93,053        (2,732,821)            94,847

OTHER COMPREHENSIVE INCOME:
   Unrealized foreign currency translation                     28,764                 -           149,437                  -
                                                      ----------------  ----------------  ----------------   ----------------

COMPREHENSIVE INCOME (LOSS)                              $ (2,353,827)         $ 93,053      $ (2,583,384)          $ 94,847
                                                      ================  ================  ================   ================

NET INCOME PER COMMON SHARE
      Basic                                                   $ (0.04)           $ 0.00           $ (0.06)            $ 0.00
                                                      ================  ================  ================   ================
      Diluted                                                 $ (0.04)           $ 0.00           $ (0.06)            $ 0.00
                                                      ================  ================  ================   ================

      Weighted Common Shares Outstanding - Basic           55,995,073        36,094,090        45,010,729         29,774,932
                                                      ================  ================  ================   ================
      Weighted Common Shares Outstanding - Diluted         55,995,073        37,447,310        45,010,729         31,112,316
                                                      ================  ================  ================   ================
</table>



            See notes to unaudited consolidated financial statements
                                       -4-

<page>
                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)
<table>
<caption>
                                                                       For the Nine Months Ended
                                                                                 March 31,
                                                                    --------------------------------
                                                                         2006             2005
                                                                    ---------------  ---------------

                                                               <c>                <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                 $ (2,732,821)    $     94,847
    Adjustments to reconcile net income (loss) to net cash used in
      operating activities:
      Depreciation and amortization                                        113,251           53,306
      Stock-based compensation                                             143,099                -
      Amortization of discount on debentures payable                     1,580,779           23,684
      Amortization of debt issuance costs                                  338,091            2,979
      Common stock and warrants issued in connection with debt
      settlement                                                         1,337,801                -
      Allowance for doubtful accounts                                       83,290                -
      Minority interest                                                    (16,977)               -

    Changes in assets and liabilities:
      Accounts receivable                                               (1,261,700)      (1,106,472)
      Inventories                                                           33,163        1,813,955
      Prepaid and other current assets                                     292,749          372,876
      Other receivables                                                    535,112                -
      Advances to employees                                                 10,221          306,547
      Advances on purchases                                             (1,098,418)               -
      Other assets                                                         (10,030)         (14,018)
      Accounts payable                                                     852,332       (1,697,935)
      Accrued expenses                                                    (780,448)         256,802
      Advances from customers                                              (23,456)        (324,022)
                                                                    ---------------  ---------------

NET CASH USED IN OPERATING ACTIVITIES                                     (603,962)        (217,451)
                                                                    ---------------  ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Due from related parties                                                23,000         (513,142)
    Cash acquired in acquisition                                            33,654                -
    Increase in short-term investments                                           -          386,473
    Decrease in restricted cash                                            367,906                -
    Capital expenditures                                                  (389,594)        (153,348)
                                                                    ---------------  ---------------

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES                   34,966         (280,017)
                                                                    ---------------  ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from loans payable                                            716,030          101,450
    Repayment of loans payable                                            (193,830)               -
    Contributed capital                                                          -           15,000
    Proceeds from debentures payable                                       503,500          321,750
    Repayment of debentures payable                                       (275,328)               -
    Placement fees paid                                                    (48,350)               -
                                                                    ---------------  ---------------

NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES                            702,022          438,200
                                                                    ---------------  ---------------

EFFECT OF EXCHANGE RATE ON CASH                                             30,826                -
                                                                    ---------------  ---------------

NET INCREASE (DECREASE) IN CASH                                            163,852          (59,268)

CASH  - beginning of year                                                  902,559          285,856
                                                                    ---------------  ---------------


CASH - end of period                                                  $  1,066,411     $   226,588
                                                                    ===============  ===============

SUPPLEMENTAL CASH FLOW INFORMATION:
    Cash paid  for:
        Interest                                                      $    177,455     $    21,937
                                                                    ===============  ===============
        Income Taxes                                                  $    113,391     $    39,591
                                                                    ===============  ===============

    Non-cash investing and financing activities
        Issuance of common stock and warrants for
        deferred compensation                                         $  1,110,918     $         -
                                                                    ===============  ===============
        Deferred discount and beneficial conversion
        on debentures payable                                         $    420,845     $   284,199
                                                                    ===============  ===============
        Issuance of common stock for convertible
        debt and debentures                                           $  1,666,837     $    57,601
                                                                    ===============  ===============
        Warrants granted for deferred debt offering costs             $    168,205     $         -
                                                                    ===============  ===============

    Acquisition details:
        Fair value of assets acquired                                  $ 1,142,348     $         -
                                                                    ===============  ===============
        Goodwill                                                       $   486,120
                                                                    ===============  ===============
        Liabilities assumed                                            $ 1,148,468     $         -
                                                                    ===============  ===============
        Common stock issued in connection with acquisition             $   480,000     $         -
                                                                    ===============  ===============

</table>
            See notes to unaudited consolidated financial statements.
                                       -5-
<page>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Dragon International Group Corp., (the "Company") formerly Retail Highway.com,
Inc. ("Retail"), was incorporated in the State of Nevada on February 17, 1993
under the name "LBF Corporation". Effective April 17, 1999, Retail acquired
certain assets to facilitate its entry into electronic commerce and changed its
name to "Retail Highway.com, Inc."

Thereafter, on or about August 13, 2004, as amended on September 30, 2004 and
effective October 4, 2004, pursuant to an Agreement and Plan of Reorganization,
the Company issued 24,625,000 shares of its common stock for the acquisition of
all of the outstanding capital stock of Dragon International Group Corp.,
("Dragon") a Florida corporation (the "Merger"). For financial accounting
purposes, the Merger as has been treated as a recapitalization of Retail with
the former shareholders of the Company retaining 1,280,234 shares of common
stock, or approximately 5%.

In connection with the Merger, the Company undertook a reverse stock split of
its common stock, whereby one (1) share of common stock was issued in exchange
for every eight (8) shares of common stock outstanding immediately prior to
October 4, 2004, the effective date. All share and per-shares information
included in this report has been restated to reflect this reverse stock split.

Additionally, as part of the Merger, the Company amended its Articles of
Incorporation, whereby the Company changed its name to "Dragon International
Group Corp.," as well as reestablished its capitalization to the authorized
capital structure immediately prior to the Merger, which consisted at the date
of merger of 25,000,000 shares of Preferred Stock, par value $0.001 per share,
and 50,000,000 Common Shares, par value $.001 per share. Further, the Company's
prior management resigned their respective positions with the Company and was
replaced by management of Dragon.

Dragon, a Florida corporation, was founded in June 2004. On June 30, 2004,
Dragon acquired 70% ownership interest of Ningbo Anxin International Co. Ltd.
("Anxin"). On December 31, 2004, the Company issued 4,000,000 Common Shares for
the remaining 30% interest in Anxin. Anxin, established in 1997, is located in
the Zhejiang Province of Ningbo, China, approximately 200 miles south of
Shanghai. Anxin is involved in the pulp and paper industry, operating as a
manufacturer and distributor of paper and integrated packaging paper products.
Anxin, through a subsidiary, holds an ISO9000 certificate and national license
to import and export products.







                                       -6-
<page>

                        DRAGON INTERNATIONAL GROUP CORP.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
             POLICIES (Continued)

The Company (Continued)

In addition to its own operations, Anxin operates four subsidiaries, including:
(i) Jiangdong Yonglongxin Special Paper Company, Limited ("Yonglongxin"), which
holds an ISO9000 certificate and operates a civil welfare manufacturing facility
Fuming County Zhang'ai Village in Ningbo, China: (ii) Hangzhou Yongxin Paper
Company, Limited ("Yongxin"). Yongxin manufactures, sells and distributes
cigarette packing materials; (iii) Ningbo Xinyi Paper Product Industrial
Company, Limited ("Xinyi"). Xinyi operates in the pulp and paper industry,
operating a manufacturing facility; and (iv) Xianyang Naite Research &
Development Center (the "R&D Center") The R&D Center was created to develop,
design and improve production methods in the specialty packaging industry in
China. Anxin has a distribution network covering east and central China. The
Stock Purchase Agreement between Dragon and Anxin has been accounted for as a
reverse acquisition under the purchase method for business combinations.
Accordingly, the combination of the two companies is recorded as a
recapitalization of Dragon, pursuant to which Anxin is treated as the continuing
entity.

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These consolidated financial statements should be read in
conjunction with the financial statements for the year ended June 30, 2005 and
notes thereto contained on Form 10-KSB of the Company as filed with the
Securities and Exchange Commission. The results of operations for the nine
months ended March 31, 2006 are not necessarily indicative of the results for
the full fiscal year ending June 30, 2006.

Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in 2006 and
2005 include the allowance for doubtful accounts of accounts receivable and the
useful life of property, plant and equipment and land use rights.






                                       -7-

<page>


                        DRAGON INTERNATIONAL GROUP CORP.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Accounts receivable

Accounts receivable are reported at net realizable value. The Company has
established an allowance for doubtful accounts based upon factors pertaining to
the credit risk of specific customers, historical trends, and other information.
Delinquent accounts are written-off when it is determined that the amounts are
uncollectible. At March 31, 2006, the allowance for doubtful accounts was
$203,131.

Inventories

Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
first-in, first-out method.

Net income (loss) per common share

Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted income per share is computed by dividing net income by the weighted
average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. The following
table presents a reconciliation of basic and diluted earnings per share:

<table>
<caption>

                                                       For the Three Months Ended            For the Nine Months
                                                                March 31,                      Ended March 31,
                                                                2006 2005                         2006 2005
                                                      ------------------------------    ------------------------------


                                                    <c>            <c>              <c>             <c>
Net income (loss)                                       $(2,382,591)      $  93,053       $(2,732,821)       $ 94,847
                                                      --------------- --------------    --------------- --------------
Weighted average shares outstanding - basic               55,995,073     36,094,090         45,010,729     29,774,932
                                                      --------------- --------------    --------------- --------------
EPS - basic                                                  $(0.04)          $0.00            $(0.06)          $0.00
                                                      =============== ==============    =============== ==============

Net income (loss)                                       $(2,382,591)      $  93,053       $(2,732,821)       $ 94,847
                                                      =============== ==============    =============== ==============
Weighted average shares outstanding - basic               55,995,073     36,094,090         45,010,729     29,774,932
Effect of dilutive securities
   Unexercised warrants                                            -         11,640                  -          2,555
   Convertible debentures                                          -          5,820                  -          1,278
   Convertible note payable                                        -      1,335,760                  -      1,333,551
                                                      --------------- --------------    --------------- --------------
Weighted average shares outstanding- diluted              55,995,073     37,447,310         45,010,729     31,112,316
                                                      =============== ==============    =============== ==============
EPS - diluted                                                $(0.04)          $0.00            $(0.06)          $0.00
                                                      =============== ==============    =============== ==============
</table>



                                       -8-

<page>


                        DRAGON INTERNATIONAL GROUP CORP.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Stock-based compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share Based Payment ("SFAS No. 123R"). SFAS
No. 123R establishes the financial accounting and reporting standards for
stock-based compensation plans. As required by SFAS No. 123R, the Company
recognized the cost resulting from all stock-based payment transactions
including shares issued under its stock option plans in the financial
statements.

Prior to January 1, 2006, the Company accounted for stock-based employee
compensation plans (including shares issued under its stock option plans) in
accordance with APB Opinion No. 25 and followed the pro forma net income, pro
forma income per share, and stock-based compensation plan disclosure
requirements set forth in the Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123").

Revenue recognition

The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.

Foreign currency translation

Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," and are
included in determining net income or loss.

For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss. As
of March 31, 2006, the exchange rate for the Chinese Renminbi (RMB) was $1 US
for 8.0352 RMB.




                                       -9-

<page>

                        DRAGON INTERNATIONAL GROUP CORP.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)

Foreign currency translation (continued)

The reporting currency is the U.S. dollar. The functional currency of the
Company's Chinese subsidiary, Anxin, is the local currency. The financial
statements of the subsidiaries are translated into United States dollars using
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the consolidated
statements of operations. The cumulative translation adjustment and effect of
exchange rate changes on cash at March 31, 2006 was $30,826.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and trade accounts receivable. The
Company places its cash with high credit quality financial institutions. Almost
all of the Company's sales are credit sales that are primarily to customers
whose ability to pay is dependent upon the industry economics prevailing in
these areas; however, concentrations of credit risk with respect to trade
accounts receivables is limited due to generally short payment terms. The
Company also performs ongoing credit evaluations of its customers to help
further reduce credit risk.

NOTE 2 - INVENTORIES

At March 31, 2006, inventories consisted of the following:


         Raw materials                                 $        228,709
         Finished goods                                       1,393,478
                                                       -----------------
                                                       $      1,622,187
                                                       =================




                                      -10-

<page>


                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 3 - RELATED PARTY TRANSACTIONS

Due from related parties

The consolidated financial statements include balances and transactions with
related parties. From time to time, the Company receives advances from or
advances funds to several affiliated entities for working capital purposes. At
March 31, 2006, the Company did not have any outstanding balances with these
affiliated entities.

Due to related party

A shareholder/consultant advanced funds to the Company for working capital
purposes. At March 31, 2006, the Company owed $5,000 to this
shareholder/consultant that is included in accrued expenses. The advances are
non-interest bearing, unsecured and are due on demand.

The former President of the Company, from time to time, provided advances to the
Company for operating expenses. These advances are non-interest bearing and
convertible into shares of the Company's common stock. The amount due to the
former President at March 31, 2006 was $18,345 and is included in accrued
expenses on the accompanying balance sheet.

NOTE 4 - CONVERTIBLE NOTES PAYABLE

In September 2002, the former President of the Company lent the Company $10,000
to pay operating expenses pursuant to a note. This note is convertible into
1,333,333 shares of the Company's common stock at a conversion price of $0.0075
per share and is due on demand. Interest accrues at the rate of 3% per annum and
aggregated $532 through March 31, 2005. Additionally, in April 2004, the former
President of the Company entered into a convertible note agreement with the
Company to convert $31,124 of advances to pay operating expenses into a
convertible note. This note is convertible into 4,149,867 shares of the
Company's common stock at a conversion price of $0.0075 per share and is due on
demand. Interest accrues at the rate of 3% per annum and aggregated $558 through
March 31, 2006. In October 2005, the Company issued 500,000 shares of common
stock in connection with the conversion of $3,750 of this debt. At March 31,
2006, convertible notes payable outstanding amounted to $6,438, which is
convertible into 858,400 shares of common stock.






                                      -11-


<page>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 5 - ACQUISITION AND DISPOSITIONS

On July 1, 2005, the Company acquired 60% interest in Hangzhou Yongxin Paper
Company, Limited ("Yongxin"). Yongxin, established in 2003, is located in
Hangzhou of Zhejiang Province, China, and manufactures and sells high-end
cigarette packing material and was a direct competitor of the Company. The
Company issued an aggregate of 1,000,000 shares of its common stock in
consideration for the nets assets of Yongxin. The fair value of the common stock
issued was based on the $.34 quoted trading price of the common stock on the
acquisition date and amounted to $340,000. All operations are now located in the
new manufacturing facilities in Ningbo. The Company acquired Yongxin as part of
its ongoing desire to consolidate interests in its industry. The Company
accounted for this acquisition using the purchase method of accounting in
accordance with SFAS No. 141. On the date of acquisition, the fair value of net
assets exceeded the purchase price by $322,192. The excess had been applied to
goodwill. The results of operations of Yongxin are included in the consolidated
results of operations of the Company from the acquisition date.

On August 1, 2005, the Company acquired the Xianyang Naite Research &
Development Center ("Xianyang"), located in Ningbo, China, which was created to
improve production efficiencies in the specialty packaging industry. The Company
paid $25,000 in cash and issued 500,000 shares of its common stock in
consideration for this acquisition. The fair value of the common stock issued
was based on $.28 per share, quoted trading price of the common stock on the
acquisition date, for a fair value of $140,000. The Research & Development
Center is expected to reduce time to commercialization for new products
substantially and allow the Company to leverage innovative paper transferring
techniques developed at the Center. The Company accounted for this acquisition
using the purchase method of accounting in accordance with SFAS No. 141. On the
date of acquisition, the purchase price exceeded the fair value of net assets
acquired by $163,928. The excess had been applied to goodwill. The results of
operations of Xianyang are included in the consolidated results of operations of
the Company from the August 1, 2005.

Anxin has consolidated the operations of two divisions in an effort to reduce
fixed operational expenses. Anxin operates the underlying business of each
entity from the headquarters located in Ningbo. The two consolidated divisions
are Shanghai An'Hong Paper Company Limited, ("An'Hong") and Ningbo Long'An
Industry and Trade Company Limited ("Long'An"). In connection with this
consolidation, the Company has a receivable of $168,731 from a third party which
is included in other receivables on the accompanying consolidated balance sheet.


                                      -12-


<page>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 5 - ACQUISITION AND DISPOSITIONS (continued)

For acquisitions during the nine months ended March 31, 2006, the assets
acquired and liabilities assumed at acquisition date were as follows:

<table>
<caption>

                                               Yongxin            Xianyang
            
                           <c>                <c>                <c>
                                                                                       Total
                                          ------------------ -------------------- -----------------
                                    Cash         $   33,654              $     -         $  33,654
                     Accounts receivable            543,564                    -           543,564
                               Inventory            496,009               25,733           521,742
             Property and equipment, net             69,121                    -            69,121
                        Accounts payable          (576,978)                    -         (576,978)
              Accrued expenses and other          (547,562)                    -         (547,562)
                           Loans payable                  -             (24,661)          (24,661)
                                Goodwill            322,192              163,928           486,120
                                          ------------------ -------------------- -----------------

                    Total purchase price        $   340,000           $  165,000        $  505,000
                                          ================== ==================== =================
</table>

NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE

On March 1, 2005, the Company closed a private offering of Units, each Unit
consisting of a secured convertible note with a face value of the principal
amount invested by each investor, carrying an annual coupon of 8% and 250,000 (5
warrants per dollar invested) Class "A" Warrants, each warrant exercisable to
purchase one (1) share of the Company's common stock at an exercise price of
$.40 per share for a period of five (5) years following the closing of the
offering. The investors in this offering were also granted "piggyback"
registration rights for the shares underlying the warrants, as well as the
shares reserved for issuance in the event of conversion of the Debentures. The
minimum subscription was for $50,000 or one Unit; however, we reserved the right
to accept subscriptions for a fractional Unit, which we did. The Company
received gross proceeds of $357,500 from the sale of these Units ($321,750 net)
and issued 1,787,500 warrants (5 warrants for every dollar invested; 357,500 X 5
= 1,787,500). The Units were sold to a total of 7 "accredited investors," as
that term is defined under the Securities Act of 1933, as amended. The
debentures were scheduled to mature six months following the closing of the
offering. Interest only is payable monthly. The relevant offering documents
contained a provision that provided for each of the investors to convert into a
subsequent offering that took place beginning in May 2005 (described below). As
such, the debentures of the March 2005 offering were replaced with $357,500
worth of debentures under the terms of the July 2005 offering. Pursuant to the
terms of the March offering, each of the investors retained ownership of the
warrants issued to them in the March offering (1,787,500) as part of the
consideration for extending the maturity date of their debenture.





                                      -13-

<page>


                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)

In connection with the 1,787,500 warrants issued in the Units, the Company
recorded imputed interest in the amount of $239,510 that was amortized over the
original life of the debentures (6 months). As incentive for these debenture
holders to convert their debentures to the terms of the subsequent offering, the
Company granted debenture holders 715,000 Class "A" Warrants, each warrant
exercisable to purchase one (1) share of the Company's Common Stock at an
exercise price of $.30 per share for a period of five (5) years following the
closing of the offering (July 2010). These warrants were treated as a discount
on the convertible debenture and in May 2005 were valued at $20,579 to be
amortized over the debenture term, which begins on July 11, 2005. The fair
market value of each stock warrant grant is estimated on the date of grant using
the Black-Scholes option-pricing model, in accordance with SFAS No. 123 using
the following weighted-average assumptions: expected dividend yield 0%,
risk-free interest rate of 4.00%, volatility of 141% to 145% and expected term
of 5 years. Additionally, in connection with the debentures, the Company
recorded a beneficial conversion amount of $97,411 that will be amortized over
the life of the debentures.

On May 9, 2005, the Company commenced a private offering of Units, each Unit
consisting of a secured, convertible promissory note and warrants (the "Units"),
totaling up to a maximum of $2,500,000. The Company closed this offering on July
11, 2005, after the Company had sold an aggregate of $1,927,400 of these Units
to 36 "accredited" investors, as that term is defined under the Securities Act
of 1933, as amended. This aggregate figure consisted of $1,569,900 in new
subscriptions and $357,500 from the offering in March 2005. The March 2005
offering stipulated the funds were to be converted under the terms of the July
2005 offering. Each Unit consisted of a secured convertible note with a face
value of the principal amount invested by each investor, carrying an annual
coupon of 8% and 2 warrants for each dollar invested. The annual coupon of 8%,
is payable on a monthly basis in cash or common stock on the first of every
month. Each warrant is exercisable at a purchase price of $.30 per share for a
period of five years following the final closing date of the offering period,
subject to adjustment upon the occurrence of specific events, including stock
dividends, stock splits, combinations or reclassifications of its common stock.
The Notes mature two years after issuance.

The Company had the option to satisfy principal and interest payments in cash or
common stock. The principal and interest is convertible into shares of our
"registered" common stock based on the following criteria: At the sole election
of the holder (the "Holder"), any portion of the unpaid principal balance of the
Note, together with any interest that may have accrued through the date of such
conversion, may be converted into shares of the Company's common stock. The
Holder may elect to receive shares of the Company's common stock at a conversion
rate equal to a 20% discount to the average closing bid price for the previous
five days to the Holder Conversion Notice. The Holder will have a maximum
conversion price of $.55 per share and a minimum conversion price of $.20 per
share. The Holder may elect to convert a portion or all of any unpaid interest
and/or principal due to the Holder regardless as to whether the criteria as
detailed herein are satisfied.



                                      -14-

<page>


                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)

Principal payments began on the first day of the fourth month following the
final closing date of the offering. The amount of principal paid each month is
1/21 of the total amount offered plus any accrued interest. The remaining
balance of the principal value of the Notes is due on the first day of the
twenty-fourth month following the final closing of the offering. However, the
Company, at its sole option, may elect to pay the current portion of principal
and/or interest in shares of its common stock. The Company is obligated to
provide the Holder with fifteen (15) days written notice prior to such payment
("Company Conversion Notice"). The Holder may receive shares of common stock at
a conversion rate equal to a 20% discount to the average closing bid price for
the previous five days to the Company Conversion Notice, subject to a $.55
ceiling.

In addition, the Company entered into a Registration Rights Agreement with these
investors pursuant to which the Company was obligated to file a registration
statement covering the above-referenced common stock and shares underlying the
warrants within 45 days of closing of this offering. The Company filed a
registration statement on August 15, 2005. Should the registration statement not
be effective within 140 days from the closing date of the offering, and the
closing bid price for any three of the previous twenty trading days is greater
than $.6875, the Company is obligated to issue collateral shares on the monthly
payment date to the investor, as liquidated damages and not as a penalty,
equivalent to 2% per month of the investor's position as calculated under the
following formula:

             (Principal Balance of Investor + Accrued interest x 2%
              x (80% average of three highest closing bids - .55))

The average of the three highest closing bids would be measured from the 20 days
preceding the 1st of each month from which a payment is due. This penalty will
be in effect until such time as the registration statement is declared effective
and will be due each month, if applicable, along with the cash payment.

In connection with these convertible debentures, warrants to purchase 2,132,800
common shares were issued to the holders at an exercise price per share of
$0.30. The warrants are exercisable immediately and expire in July 2010. These
warrants were treated as a discount on the convertible debenture and in June
2005 were valued at $423,192 to be amortized over the debenture term, which
begins on July 11, 2005. The fair market value of each stock warrant grant is
estimated on the date of grant using the Black-Scholes option-pricing model, in
accordance with SFAS No. 123 using the following weighted-average assumptions:
expected dividend yield of 0%, risk-free interest rate of 4.00%, volatility of
145% and expected term of 5 years. Additionally, in connection with the
debentures, the Company recorded a beneficial conversion amount of $591,757 that
will be amortized over the life of the debentures.



                                      -15-

<page>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)

In July 2005, the Company sold to new investors an aggregate of $503,500 of the
Units. In connection with these convertible debentures, warrants to purchase
1,007,000 common shares were issued to the holders at an exercise price per
share of $0.30. The warrants are exercisable immediately and expire in July
2010. These warrants were treated as a discount on the convertible debenture and
in July 2005 were valued at $184,829 under SFAS No.123 using the Black-Scholes
option-pricing model to be amortized over the debenture term, which begins on
July 11, 2005. The fair market value of each stock warrant grant is estimated on
the date of grant using the Black-Scholes option-pricing model, in accordance
with SFAS No. 123 using the following weighted-average assumptions: expected
dividend yield 0%, risk-free interest rate of 3.75%, volatility of 145% and
expected term of 5 years. Additionally, in connection with the debentures, the
Company recorded a beneficial conversion amount of $236,016 that will be
amortized over the life of the debentures.


In January 2006, the Company made an offer to all of the holders of our
outstanding Units wherein the Company offered the holders of the units an
opportunity to convert the outstanding principal and interest owed pursuant to
the debentures into shares of the Company's common stock at a conversion price
of $.09 per share. This offer also provided for the reduction of the exercise
price on the warrants included in the units issued in the July Offering from
$.30 to $.15 per warrant. As further inducement, if the holder agreed to
convert, the Company also agreed to issue additional common stock purchase
warrants equal to the number of warrants held by each Unit holder that are also
exercisable at $.15 per warrant for a period of three (3) years. All of the Unit
holders have accepted this offer, except for two holders who assigned their
debentures to third parties who subsequently converted. Accordingly, the Company
converted principal balances and accrued interest payable of $1,663,086. These
holders kept the warrants issued as part of their original Units (5,642,300:
1,787,500 + 3,854,800 = 5,642,300). As a result, the Company issued an aggregate
of 18,478,568 shares of its common stock and 5,642,300 common stock purchase
warrants, pro rata to the number of Units held by each holder that elected to
convert. The Company also reduced the exercise price on the 3,704,800 warrants
held by the converting holders to $.15 per share, while maintaining the exercise
price on 150,000 warrants for those holders who elected not to convert at $.30
per share. The Company also reduced the exercise price on the 1,787,500 warrants
received as consideration for the March offering from $.40 to $.15 per share.

In accordance with FAS No. 84, "Induced Conversion of Convertible Debt", the
Company recognized an expense equal to the fair value of the additional
securities and other consideration issued to induce conversions. Accordingly,
the Company recorded debt settlement expense of $914,689 related to the
additional shares issued upon conversion and $423,112 of debt settlement expense
related to the granting warrants to purchase 5,642,300 shares of the Company's
common stock at $.15 per share. The fair market value of these stock warrant
grants were estimated on the date of grant using the Black-Scholes
option-pricing model, in accordance with SFAS No. 123 using the following
weighted-average assumptions: expected dividend yield 0%, risk-free interest
rate of 4.39%, volatility of 171% and expected term of 3 years.

For the nine months ended March 31, 2006, amortization of imputed interest and
beneficial conversion charged to interest expense was $1,580,779.


                                      -16-

<page>


                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)

Skyebanc, Inc. ("Skyebanc"), an NASD broker dealer, acted as selling agent in
connection with the offering. The Company paid Skyebanc a total of eight percent
(8%) of the total proceeds resulting from the sale of the securities and
reimbursed Skyebanc, Inc. for its expenses in the amount of two percent (2%) of
the selling price of the securities sold on a non-accountable basis for an
aggregate cash placement fee of $190,740. Additionally, on July 1, 2005, the
Company granted Skyebanc warrants to purchase 500,000 shares of its common stock
for its services related to the offering at an exercise price of $.01 per share,
which warrants expire on July 1, 2010. These warrants were treated as a deferred
debt offering cost and on July 1, 2005 were valued at $168,205 to be amortized
over the debenture term. The fair market value of each stock warrant grant is
estimated on the date of grant using the Black-Scholes option-pricing model, in
accordance with SFAS No. 123 using the following weighted-average assumptions:
expected dividend yield 0%, risk-free interest rate of 3.75%, volatility of 145%
and expected term of 5 years. The placement fees were deemed to be a deferred
debt offering cost and were amortized as a debt issuance cost over the debenture
term. For the nine months ended March 31, 2006, amortization of debt issuance
costs amounted to $338,091.

NOTE 7 - STOCKHOLDERS EQUITY

Common Stock

On July 1, 2005, in connection with the acquisition of a 60% interest in
Yongxin, the Company issued 1,000,000 shares of common stock (see note 5 above).
The fair value of the common shares issued was based on the $.34 quoted trading
price of the Company's common stock on the acquisition date and amounted to
$340,000.

On July 22, 2005, the Company entered into a one-year agreement with China
Direct Investments, Inc ("China Direct") to provide business development and
management services, effective July 1, 2005. In connection with this agreement,
the Company issued 400,000 shares of the Company's common stock. The Company
valued these services using the fair value of common shares on grant date at
approximately $.26 per share and recorded deferred consulting expense of
$104,000 to be amortized over the service period. Additionally, effective
January 10, 2006, the Company entered into a new three-year consulting agreement
with China Direct. In connection with this agreement, the Company agreed to
issue 6,000,000 of the Company's common stock to China Direct. The Company
valued these services using the fair value of common shares on grant date at
approximately $.09 per share and recorded deferred consulting expense of
$540,000 to be amortized over the service period. For the nine months ended
March 31, 2006, amortization of deferred consulting expense related to these
shares amounted to $113,000. As of March 31, 2006, the 6,000,000 share had not
been issued and are reflected in common stock issuable on the accompanying
balance sheet.


                                      -17-


<page>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 7 - STOCKHOLDERS EQUITY (continued)

Common Stock (continued)

On August 1, 2005, in connection with the acquisition of a 100% interest in
Xianyang, the Company issued 500,000 shares of common stock (see note 5). The
fair value of the common shares issued was based on the $.28 quoted trading
price of the common stock on the acquisition date and amounted to $140,000.

In October 2005, the Company issued 500,000 shares of common stock in connection
with the conversion of $3,750 of convertible notes payable (see Note 4).

In connection with the conversion of debentures payable, the Company issued
18,478,568 shares of common stock upon conversion of outstanding debenture
balances and accrued interest of $1,663,086 (see note 6).

Stock Warrants

In July 2005, in connection with the private offering discussed in Note 6, the
Company issued 1,007,000 warrants to purchase 1,007,000 shares of the Company's
common stock exercisable at $.30 per share. The purchase warrants expire in July
2010. Additionally, in July 2005, in connection with the private offering
discussed in Note 6, the Company granted 500,000 warrants to purchase 500,000
shares of the Company's common stock to the placement agent for services
rendered exercisable at $.01 per share. The purchase warrants expire in July
2010.

On January 10, 2006, in connection with a three-year consulting agreement with
China Direct, the Company issued warrants to purchase 4,700,000 shares of common
stock to China Direct at $.15 per share. The warrants expire on January 10,
2011. The fair market value of these warrants of $395,675 will be amortized over
the service period and was estimated on the date of grant using the
Black-Scholes option-pricing model, in accordance with SFAS No. 123 using the
following weighted-average assumptions: expected dividend yield 0%, risk-free
interest rate of 4.39%, volatility of 171% and expected term of 5 years.

On February 15, 2006, the Company entered into a one-year consulting agreement
with Skyebanc as financial advisor. In connection with this consulting
agreement, the Company issued 500,000 warrants to purchase 500,000 shares of the
Company's common stock for $.15. The warrants expire on February 15, 2011. The
fair market value of these warrants of $71,243 will be amortized over the
service period and was estimated on the date of grant using the Black-Scholes
option-pricing model, in accordance with SFAS No. 123 using the following
weighted-average assumptions: expected dividend yield 0%, risk-free interest
rate of 4.39%, volatility of 171% and expected term of 5 years.




                                      -18-

<page>


                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 7 - STOCKHOLDERS EQUITY (continued)

Stock Warrants (continued)

For the nine months ended March 31, 2006, amortization of deferred compensation
related to warrants amounted to $30,099.

As inducement for holders of convertible debt to convert, the Company issued
additional common stock purchase warrants equal to the number of warrants held
by each Unit holder that are also exercisable at $.15 per warrant for a period
of three (3) years. As a result, the Company issued an aggregate of 5,642,300
common stock purchase warrants, pro rata to the number of Units held by each
holder that elected to convert. The Company also reduced the exercise price on
the 3,704,800 warrants held by the converting holders to $.15 per share, while
maintaining the exercise price on 150,000 warrants for those holders who elected
not to convert at $.30 per share. The Company also reduced the exercise price on
the 1,787,500 warrants received as consideration for the March offering from
$.40 to $.15 per share.

A summary of the status of the Company's outstanding stock warrants as of March
31, 2006 and changes during the period then ended is as follows:

<table>
<caption>


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

     
                                                 <c>              <c>
       Outstanding at July 1, 2005                          4,635,300       $     0.150
       Granted                                             12,349,300             0.146
       Exercised                                                    -                 -
       Forfeited                                                    -                 -
                                                           -----------       --------------

       Outstanding at March 31, 2006                      16,984,600        $     0.147
                                                        ==============     ==============

           Warrants exercisable at end of period          16,984,600        $     0.147
                                                         ==============     ==============
           Weighted-average fair value of warrants
             granted during the period                                      $     0.147
                                                                            =============
</table>

The following information applies to all warrants outstanding at March 31, 2006:

<table>
<caption>

                                                            Warrants Outstanding          Warrants Exercisable
                                                       ----------------------------    ------------------------
                                                         Weighted
                                                          Average         Weighted                     Weighted
                                                        Remaining         Average                      Average
                                                       Contractual        Exercise                     Exercise
     Range of Exercise Prices              Shares      Life (Years)        Price          Shares        Price
     ------------------------          -----------    ------------     -----------    -------------- ----------
    
                               <c>            <c>              <c>              <c>           <c>
        $0.30                               150,000         4.25           $ 0.30           150,000     $ 0.30
        $0.15                            16,334,600         4.75           $ 0.15        16,334,600     $ 0.15
        $0.01                               500,000         4.30           $ 0.01           500,000     $ 0.01
</table>




                                      -19-
<page>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 8 - OPERATING RISK (continued)

(a) Country risk

The Company's revenues are mainly derived from the sale of paper products in the
Peoples Republic of China (PRC). The Company hopes to expand its operations to
countries outside the PRC, however, such expansion has not been commenced and
there are no assurances that the Company will be able to achieve such an
expansion successfully. Therefore, a downturn or stagnation in the economic
environment of the PRC could have a material adverse effect on the Company's
financial condition.

(b) Products risk

In addition to competing with other companies, the Company could have to compete
with larger US companies who have greater funds available for expansion,
marketing, research and development and the ability to attract more qualified
personnel if access is allowed into the PRC market. If U.S. companies do gain
access to the PRC markets, they may be able to offer products at a lower price.
There can be no assurance that the Company will remain competitive should this
occur.

(c) Exchange risk

The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Reminbi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.

(d) Political risk

Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.

(e) Key personnel risk

The Company's future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.



                                      -20-

<page>


                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 8 - OPERATING RISK (continued)

(f) Performance of subsidiaries risk

All of the Company's revenues are derived via the operations of the Company's
Chinese subsidiaries. Economic, governmental, political, industry and internal
company factors outside of the Company's control affect each of the
subsidiaries. If the subsidiaries do not succeed, the value of the assets and
the price of our common stock could decline. Some of the material risks relating
to the partner companies include the fact that the subsidiaries are located in
China and have specific risks associated with that and the intensifying
competition for the Company's products and services and those of the
subsidiaries.








                                      -21-


<PAGE>



ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following analysis of our results of operations and financial condition
should be read in conjunction with our audited financial statements for the year
ended June 30, 2005, and notes thereto contained in our report on Form 10-KSB,
as filed with the Securities and Exchange Commission.

This report on Form 10-QSB contains forward-looking statements that are subject
to risks and uncertainties that could cause actual results to differ materially
from those discussed in the forward-looking statements and from historical
results of operations. Among the risks and uncertainties which could cause such
a difference are those relating to our dependence upon certain key personnel,
our ability to manage our growth, our success in implementing the business
strategy, our success in arranging financing where required, and the risk of
economic and market factors affecting us or our customers. Many of such risk
factors are beyond our control.

Overview

On or around August 13, 2004, as amended on September 30, 2004 and effective
October 4, 2004, under an Agreement and Plan of Reorganization, we issued
24,625,000 shares of our common stock for the acquisition of all of the
outstanding capital stock of Dragon International Group Corp., ("Dragon") a
Florida corporation. For financial accounting purposes, the exchange of stock
was treated as a recapitalization, with our former shareholders retaining
1,280,234, or approximately 5% of the outstanding stock.

Dragon was founded in June 2004. On June 30, 2004, Dragon acquired 70% ownership
interest of Ningbo Anxin International Co. Ltd. ("Anxin") and on December 31,
2004, we issued 4,000,000 common shares for the remaining 30% interest in Anxin.
Anxin, established in 1997, is located in the Zhejiang Province of Ningbo in
China, approximately 200 miles south of Shanghai. Anxin is involved in the pulp
and paper industry, operating as a manufacturer and distributor of paper and
integrated packaging paper products. Anxin, through a subsidiary, holds an
ISO9000 certificate and national license to import and export products. The
Stock Purchase Agreement between Dragon and Anxin has been accounted for as a
reverse acquisition under the purchase method for business combinations.
Accordingly, the combination of the two companies is recorded as a
recapitalization of Anxin, pursuant to which Dragon is treated as the continuing
entity.

Our operations are conducted through Anxin. Anxin distributes an assortment of
paper products and packaging materials. The main consumers of Anxin's products
are packaging companies for the tobacco industry, cosmetics industry, and the
wine and spirits industry. Anxin, through its wholly owned subsidiary, Jiangdong
Yonglongxin Special Paper Co. Ltd. ("Yonglongxin"), imports an assortment of
paper and packaging products. The products imported by Anxin are used both as a
finished product and as well as a raw material to manufacture a variety of paper
products and packaging materials. Products manufactured by Anxin or one of its
subsidiaries are then sold and distributed in China.



                                      -22-

<page>

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION   (continued)

         Anxin operates the following subsidiaries:

         -  Jiangdong Yonglongxin Special Paper Co. Limited. ("Yonglongxin")
         -  Hangzhou Yongxin Paper Company, Limited. ("Yongxin")
         -  Ningbo Xinyi Paper Product Industrial Co., Limited ("Xinyi")
         -  Xianyang Naite Research & Development Center (the "R&D Center")

In fiscal 2005, Anxin consolidated the operations of two divisions in an effort
to reduce fixed operational expenses. Anxin continues operating the underlying
business of each entity from the headquarters located in Ningbo. The two
consolidated divisions are; Shanghai An'Hong Paper Company Limited, ("An'Hong")
and Ningbo Long'An Industry and Trade Company Limited ("Long'An"). The remote
operations were established in an effort to improve client relations and extend
the brand awareness of Anxin products and services throughout China. Further, we
believe Anxin can improve its status among financial institutions in China, as a
large group with additional operations in various business segments.
Unfortunately the cost of the additional offices proved too costly. Anxin will
service the clients of An'Hong and Long'An as they continue to operate the
underlying business of each entity from the headquarters in Ningbo. The fixed
assets, office equipment and entities were sold to Shanghai DIJI Investment
Management Company.

Anxin imports pulp and paper products manufactured overseas and distributes
those products in China. The general process of a typical order are; (i) initial
purchase order from customer, (ii) relay the purchase order to international
supplier; (iii) receive letter of credit from bank; (iv) schedule transportation
from supplier; (v) schedule transportation to customer; and (vi) receive payment
from customer. This entire process can take anywhere from two to three months.
Often times, extenuating factors such as weather or holidays may prolong this
process, causing a delay in payment or shipment.

The following information is intended to highlight developments in our
operations, to present our results of operations, to identify key trends
affecting our businesses and to identify other factors affecting our results of
operations for the periods indicated.

Results of Operations

Comparison of Our Results of Operations for our six months ended March 31,
2006 and 2005

During the nine months ended March 31, 2006, we generated revenues of
$14,198,378, as compared to revenues of $8,789,729 for the nine months ended
March 31, 2005, an increase of $5,408,649, or 61.5%. For the nine months ended
March 31, 2006, we recorded revenues from our Yongxin subsidiary that we
acquired effective July 1, 2005 of approximately $1,955,540. The remaining
increase was attributable to sales to new customers during the nine months of
March 31, 2006.

During our nine month period ended March 31, 2006, our cost of sales was
$12,958,989, compared to $7,871,809 during our nine month period ended March 31,
2005, an increase of $5,087,180, or 64.6%. Anxin has experienced higher raw
material costs, including raw pulp and pulp related products, over the past 12
months, as well as increased import/transportation costs as a result of the
worldwide increase in the price of oil. This increase has impacted the global
paper industry and is not specific to our company. We expect our cost of sales
to continue to increase in the future

                                      -23-
<page>


ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)

For the nine months ended March 31, 2006, gross profit was $1,239,389, as
compared to gross profit of $917,920 for the nine months ended March 31, 2005,
an increase of $321,469. For the nine months ended March 31, 2006, gross profit
on a percentage basis decreased to 8.7% from 10.4% for the nine months ended
March 31, 2005.

The decrease in gross profit on a percentage basis is attributable to higher
cost of sales. Cost of sales on a percentage basis is higher, and we expect it
could continue to increase as a percentage of gross revenues. Anxin is
experiencing higher raw material costs and increased import/transportation
costs. We have experienced an increase in the cost of our raw materials; such as
raw pulp and pulp related products over the past 12 months. This increase has
impacted the global paper industry and is not specific to our company.
Additionally, we recorded incremental revenues generated through external sales
agents; of which we recognize a minor gross profit of approximately 1%.
Management of Anxin does not anticipate the trend to reverse. Management has
made efforts to reduce fixed administrative costs to alleviate the burden of an
increase cost of sales for the fiscal year 2006.

For the nine months ended March 31, 2006, operating expenses amounted to
$797,282, or 5.6% of net revenues as compared to $725,929, or 8.3% of revenues
for the nine months ended March 31, 2005, a decrease of $71,353, or 9.8%. The
increase was attributable to the following:

For the nine months ended March 31, 2006, selling expenses amounted to $281,195
as compared to $338,595 for the nine months ended March 31, 2005, a decrease of
$57,400 or 17%. This decrease is attributable to a decrease in shipping costs to
customers of approximately $53,404. The Company was able to decrease actual
shipping costs by concentrating sales within geographic proximity; this has
served to reduce actual shipping costs, although we are experiencing increase
costs related to shipping. Additionally, we experienced a decrease in salaries
of approximately $27,044 due to reduction in sales staff through the use of
outside sales reps and a decrease in other selling expenses due to the
consolidation of our operations of approximately $20,000. These decreases were
offset by an increase in travel and entertainment expenses of $43,341.

For the nine months ended March 31, 2006, general and administrative expenses
were $516,087 as compared to $387,334 for the nine months ended March 31, 2005,
an increase of $128,753 or approximately 33%. The increase was attributable to
the following:

o        For the nine months ended March 31, 2006, consulting fees increased by
         approximately $45,000. This increase was attributable to an increase in
         consulting fees of approximately $87,000 from the issuance of common
         stock and warrants to consultants for business development, management
         of professional resources, and financial advisory relations services
         rendered. Additionally, as a offset to these increased consulting fees,
         during the nine months ended March 31, 2006, our subsidiary, Anxin,
         received a refund of consulting fees amounting to approximately $42,000
         that reduced our general and administrative expenses.
o        We had a decrease in professional fees of $16,392. During the nine
         months ended March 31, 2005, we incurred additional auditing fees
         related to financial statements for the fiscal years ended June 30,
         2004 and 2003.


                                      -24-
<page>


ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  (continued)

o        Depreciation and amortization expense increased by approximately
         $51,000 related to the acquisition of land use rights. On June 1, 2005,
         we reached an agreement to buy a land use rights and a manufacturing
         facility from Ningbo Xinyi Company, Limited ("XinYi"). XinYi has
         transferred ownership of 23,345 square meters of property, including a
         recently completed 8,500 square meter manufacturing facility and the
         right to use land until March 4, 2053.
o        During the nine months ended March 31, 2006, we recorded bad debt
         expense of approximately $39,000 based on our estimate of uncollectible
         accounts receivable balances.
o        We incurred additional operating expense from our increase in
         operations.

Management is attempting to reduce fixed administrative costs to alleviate the
burden of the increased cost of sales. As mentioned above, Anxin has
consolidated the operations of Shanghai An'Hong Paper Company Ltd., ("An'Hong")
and Ningbo Long'An Industry and Trade Company Limited in 2005. The closures will
allow Anxin to decrease fixed administrative costs. Furthermore we have made
efforts to maintain lower actual shipping costs by generating sales in closer
proximity.

For the nine months ended March 31, 2006, other income amounted to $275,868 as
compared to other income of $57,856 for the nine months ended March 31, 2005.
Other income for the nine months ended March 31, 2006 and 2005 was primarily
associated with income recognized from the collection of value-added taxes on
certain of our products which we receive a tax credit. Additionally, during the
nine months ended March 31, 2006, we reduced accounts payable by approximately
$29,500 which have been settled.

For the nine months ended March 31, 2006, debt issuance costs were $338,091 as
compared to $0 for the nine months ended March 31, 2005. This was related to the
amortization of placements fees paid in connection with our private offering
described above. In February 2006, upon conversion of our outstanding debentures
to common stock, we expenses all unamortized debt issuance costs.

In accordance with FAS No. 84, "Induced Conversion of Convertible Debt", we
recognized an expense equal to the fair value of the additional securities and
other consideration issued to induce conversions. Accordingly, we recorded debt
settlement expense of $914,689 related to the additional shares issued upon
conversion and $423,112 of debt settlement expense related to the granting
warrants to purchase 5,642,300 shares of our common stock at $.15 per share for
an aggregate debt settlement expense of $1,337,801.

For the nine months ended March 31, 2006, interest expense was $1,790,114 as
compared to $105,787 for the nine months ended March 31, 2005, an increase of
$1,684,327 and was related to 1) increased borrowings; and 2) the recording of
$1,580,779 in amortization of discount on debentures payable that was included
in interest expense. In February 2006, upon conversion of these debentures to
common stock, we expenses all unamortized discount related to the debentures.

As a result of these factors, we reported a net loss of $(2,732,821) or a net
loss of $(.06) per share for the nine months ended March 31, 2006 as compared to
net income of $94,847 (less than $.01 per share) for the nine months ended March
31, 2005.

                                      -25-
<page>

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)

Liquidity and Capital Resources

At March 31, 2006, we had $1,066,411 in cash. At March 31, 2006, our cash
position by geographic area is as follows:

           United States          $       509
           China                    1,065,902
                                 ------------
           Total                  $ 1,066,411
                                 =============

         In March 2005, we received gross proceeds of $357,500 ($321,750 net)
from accredited investors under a private offering of Units. Each Unit consisted
of a of a secured convertible note with a face value of the principal amount
invested by each investor, carrying an annual coupon of 8% and 250,000 (5
warrants per dollar invested) Class A Common Stock Purchase Warrants to purchase
shares of our common stock at $.40 per share for a period of five (5) years
following the closing of the offering. The investors in this offering were also
granted "piggyback" registration rights for the shares underlying the warrants,
as well as the shares reserved for issuance in the event of conversion of the
debentures. The minimum subscription was for $50,000 or one Unit; however, we
reserved the right to accept subscriptions for a fractional Unit, which we did.
The Units were sold to a total of 7 "accredited investors," as that term is
defined under the Securities Act of 1933, as amended. The Debentures were to
mature six (6) months following the closing of the offering. Interest only was
payable monthly. However, the investors in this offering converted to our second
offering, described below, pursuant to the original terms included in this
offering.

         During the period from May 2005 to July 2005, we successfully closed a
second private offering of Units. We sold an aggregate of $1,927,400 ($1,569,900
in new subscriptions and $357,500 from the March 2005 offer) from the sale of
the Units ($1,413,910 net) to a total of 36 "accredited investors," as that term
is defined under the Securities Act of 1933, as amended, including the seven (7)
investors who purchased Units in our prior offering undertaken in March 2005,
discussed above. Each Unit consisted of a $100,000 8% Secured Convertible
Debenture and Class A Common Stock Purchase Warrants to purchase 200,000 of our
common stock at $.30 per share for a period of five (5) years expiring July 1,
2010. The debentures were convertible into shares of our common stock and would
have matured two years after issuance. We had the option to satisfy principal
and interest payments in cash or common stock. The principal and interest was
convertible into shares of our "registered" common stock. At the sole election
of the Holder, any portion of the unpaid principal balance of the debentures,
together with any interest that may have accrued through the date of such
conversion, was eligible to be converted into shares of our common stock. The
Holder had the right to receive shares of our common stock at a conversion rate
equal to a 20% discount to the average closing bid price for the previous five
days to the date of the Holder's Conversion Notice. The Holder had a maximum
conversion price of $.55 per share and a minimum conversion price of $.20 per
share. The Holder could have elected to convert a portion or all of any unpaid
interest and/or principal due to the Holder regardless as to whether the
criteria as detailed herein are satisfied.


                                      -26-
<page>


ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)

         Principal payments began on the first day of the fourth month following
the final closing date of the offering. The amount of principal to be paid each
month was equal to 1/21 of the total amount offered plus any accrued interest.
The remaining balance of the principal value of the debentures was due on the
first day of the twenty-fourth month following the final closing of the
offering. However, we, at our sole option, had the right to elect to pay the
current portion of principal and/or interest in shares of our Common Stock.
During the nine months ended March 31, 2006, we repaid principal amounts
amounting to $183,592.

            In January 2006, we made an offer to all of the holders of our
outstanding Units wherein we offered the holders of the Units an opportunity to
convert the outstanding principal and interest owed pursuant to the debentures
into shares of our common stock at a conversion price of $.09 per share. This
offer also provided for the reduction of the exercise price on the warrants
included in the Units issued in the July Offering from $.30 to $.15 per warrant.
As further inducement, if the holder agreed to convert, we also agreed to issue
additional common stock purchase warrants equal to the number of warrants held
by each Unit holder that are also exercisable at $.15 per warrant for a period
of three (3) years. All of the Unit holders accepted this offer, except for two
holders who assigned their debentures to third parties who subsequently
converted. Accordingly, we converted principal balances and accrued interest
payable of $1,663,086. These holders kept the warrants issued as part of their
original Units. As a result, we issued an aggregate of 18,478,568 shares of our
common stock and 5,642,300 common stock purchase warrants, pro rata to the
number of Units held by each holder that elected to convert. We also reduced the
exercise price on the 3,704,800 warrants held by the converting holders to $.15
per share, while maintaining the exercise price on 150,000 warrants for those
holders who elected not to convert at $.30 per share. We also reduced the
exercise price on the 1,787,500 warrants received as consideration for the March
offering from $.40 to $.15 per share.

            Net cash used in operating activities during the nine months ended
March 31, 2006 were $603,962 as compared to net cash used in operating
activities of $217,451 during the nine months ended March 31, 2005. This
increase in cash used in operating activities is primarily attributable to:

         * an increase of $2,827,668 in our net loss. For the nine months ended
March 31, 2006, we had a net loss of $2,732,821 compared to net income of
$94,847 for the nine months ended March 31, 2005.

         * an increase of $59,945 in depreciation and amortization as a result
of an increase in property, plant and equipment as well as the amortization of
acquired land use rights.

         * an increase of $1,557,095 and $335,112 in amortization of discount on
debentures payable and debt issuance costs , respectively, related to the sale
of debentures payable.

         * an increase of $143,099 in stock-based compensation related to the
issuance of common stock to a consultant in the current period,

         * an increase of $1,337,801 in debt settlement expense related to the
issuance on common stock and warrants to debt holders as incentive to convert,


                                      -27-

<page>

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)

         * an increase of $83,290 in allowance for doubtful accounts which
represents an increase in our allowance for bad debt based on an analysis of our
receivable balances.

         * For the nine months ended March 31, 2006, our net operating assets
increased by $1,450,475 as compared to a net increase in net operating assets of
$392,267 for the nine months ended March 31, 2005. During the nine months ended
March 31, 2006, we experienced an increase in accounts receivable due to
increased sales. Additionally, our advances on purchases increased in order to
secure product with favorable terms.

Net cash provided by investing activities during the nine months ended March 31,
2006 was $34,966 as compared to net cash used in investing activities of
$(280,017) for the nine months ended March 31, 2005. During the nine months
ended March 31, 2006, we used cash for capital expenditures of $389,594. This
use of cash was offset by a decrease in our restricted cash balance by $367,906
that collateralizes certain debt, by cash received of $33,654 from acquisitions
and by $23,000 of cash received from repayment of related party advances. During
the nine months ended March 31, 2005, we used cash for capital expenditures of
$153,348 and the advances of funds to related parties of $513,142, offset by
cash provided by a decrease in short-term investments of $386,473.

Net cash provided by financing activities during the nine months ended March 31,
2006 was $702,022 as compared to net cash provided by financing activities
during the nine months ended March 31, 2005 of $438,200. During the nine months
ended March 31, 2006, we received gross proceeds of $503,500 from debentures
payable and $716,030 from borrowings offset by the repayment of loans payable of
$193,830, the payment of placement fees of $48,350, and the repayment of
debentures payable of $275,328. For the nine months ended March 31, 2005, we
received proceeds of $101,450 from loans payable, received net proceeds of
$321,750 from debentures payable, and received contributions of $15,000.

From time to time, we need additional working capital for our operations. In
2005, Yonglongxin, a subsidiary of Anxin, borrowed money pursuant to several
lines of credit that we have established with three banks. At March 31, 2006, we
owed $2,885,683 to these lenders with six to 12 months term from through
September 2006, with an annual interest rate ranging from approximately 5 to 7%.
All loans are renewable when they mature. We generate sufficient cash flow from
financing and operations to pay for our debt services. We do not anticipate
these loans will have material impact on our liquidity. These loans are secured
by inventory, equipment and assets owned by the third parties. We are current on
all payments relating to these loans and expect to renew the loans at terms and
at interest rates comparable to our current loans.

We currently have no material commitments for capital expenditures.

While we have sufficient funds to conduct our business and operations as they
are currently undertaken, we want to build an additional manufacturing line in
order to expand our paper product production. A portion of the proceeds we
derived from our private offering will be used to update our manufacturing
facilities.



                                      -28-

<page>


ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)

Trends

Management estimates that Federal SBS and Hang Kong CCB will continue to witness
strong consumer demand in the near future. Both products have a strong
reputation for quality and are produced by venerable industry participants.

Domestic grades of SBS are improving, and should witness increased demand as
consumer confidence grows. If consumer confidence for domestic SBS improves,
demand for Federal SBS may decrease. We expect International Paper Company will
take measures to protect its market share, possibly in the form of price
incentives. There can be no assurances that such incentives will be available in
the future, or if available, that such incentives will result in improved
margins. From time to time, Anxin may purchase domestically manufactured SBS. In
the past Anxin has purchased solid bleached sulfate paperboard ("SBS") from
Zhong' Hua Paper Co., Ltd. Anxin expects Federal SBS will continue to witness
strong demand. Anxin will seek to garner a growing share of sales of
domestically produced SBS as this market gains acceptance.

Anxin expects the demand for Hang Kong CCB to remain strong. Hang Kong CCB has
established a reputation for quality generally accepted by the industry in
China. Presently there are few alternatives to Hang Kong CCB available in China
and there are no substantial domestic manufacturers in China. Management of
Anxin believes it will take time for domestic grades of cast coated board to be
accepted by the industry. As a result, we expect the demand for Hang Kong CCB to
remain strong for the foreseeable future.

Our organization has witnessed an increase in the cost of our raw materials;
such as raw pulp and pulp related products over the past 12 months. This
increase has impacted the global paper industry and is not specific to our
company. Management of Anxin does not anticipate the trend to reverse.
Furthermore, increase oil prices over the past year have led to higher
transportation costs for our products. Anxin does not have any control over the
price of oil. In response, we have taken necessary actions to alleviate the
impact of rising costs including the reduction of fixed administration expenses
and the implementation of variable cost controls. Management estimates our gross
profit as a percentage will decline over the next few operating quarters.
Furthermore management has taken steps to improve operating results in the
future. Management has successfully acquired a manufacturing facility with the
acquisition of Yonglongxin. This should limit our dependence on foreign
manufactured goods, while attaining a level of control on both the price and
availability of our products. We have established an internal research and
development program with the acquisition of the Research & Development Center.
This research and development program could lead to the creation of new
innovative products. New innovative products could command a higher profit
margin in the industry. However, there is no guarantee that the program will
generate new products. There is no guarantee that any new products will receive
a favorable reception in the industry.

                                      -29-

<page>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)

In the first quarter of 2005, the Chinese government issued minimum production
quotas for the cigarette manufacturing industry. The government established a
yearly quota of 100,000 boxes of cigarettes. This judgment unfavorably impacted
smaller cigarette manufacturers; many of who are customers of Anxin. Management
of Anxin had consciously sought target smaller manufacturers because Anxin
sought to limit the dependence on any one customer, and Anxin can garner a
higher margin from smaller manufacturers, as opposed to larger manufacturers.
Larger manufactures have a higher level of pricing power than smaller
manufacturers. This new quota impacted many of our clients, as they were forced
to close plants or merge with other industry participants in an effort to meet
quotas. As an indirect result, orders for packaging materials were reduced.

The quality of SBS produced domestically has improved. In response, Anxin is
exploring new forms of solid bleached sulfate paperboard produced domestically.
Domestic manufacturers have had success with new products such as Zhong Hua
solid bleached sulfate paperboard and a form of water-proof art paper. Anxin is
seeking ways to incorporate these new products into their product base. In the
event Anxin is successful with this effort, it will attempt to sell and
distribute the new products using the existing sales network. A main attraction
to employ domestic products is the reduced cost as compared to foreign sources.
Anxin, through its subsidiaries, has gradually increased the sales of domestic
products as it attempts to grab market share in this domestic market. Anxin
expects to obtain a higher profit margin on sales of domestically manufactured
SBS because of reduced raw material, transportation and export costs. Anxin has
begun to establish a relationship with Ningbo Zhong' Hua Paper Company Limited
("Zhong Hua"), a manufacturer of SBS in China. Anxin believes that Zhong' Hua
will be able to provide a stable supply of quality grades of SBS. In the future,
the quality of SBS manufactured domestically should improve. Management plans to
protect our position in this segment by seeking to expand our manufacturing base
to incorporate our own proprietary form of a high quality SBS and establishing a
relationship with a domestic manufacturer of a high quality SBS. Although sales
of domestically produced SBS have gradually increased due to increased quality,
overall the domestic products will not substitute all imported products in the
near future, because customers will continue to demand the highest quality
grades, and foreign manufacturer will take measures to protect their market
share. As foreign manufacturers offer incentives to maintain market share, Anxin
could experience improved margins on foreign goods than it currently realizes on
foreign goods.

Inflation

Although management expects that our operations will be influenced by general
economic conditions we do not believe that inflation had a material effect on
our results of operations during the nine months ended March 31, 2006.





                                      -30-


<page>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and on various other 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 from these
estimates under different assumptions or conditions. A summary of significant
accounting policies is included in Note 1 to our audited financial statements
included in our Form 10-KSB as filed with the Securities and Exchange Commission
for the year ended June 30, 2005. Management believes that the application of
these policies on a consistent basis enables us to provide useful and reliable
financial information about the company's operating results and financial
condition. During the nine months ended March 31, 2006, there have been no
material changes to our critical accounting policies that impacted our
consolidated financial condition or results of operations.

We record property and equipment at cost. Depreciation on property and equipment
is calculated using the straight-line method over the estimated useful lives of
the assets. Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. We review these
long-lived assets for impairment whenever circumstances and situations change
such that there is an indication that the carrying amounts may not be
recoverable. If the undiscounted future cash flows of the long-lived assets are
less than the carrying amount, their carrying amount is reduced to fair value
and an impairment loss is recognized. To date, we have not recognized any
impairment losses.

Accounting for Stock Based Compensation - We account for stock based
compensation utilizing Statement of Financial Accounting Standards No. 123R,
"Accounting for Stock-Based Compensation" ("SFAS 123R") and related
interpretations, which requires companies to record compensation cost for
stock-based employee compensation plans at fair value.

We follow the guidance of the Securities and Exchange Commission's Staff
Accounting Bulletin 104 for revenue recognition. In general, we record revenue
when persuasive evidence of an arrangement exists, services have been rendered
or product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. Our revenues from the
sale of products are recorded when the goods are shipped, title passes, and
collectibility is reasonably assured.




                                      -31-

<page>


ITEM 3. CONTROLS AND PROCEDURES

Disclosure controls and procedures and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time period specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is accumulated and communicated to management including our
President as appropriate, to allow timely decisions regarding required
disclosure. Our management, including our President, does not expect that our
disclosure controls and procedures will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions.

Based upon that evaluation, our company's President has concluded that our
disclosure controls and procedures were not effective because of the significant
deficiency and the material weakness described below.

We restated our consolidated statement of operations, as previously filed with
the Securities and Exchange Commission for our three-month periods ended
September 30, 2004 and March 31, 2005. The restatement of our consolidated
financial statements was made to correct an error in the elimination of
inter-company revenues and cost of sales. As a result of this error, we have
determined that there was a significant deficiency in our internal control over
financial reporting through March 31, 2005, related to elimination of
inter-company revenues and cost of sales. We have also determined that this
control deficiency constituted a material weakness. We have taken the remedial
steps necessary to eliminate the material weakness relating to financial
disclosure controls that resulted in this restatement.

Other than the changes discussed above, there have been no changes in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.



                                      -32-


<page>

                           Part II - OTHER INFORMATION

Item 1. Legal Proceedings

         None

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

         In connection with the conversion of debentures payable, the Company
issued 18,478,568 shares of common stock upon conversion of outstanding
debenture balances and accrued interest of $1,663,086.

          Effective January 10, 2006, we entered into a new three-year
          consulting agreement with China Direct. In connection with this
          agreement, we agreed to issue 6,000,000 of the Company's common stock
          to China Direct. As of March 31, 2006, the 6,000,000 share had not
          been issued and are reflected in common stock issuable on the
          accompanying balance sheet. These shares described above were exempt
          from the registration requirements of the Securities Act by reason of
          Section 4(2) of the Securities Act and the rules and regulations,
          including Regulation D there under, as a transaction by an issuer not
          involving a public offering.

Item 3. Defaults Upon Senior Securities

         None

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

         None

Item 5. Other Information

         None

Item 6.  Exhibits

Exhibit
Number              Description
-----------       ----------------
31.1              Section 302 Certificate of Chief Executive Officer *
31.2              Section 302 Certificate of Chief Financial Officer *
32.1              Section 906 Certificate of Chief Executive Officer *
32.2              Section 906 Certificate of Chief Financial Officer *

              * Filed herein


                                      -33-


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                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Ningbo, China on May 15, 2006.

                         DRAGON INTERNATIONAL GROUP CORP

                                    By: /s/ David Wu
                                    David Wu, CEO, Principal Executive Officer









                                      -34-


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