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 December 31, 2005



                         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:  58,463,799  shares at February 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 DECEMBER 31, 2005
                                      INDEX




                                                                            Page
                                                                            ----

PART I - FINANCIAL INFORMATION

   Item 1 - Financial Statements

   Consolidated Balance Sheet
       December 31, 2005 (Unaudited).....................................      3
   Consolidated Statements of Operations (Unaudited)
       For the Three and Six Months Ended December 31, 2005 and 2004.....      4
   Consolidated Statements of Cash Flows (Unaudited)
       For the Six Months Ended December 31, 2005 and 2004...............      5

   Notes to Consolidated Financial Statements............................   6-19

   Item 2 - Management's Discussion and Analysis or Plan of Operation....  20-29

   Item 3 - Controls and Procedures......................................     30

PART II - OTHER INFORMATION

   Item 1 - Legal Proceedings............................................     30

   Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds..     30

   Item 3 - Default upon Senior Securities ..............................     30

   Item 4 - Submission of Matters to a Vote of Security Holders..........     30

   Item 5 - Other Information............................................     31

   Item 6 - Exhibits.....................................................     31

   Signatures............................................................     32





                                       -2-


<PAGE>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                December 31, 2005
                                   (Unaudited)


                                     ASSETS

CURRENT ASSETS:
    Cash                                                      $    564,591
    Cash - restricted                                              266,307
    Accounts receivable (net of allowance for
       doubtful accounts of $127,711)                            4,767,101
    Inventories                                                    414,353
    Advances on purchases                                          912,158
    Other receivables                                              353,728
    Prepaid expenses and other                                      41,928
                                                              ------------

        Total Current Assets                                     7,320,166

PROPERTY AND EQUIPMENT - Net                                       964,171
LAND USE RIGHTS - Net                                            2,530,861
DEFERRED DEBT ISSUANCE COSTS                                       242,396
GOODWILL                                                           488,330
                                                              ------------

        Total Assets                                          $ 11,545,924
                                                              ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Current portion of long-term debt                         $  2,500,476
    Convertible debentures payable, net                            382,934
    Convertible notes payable                                        6,438
    Accounts payable                                             1,793,239
    Accrued expenses                                             1,698,122
                                                              ------------

        Total Current Liabilities                                6,381,209

CONVERTIBLE DEBENTURES PAYABLE, net                                284,029
                                                              ------------

        Total Liabilities                                        6,665,238
                                                              ------------

MINORITY INTEREST                                                   17,988
                                                              ------------

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; 39,985,234 shares
        issued and outstanding)                                     39,985
    Additional paid-in capital                                   2,909,922
    Retained earnings                                            1,844,118
    Deferred compensation                                          (52,000)
    Other comprehensive income - foreign currency                  120,673
                                                              ------------

        Total Stockholders' Equity                               4,862,698
                                                              ------------

        Total Liabilities and Stockholders' Equity            $ 11,545,924
                                                              ============


            See notes to unaudited consolidated financial statements
                                       -3-


<PAGE>

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


<CAPTION>

                                                       For the Three Months Ended      For the Six Months Ended
                                                               December 31,                  December 31,
                                                     ----------------------------    ----------------------------
                                                          2005           2004            2005            2004
                                                     ------------    ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>             <C>
NET REVENUES                                         $  4,869,309    $  2,773,884    $  9,491,419    $  6,316,734

COST OF SALES                                           4,368,285       2,507,284       8,883,949       5,744,166
                                                     ------------    ------------    ------------    ------------

GROSS PROFIT                                              501,024         266,600         607,470         572,568
                                                     ------------    ------------    ------------    ------------
OPERATING EXPENSES:
     Selling expenses                                     111,977          67,983         160,812         218,224
     General and administrative                            16,806         211,918         275,931         281,498
                                                     ------------    ------------    ------------    ------------

        Total Operating Expenses                          128,783         279,901         436,743         499,722
                                                     ------------    ------------    ------------    ------------

INCOME (LOSS) FROM OPERATIONS                             372,241         (13,301)        170,727          72,846
                                                     ------------    ------------    ------------    ------------
OTHER INCOME (EXPENSE):
     Other income                                          22,249          10,695         204,713          29,913
     Debt issuance costs                                  (40,400)             --         (95,695)             --
     Interest expense                                    (254,356)        (29,745)       (631,492)        (51,682)
                                                     ------------    ------------    ------------    ------------

        Total Other Income (Expense)                     (272,507)        (19,050)       (522,474)        (21,769)
                                                     ------------    ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES                          99,734         (32,351)       (351,747)         51,077

INCOME TAXES                                                   11          (9,692)          2,801         (49,283)
                                                     ------------    ------------    ------------    ------------

NET INCOME (LOSS) BEFORE MNORITY INTEREST                  99,745         (42,043)       (348,946)          1,794

MINORITY INTEREST IN LOSS OF SUBSIDIARY                    (3,618)             --          (1,284)             --
                                                     ------------    ------------    ------------    ------------

NET INCOME (LOSS)                                          96,127         (42,043)       (350,230)          1,794

OTHER COMPREHENSIVE INCOME:
   Unrealized foreign currency translation                 22,499              --         120,673              --
                                                     ------------    ------------    ------------    ------------

COMPREHENSIVE INCOME (LOSS)                          $    118,626    $    (42,043)   $   (229,557)   $      1,794
                                                     ============    ============    ============    ============

NET INCOME PER COMMON SHARE
      Basic                                          $       0.00    $      (0.00)   $      (0.01)   $       0.00
                                                     ============    ============    ============    ============
      Diluted                                        $       0.00    $      (0.00)   $      (0.01)   $       0.00
                                                     ============    ============    ============    ============

      Weighted Common Shares Outstanding - Basic       39,979,799      29,392,783      39,637,951      28,780,497
                                                     ============    ============    ============    ============
      Weighted Common Shares Outstanding - Diluted     41,206,234      29,392,783      39,637,951      34,263,697
                                                     ============    ============    ============    ============

</TABLE>

            See notes to unaudited consolidated financial statements
                                       -4-


<PAGE>

<TABLE>
                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

<CAPTION>
                                                         For the Six Months Ended
                                                                December 31,
                                                        --------------------------
                                                           2005           2004
                                                        -----------    -----------
<S>                                                     <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                    $  (350,230)   $     1,794
   Adjustments to reconcile net income (loss)
     to net cash provided by (used in
     operating activities:
       Depreciation and amortization                         58,922         16,787
       Stock-based compensation                              52,000             --
       Amortization of discount on debentures payable       503,934             --
       Amortization of debt issuance costs                   95,695             --
       Allowance for doubtful accounts                       12,063             --
       Minority interest                                      1,380             --

   Changes in assets and liabilities:
       Accounts receivable                               (1,023,979)       289,402
       Inventories                                        1,192,844      1,123,777
       Prepaid and other current assets                     284,266        308,627
       Other receivables                                    646,083             --
       Advances to employees                                     --        431,147
       Advances on purchases                               (657,429)            --
       Other assets                                           4,154         (2,298)
       Accounts payable                                  (1,329,956)    (1,830,943)
       Accrued expenses                                    (439,075)       (15,290)
       Advances from customers                              (22,945)      (364,477)
                                                        -----------    -----------

NET CASH USED IN OPERATING ACTIVITIES                      (972,273)       (41,474)
                                                        -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Due from related parties                                      --         40,924
   Cash acquired in acquisition                              33,654             --
   Increase in short-term investments                            --       (120,773)
   Decrease in restricted cash                              353,258             --
   Capital expenditures                                    (230,419)      (122,657)
                                                        -----------    -----------

NET CASH FLOWS PROVIDED BY
   (USED IN) INVESTING ACTIVITIES                           156,493       (202,506)
                                                        -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from loans payable                              548,746         12,078
   Repayment of loans payable                              (376,097)            --
   Proceeds from debentures payable                         503,500             --
   Prepayment of debentures payable                        (183,592)            --
   Placement fees paid                                      (48,350)            --
                                                        -----------    -----------

NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES             444,207         12,078
                                                        -----------    -----------

EFFECT OF EXCHANGE RATE ON CASH                              33,605             --
                                                        -----------    -----------

NET DECREASE IN CASH                                       (337,968)      (231,902)

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

CASH - end of period                                    $   564,591    $    53,954
                                                        ===========    ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid for:
      Interest                                          $   134,625    $    21,937
                                                        ===========    ===========
      Income Taxes                                      $    54,766    $    39,591
                                                        ===========    ===========

   Non-cash investing and financing activities
      Issuance of common stock for future services      $    52,000    $        --
                                                        ===========    ===========
      Deferred discount and beneficial conversion
         on debentures payable                          $   420,845    $        --
                                                        ===========    ===========
      Issuance of common stock for convertible debt     $     3,750    $        --
                                                        ===========    ===========

   Acquisition details:
      Fair value of assets acquired                     $ 1,142,348    $        --
                                                        ===========    ===========
      Goodwill                                          $   486,120    $        --
                                                        ===========    ===========
      Liabilities assumed                               $ 1,148,468    $        --
                                                        ===========    ===========
      Common stock issued in connecxtion
         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
                                DECEMBER 31, 2005


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 consists 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
                                DECEMBER 31, 2005


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 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 six months ended December
31, 2005 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 2005 and
2004 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
                                DECEMBER 31, 2005


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 December 31, 2005,  the allowance  for doubtful  accounts was
$127,711.

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 (loss) per share is computed by dividing net income (loss) 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 Six Months
                                                       December 31,                Ended December 31,
                                                   2005           2004            2005            2004
                                               ------------   ------------    ------------    ------------
<S>                                            <C>            <C>             <C>             <C>
Net income (loss)                              $     96,127   $    (42,043)   $   (350,230)   $      1,794
Weighted average shares outstanding - basic      39,979,799     29,392,783      39,637,951      28,790,497
EPS - basic                                    $       0.00   $      (0.00)   $      (0.01)   $       0.00
                                               ============   ============    ============    ============

Net income (loss)                              $     96,127   $    (42,043)   $   (350,230)   $      1,794
                                               ============   ============    ============    ============

Weighted average shares outstanding - basic      39,979,799     29,392,783      39,637,951      28,790,497
Effect of dilutive securities
   Unexercised warrants                             422,617             --              --              --
   Convertible debentures                                --             --              --              --
   Convertible note payable                         803,818             --              --       5,473,200
                                               ------------   ------------    ------------    ------------
Weighted average shares outstanding- diluted     41,206,234     29,392,783      39,637,951      34,263,697
                                               ============   ============    ============    ============
EPS - diluted                                         $0.00         $(0.00)         $(0.01)          $0.00
                                               ============   ============    ============    ============
</TABLE>


                                       -8-
<PAGE>

                        DRAGON INTERNATIONAL GROUP CORP.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

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

Stock-based compensation

The Company  accounts for stock options  issued to employees in accordance  with
the  provisions  of  Accounting   Principles   Board  ("APB")  Opinion  No.  25,
"Accounting  for Stock Issued to  Employees,"  and related  interpretations.  As
such,  compensation  cost is  measured on the date of grant as the excess of the
current  market  price of the  underlying  stock over the exercise  price.  Such
compensation  amounts, if any, are amortized over the respective vesting periods
of the option grant.  The Company adopted the disclosure  provisions of SFAS No.
123,  "Accounting for Stock-Based  Compensation"  and SFAS 148,  "Accounting for
Stock-Based Compensation -Transition and Disclosure",  which permits entities to
provide  pro forma net  income  (loss) and pro forma  earnings  (loss) per share
disclosures for employee stock option grants as if the fair-valued  based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to  non-employees  for goods or services in accordance with the
fair value method of SFAS 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 December 31, 2005, the exchange rate for the Chinese Renminbi (RMB) was $1 US
for 8.0734 RMB.


                                       -9-
<PAGE>

                        DRAGON INTERNATIONAL GROUP CORP.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

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  and were not material  during the periods  presented
because the Chinese dollar (RMB)  fluctuates with the United States dollar.  The
cumulative translation adjustment and effect of exchange rate changes on cash at
December 31, 2005 and 2004 was not material.

On July 21, 2005,  China let the RMB fluctuate  ending its decade-old  valuation
peg to the U.S. dollar.  The new RMB rate reflects an approximate 2% increase in
value  against  the  U.S.  dollar.  Historically,  the  Chinese  government  has
benchmarked the RMB exchange ratio against the U.S. dollar,  thereby  mitigating
the associated foreign currency exchange rate fluctuation risk. The Company does
not  believe  that  its  foreign  currency  exchange  rate  fluctuation  risk is
significant.

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 December 31, 2005, inventories consisted of the following:


         Raw materials                               $    131,434
         Finished goods                                   282,919
                                                     ------------
                                                     $    414,353
                                                     ============


                                      -10-
<PAGE>


                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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
December 31, 2005, 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   December   31,   2005,   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  December  31, 2005 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
December 31, 2005. In October 2005,  the Company issued 500,000 shares of common
stock in connection  with the conversion of $3,750 of this debt. At December 31,
2005,  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
                                DECEMBER 31, 2005


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 fair value of net assets exceeded the purchase price 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 $353,728 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
                                DECEMBER 31, 2005


NOTE 5 - ACQUISITION AND DISPOSITIONS (continued)

For  acquisitions  during the six months ended  December  31,  2005,  the assets
acquired and liabilities assumed at acquisition date were as follows:

                                      Yongxin      Xianyang       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
                                    ==========     ========     =========

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.  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 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
                                DECEMBER 31, 2005


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 has 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 shall provide the Company with fifteen (15) days written  notice prior to
such  payment  ("Holder  Conversion  Notice").  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
                                DECEMBER 31, 2005

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.

The Company can elect to convert the current  portion of unpaid  interest and/or
principal  due to the Holder under the condition  that certain  criteria are met
which include:  (a) the Common Stock received for payment is fully registered at
the time of receipt and is delivered  without  restriction  of any kind; and (b)
the  average  daily  trading  volume as  measured  for the prior  twenty days to
payment is as  follows:  (i)  100,000  shares per day for  principal  balance in
excess of $2,000,000; (ii) 75,000 shares per day for principal balance in excess
of $500,000 but less than $2,000,000;  (iii) 50,000 shares per day for principal
balance  less than  $500,000;  (iv) no less than  100,000  shares per day if the
remaining  principal  balance is in excess of  $2,000,000;  and (v) the  average
daily price per share as measured from the five trading days prior to payment is
no less than $0.24 per share.  The stock must be delivered  within five business
days of the first of the then current month.

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.



                                      -15-
<PAGE>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)

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. -

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.

For the six months  ended  December  31,  2005,  the amount of  amortization  of
imputed  interest  and  beneficial  conversion  charged to interest  expense was
$503,934.

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.  At December 31, 2005,  the  placement  fees were
deemed to be a deferred debt offering cost on the accompanying balance sheet and
are  being  amortized  as a debt  issuance  cost over the  debenture  term of 24
months.  For the six  months  ended  December  31,  2005,  amortization  of debt
issuance costs amounted to $95,695.



                                      -16-
<PAGE>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)

The debentures are secured by 12,250,000 shares of common stock held in the name
of the Company's Chief Executive  Officer,  7,150,000  shares of common stock in
the name of Shun Li Shi,  a  shareholder,  a  minimum  of  $150,000  in  readily
available funds and a mining facility valued of at $3,000,000 owned by David Wu,
the Company's Chief Executive Officer.

The convertible debenture liability is as follows at December 31, 2005:


Convertible debentures payable                         $     1,743,808
Less: unamortized discount on debentures                    (1,076,845)
                                                       ---------------
Convertible debentures, net                                    666,963
Less: current portion of convertible debentures               (382,934)
                                                       ----------------

Convertible debentures payable - long-term             $       284,029
                                                       ===============

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.  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.  For the six months ended December 31, 2005,
amortization of deferred consulting expense amounted to $52,000.

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).


                                      -17-
<PAGE>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

NOTE 7 - STOCKHOLDERS EQUITY (continued)

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.

     A summary of the status of the Company's  outstanding  stock warrants as of
     December 31, 2005 and changes during the period then ended is as follows:

                                                                  Weighted
                                                                   Average
                                                                  Exercise
                                                      Shares        Price
                                                    ----------   ----------
       Outstanding at July 1, 2005                   4,635,300    $    0.34
        Granted                                      1,507,000         0.20
        Exercised                                            -            -
        Forfeited                                            -            -
                                                    ----------    ---------

        Outstanding at December 31, 2005             6,142,300   $     0.31
                                                    ==========   ==========

           Warrants exercisable at end of period     6,142,300   $     0.31
                                                    ==========   ==========
           Weighted-average fair value of warrants
             granted during the period                   $0.20
                                                    ==========

The following information applies to all warrants outstanding at December 31,
2005:

<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
     ------------------------     -----------  ------------  ----------  ---------  ----------
<S>     <C>                         <C>            <C>         <C>       <C>          <C>
        $0.40                       1,787,500      4.50        $ 0.40    1,787,500    $ 0.40
        $0.30                       3,854,800      4.55        $ 0.30    3,854,800    $ 0.30
        $0.01                         500,000      4.50        $ 0.01      500,000    $ 0.01
</TABLE>

NOTE 8 - OPERATING RISK

(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.

                                      -18-


<PAGE>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

NOTE 8 - OPERATING RISK (continued)

(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.

(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.


                                      -19-

<PAGE>

                DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


NOTE 9 - SUBSEQUENT EVENT

In  January  2006,  the  Company  made an  offer  to all of the  holders  of its
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.  As of the date
of this  Report,  all of the Unit holders have  accepted  the  Company's  offer,
except  for two  holders  who did  agree to  assign  their  Debentures  to third
parties.  These  holders kept the Warrants  issued as part of their Units.  As a
result, the Company issued an aggregate of 18,478,565 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. The exercise price on the 3,704,800
Warrants held by the converting  holders was also reduced to $.15 per share. The
exercise price for those holders who elected not to convert  remains at $.30 per
share for the relevant 150,000 Warrants.


                                      -20-
<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.



                                      -21-
<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.

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  December 31,
2005 and 2004

During  the six months  ended  December  31,  2005,  we  generated  revenues  of
$9,491,419,  as  compared to revenues  of  $6,316,734  for the six months  ended
December 31, 2004, an increase of $3,174,685, or 50.3%. For the six months ended
December 31, 2005,  we recorded  revenues  from our Yongxin  subsidiary  that we
acquired  effective  July 1, 2005 of  approximately  $1,414,000.  The  remaining
increase was attributable to the hiring of additional sales staff, from sales to
new customers and increased sales during the months of December 2005.



                                      -22-
<PAGE>

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

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.

For the six months  ended  December  31, 2005,  gross  profit was  $607,470,  as
compared to gross profit of $572,568 for the six months ended December 31, 2004,
an increase of $34,902. For the six months ended December 31, 2005, gross profit
on a  percentage  basis  decreased  to 6.4% from 9.0% for the six  months  ended
December 31, 2004.

The decrease in gross profit percentage is attributable to higher cost of sales.
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 increased revenues that were generated
through  sales  agents that we  recognize a gross  profit of  approximately  1%.
Management  of Anxin  does not  anticipate  the trend to  reverse.  Furthermore,
increased oil prices over the past year have led to higher  transportation costs
for our products.  Anxin does not have any control over the international  price
of oil.  Management  has made  efforts to reduce fixed  administrative  costs to
alleviate  the burden of an increase  cost of sales for the fiscal year 2005. As
mentioned above,  Anxin has consolidated the operations of Shanghai Anhong 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.

For the six months  ended  December  31, 2005,  operating  expenses  amounted to
$436,743, or 4.6% of net revenues, compared to $499,722, or 7.9% of revenues for
the six months ended  December 31,  2004, a decrease of $62,979,  or 12.6%.  The
decrease was attributable to the following:

For the six months  ended  December  31,  2005,  selling  expenses  amounted  to
$160,812 as compared to $218,224 for the six months  ended  December 31, 2005, a
decrease  of $57,412 or 26%.  This  decrease  is  attributable  to a decrease in
shipping costs of approximately $22,418. Additionally, we experienced a decrease
in  salaries of  approximately  $23.455  due to  reduction  in sales staff and a
decrease in other selling expenses due to the consolidation of our operations.

For the six months ended December 31, 2005, general and administrative  expenses
were  $275,931,  as compared to $281,498 for the six months  ended  December 31,
2004,  a  decrease  of $5,567,  or  approximately  2%. For the six months  ended
December 31, 2005, our subsidiary,  Anxin,  received a refund of consulting fees
amounting to approximately  $54,187 that reduced our general and  administrative
expenses.  This  decrease  was offset by an  increase in  professional  fees and
consulting fees associated  with our obligations  under the Securities  Exchange
Act of 1934, as amended and other  administrative  activities  of  approximately
$48,000.


                                      -23-
<PAGE>

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

For the six months ended December 31, 2005,  other income  amounted to $204,713,
as compared to other  income of $29,913 for the six months  ended  December  31,
2004.  Other  income for the six months  ended  December  31,  2005 and 2004 was
associated with income  recognized  from the collection of value-added  taxes on
certain of our products which we receive a tax credit.

For the six months ended December 31, 2005, debt issuance costs were $95,695, as
compared to $0 for the six months  ended  December  31, 2004 this was related to
the amortization of placements fees paid in connection with the private offering
described above.

For the six months ended December 31, 2005,  interest  expense was $631,492,  as
compared to $51,682 for the six months ended  December 31, 2004,  an increase of
$579,810 and was related to 1)  increased  borrowings;  and 2) the  recording of
$503,934 in amortization of discount of debentures  payable that was included in
interest expense.

As a result of these factors, we reported a net loss of $(350,230) or a net loss
of $(.01) per share for the six months  ended  December  31, 2005 as compared to
net  income of  $1,794  (less  than $.01 per  share)  for the six  months  ended
December 31, 2004.

Anxin is making an effort to increase the sales  generated by  Yonglongxin.  The
reason is twofold;  (i) Anxin can control the price and maintain  higher margins
on products  manufactured  within the  organization;  and (ii)  increase the tax
benefits realized from output from the Yonglongxin factory. Yonglongxin operates
a welfare  factory  in the  Fuming  County of the  Zhang'ai  Village  in Ningbo.
Yonglongxin  has been  certified  as a civil  welfare  company by the  municipal
government  of  Ningbo.   Civil  welfare  companies  in  China  enjoy  financial
incentives  including  favorable tax status and value-added  tax rebates.  These
incentives translate to reduced costs.

Liquidity and Capital Resources

At December 31, 2005,  we had $564,591 in cash.  At December 31, 2005,  our cash
position by geographic area is as follows:

           United States        $   3,996
           China                  560,595
                                ---------
           Total                $ 564,591
                                =========



                                      -24-
<PAGE>

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

     In March 2005, we raised $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 is
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 $1,569,900  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  are secured by property with an audited
value of $227,900 and  12,250,000  shares of Common Stock owned by David Wu, our
President and Chief  Executive  Officer.  The  Debentures are  convertible  into
shares of our  Common  Stock and mature two years  after  issuance.  We have 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. At the sole election of 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 our Common Stock.
The Holder shall provide us with fifteen (15) days written  notice prior to such
payment ("Holder Conversion Notice").  The Holder may elect to 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 date of the  Holder's  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.

     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 shall be 1/21 of the total amount offered plus any accrued  interest.  The
remaining  balance of the principal  value of the Notes will be due on the first
day of the  twenty-fourth  month  following  the final  closing of the offering.
However,  we,  at our sole  option,  may  elect to pay the  current  portion  of
principal  and/or interest in shares of our Common Stock.  During the six months
ended December 31, 2005, we repaid principal amounts amounting to $183,592.



                                      -25-
<PAGE>

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

     We are  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 our  Company
Conversion  Notice,  subject  to a $.55  ceiling.  We can elect to  convert  the
current portion of unpaid interest and/or  principal due to the Holder under the
condition  that  certain  criteria are met which  include:  (a) the Common Stock
received for payment is fully registered at the time of receipt and is delivered
without  restriction  of any kind;  and (b) the average daily trading  volume as
measured for the prior twenty days to payment is as follows:  (i) 100,000 shares
per day for principal  balance in excess of  $2,000,000;  (ii) 75,000 shares per
day for principal balance in excess of $500,000 but less than $2,000,000;  (iii)
50,000 shares per day for  principal  balance less than  $500,000;  (iv) no less
than 100,000 shares per day if the remaining  principal  balance is in excess of
$2,000,000.00;  and (v) the average  daily price per share as measured  from the
five trading days prior payment is no less than $0.24 per share.  The stock must
be delivered within 5 business days of the first of the then current month.

Subsequent Event

     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 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, 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. As of the date of this Report,  all of the Unit holders have
accepted  the  Company's  offer,  except for two holders who did agree to assign
their  Debentures to third  parties.  These holders kept the Warrants  issued as
part of their original Units. As a result,  we issued an aggregate of 18,478,565
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.

     Net cash used in operating  activities during the six months ended December
31, 2005 were  $972,273 as compared to net cash used in operating  activities of
$41,474  during the six months ended  December 31, 2004.  This  increase in cash
used in operating activities is primarily attributable to:

     * an  increase  of  $352,024  in our net  loss.  For the six  months  ended
December  31,  2005,  we had a net loss of  $350,230  compared  to net income of
$1,794 for the six months ended December 31, 2004.

     * an increase of $42,135 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  $503,934  and  $95,695 in  amortization  of discount on
debentures  payable and debt issuance costs , respectively,  related to the sale
of debentures payable.

                                      -26-
<PAGE>

     * an  increase  of  $52,000  in  stock-based  compensation  related  to the
issuance of common stock to a consultant in the current period,

     *  an  increase  of  $12,063  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 six months  ended  December 31, 2005,  our net  operating  assets
increased by $1,346,037 as compared to a net increase in net operating assets of
$60,055 for the six months ended December 31, 2004,

Net cash provided by investing  activities  during the six months ended December
31, 2005 was  $156,493 as compared to net cash used in investing  activities  of
$(202,506)  for the six months ended  December  31, 2004.  During the six months
ended December 31, 2005, we used cash for capital  expenditures  of $230,419 and
had a decrease in our  restricted  cash balance by $353,258 that  collateralizes
certain debt offset by cash  received of $33,654 from  acquisitions.  During the
six months ended  December 31, 2004,  we used cash for capital  expenditures  of
$122,657,  used cash to acquire short-term  investments of $120,773 and received
advances from related parties of $40,924.

Net cash provided by financing  activities  during the six months ended December
31, 2005 was $444,207 as compared to net cash  provided by financing  activities
during the six months ended December 31, 2004 of $12,078.  During the six months
ended December 31, 2005, we received gross proceeds of $503,500 from  debentures
payable and $548,746 from borrowings offset by the repayment of loans payable of
$376,097,  the  payment of  placement  fees of  $48,350,  and the  repayment  of
debentures  payable of $183,592.  During the six months ended December 31, 2004,
we received proceeds from loans payable of $12,078.

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 December 31, 2005,
we owed  $2,500,476  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.


                                      -27-
<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.

                                      -28-
<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 six months ended December 31, 2005.

                                      -29-
<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 six months ended December
31,  2005,  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.



                                      -30-
<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.






                                      -31-
<PAGE>

                           Part II - OTHER INFORMATION

Item 1. Legal Proceedings

     None

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

     We made no  unregistered  sales of our equity  securities  during the three
month period ended December 31, 2005.

Subsequent Event

     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 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, 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. As of the date of this Report,  all of the Unit holders have
accepted  the  Company's  offer,  except for two holders who did agree to assign
their  Debentures to third  parties.  These holders kept the Warrants  issued as
part of their original Units. As a result,  we issued an aggregate of 18,478,565
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.

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

                                      -32-
<PAGE>

                                   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 February 9, 2006.

                                   DRAGON INTERNATIONAL GROUP CORP

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

















                                      -33-