UNITED STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
 (Mark
One)
 
 [X]      QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
quarterly period ended December 31, 2008
  [  
]      TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
  For the
transition period from ________ to __________
  Commission
File Number: 0-23485
  DRAGON
      INTERNATIONAL GROUP CORP.(Exact
      name of small business issuer as specified in
  charter)
   Nevada
              
              98-0177646(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)
  
 No.
      201 Guangyuan Road, District C Investment Pioneering Park
      Jiangbei,Ningbo,
      China 315033(Address
      of principal executive offices)(86)
      574-83070703(Issuer's
      telephone number)(Former
      name, former address and former fiscal year,if
      changed since last report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer
                [ 
      ]
                
                
                Accelerated
      filer
                [  ]Non-accelerated
      filer
                [
       ]
                
                
                Smaller
      reporting company
                [X](Do
      not check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes [   ] No [X]
 
 Indicate
the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 134,752,772 shares of
common stock are issued and outstanding at February 10, 2009.
  
  DRAGON INTERNATIONAL GROUP
CORP.
 QUARTERLY
PERIOD ENDED DECEMBER 31, 2008
  TABLE OF CONTENTS
 
 PART
      I. FINANCIAL INFORMATIONItem 1.
                            Financial
      Statements
                            Page No.1.
                            Consolidated balance sheets as of December 31,
      2008 (Unaudited) and June 30, 2008
                            12.
                            Consolidated statements of operations for the
      three and six months ended December 31, 2008 and 2007
      (Unaudited)
                            23.
                            Consolidated statements of cash flows for the six months
      ended December 31, 2008 and 2007 (Unaudited)
                            34.
                            Notes to consolidated financial
      statements
                            4Item
      2.
                            Management’s Discussion and Analysis of
      Financial Condition and Results of
    Operations
                            14Item
      4A(T).
                            Controls and Procedures
                            22PART
      II. OTHER INFORMATIONItem
      1.
                            Legal
      Proceedings
                            23Item
      2.
                            Unregistered Sales of Equity Securities and Use
      of Proceeds
                            23Item
      3.
                            Defaults Upon Senior Securities
                            23Item
      4.
                            Submission of Matters to a Vote of Security
      Holders
                            23Item
      5.
                            Other Information
                            23Item
      6.
                            Exhibits
                            23SIGNATURES
                            
                            24
  Table of Contents
  Part
I – Financial Information
 Item
1 – Financial Statements
  DRAGON INTERNATIONAL GROUP CORP. AND
      SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSDecember
      31, 2008
                          
                          
                          June
      30, 2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                          
                          $
                          909,751
                          
                          
                          $
                          213,110Accounts
      receivable (net of allowance for doubtful accounts of $764,381 and
      $1,333,501, respectively)
                          
                          
                          4,367,994
                          
                          
                          
                          9,919,791Inventories
                          
                          
                          3,475,867
                          
                          
                          
                          4,819,435Advances
      on purchases
                          
                          
                          5,918,110
                          
                          
                          
                          5,034,567Other
      receivables
                          
                          
                          120,584
                          
                          
                          
                          57,536Prepaid
      expenses and other current assets
                          
                          
                          72,256
                          
                          
                          
                          39,291Total
      Current Assets
                          
                          
                          14,864,562
                          
                          
                          
                          20,083,730Cash - restricted
                          
                          
                          -
                          
                          
                          
                          240,112Property and equipment - net
                          
                          
                          3,239,756
                          
                          
                          
                          3,125,797Intangible assets - net
                          
                          
                          3,117,741
                          
                          
                          
                          2,813,666Deferred expense
                          
                          
                          23,393
                          
                          
                          
                          28,525Taxes receivable
                          
                          
                          30,670
                          
                          
                          
                          -Total
      Assets
                          
                          $
                          21,276,122
                          
                          
                          $
                          26,291,830LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Notes
      payable - current portion
                          
                          $
                          5,584,919
                          
                          
                          $
                          5,498,220Accounts
      payable
                          
                          
                          3,247,971
                          
                          
                          
                          8,505,110Accrued
      expenses
                          
                          
                          337,269
                          
                          
                          
                          283,616Advances
      from customers
                          
                          
                          112,032
                          
                          
                          
                          62,504Tax
      payable
                          
                          
                          -
                          
                          
                          
                          40,015Due
      to related parties
                          
                          
                          18,354
                          
                          
                          
                          602,511Total
      Current Liabilities
                          
                          
                          9,300,545
                          
                          
                          
                          14,991,976STOCKHOLDERS'
      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;132,198,022
      and 117,033,022 shares issued and outstanding at December 31, 2008 and
      June 30, 2008, respectively.)
                          
                          
                          132,198
                          
                          
                          
                          117,033Additional
      paid-in capital
                          
                          
                          12,280,547
                          
                          
                          
                          11,640,962Accumulated
      deficit
                          
                          
                          (1,802,665
                          )
                          
                          
                          (1,800,842
                          )Other
      comprehensive income - foreign currency
                          
                          
                          1,365,497
                          
                          
                          
                          1,342,701Total
      Stockholders' Equity
                          
                          
                          11,975,577
                          
                          
                          
                          11,299,854Total
      Liabilities and Stockholders' Equity
                          
                          $
                          21,276,122
                          
                          
                          $
                          26,291,830See
      accompanying notes to Consolidated Financial Statements
  - 1
-
 Table of Contents
  DRAGON INTERNATIONAL GROUP CORP. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(Unaudited)For
      the Three Months Ended
                              
                              
                              For
      the Six Months EndedDecember
      31,
                              
                              
                              December
      31,2008
                              
                              
                              2007
                              
                              
                              2008
                              
                              
                              2007NET
      REVENUES
                              
                              $
                              5,660,758
                              
                              
                              $
                              13,056,527
                              
                              
                              $
                              15,475,744
                              
                              
                              $
                              20,986,025COST
      OF SALES
                              
                              
                              4,953,777
                              
                              
                              
                              12,122,988
                              
                              
                              
                              14,021,294
                              
                              
                              
                              19,454,321GROSS
      PROFIT
                              
                              
                              706,981
                              
                              
                              
                              933,539
                              
                              
                              
                              1,454,450
                              
                              
                              
                              1,531,704OPERATING
      EXPENSES:Selling
      expenses
                              
                              
                              163,453
                              
                              
                              
                              92,716
                              
                              
                              
                              545,028
                              
                              
                              
                              285,024General
      and administrative Expenses
                              
                              
                              337,011
                              
                              
                              
                              289,000
                              
                              
                              
                              725,347
                              
                              
                              
                              523,339Total
      Operating Expenses
                              
                              
                              500,464
                              
                              
                              
                              381,716
                              
                              
                              
                              1,270,375
                              
                              
                              
                              808,363INCOME
      FROM OPERATIONS
                              
                              
                              206,517
                              
                              
                              
                              551,823
                              
                              
                              
                              184,075
                              
                              
                              
                              723,341OTHER
      (EXPENSE) INCOME :Income
      tax abatement
                              
                              
                              -
                              
                              
                              
                              1,621,322
                              
                              
                              
                              -
                              
                              
                              
                              1,621,322Other
      income
                              
                              
                              90,133
                              
                              
                              
                              70,653
                              
                              
                              
                              148,070
                              
                              
                              
                              128,047Interest
      expense
                              
                              
                              (143,610
                              )
                              
                              
                              (95,031
                              )
                              
                              
                              (321,681
                              )
                              
                              
                              (174,523
                              )Total
      Other (Expense) Income
                              
                              
                              (53,477
                              )
                              
                              
                              1,596,944
                              
                              
                              
                              (173,611
                              )
                              
                              
                              1,574,846INCOME
      BEFORE INCOME TAXES
                              
                              
                              153,040
                              
                              
                              
                              2,148,767
                              
                              
                              
                              10,464
                              
                              
                              
                              2,298,187INCOME
      TAXES
                              
                              
                              (5,974
                              )
                              
                              
                              (172,009
                              )
                              
                              
                              (12,286
                              )
                              
                              
                              (262,907
                              )NET
      INCOME (LOSS) BEFORE MINORITY INTEREST
                              
                              
                              147,066
                              
                              
                              
                              1,976,758
                              
                              
                              
                              (1,822
                              )
                              
                              
                              2,035,280MINORITY
      INTEREST IN INCOME OF SUBSIDIARY
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (75,870
                              )NET
      INCOME (LOSS)
                              
                              $
                              147,066
                              
                              
                              $
                              1,976,758
                              
                              
                              $
                              (1,822
                              )
                              
                              $
                              1,959,410OTHER
      COMPREHENSIVE INCOME:Unrealized
      foreign currency translation
                              
                              $
                              1,159
                              
                              
                              $
                              217,420
                              
                              
                              $
                              22,796
                              
                              
                              $
                              316,200COMPREHENSIVE
      INCOME
                              
                              $
                              148,225
                              
                              
                              $
                              2,194,178
                              
                              
                              $
                              20,974
                              
                              
                              $
                              2,275,610NET
      INCOME PER COMMON SHAREBasic
                              
                              $
                              0.00
                              
                              
                              $
                              0.02
                              
                              
                              $
                              0.00
                              
                              
                              $
                              0.02Diluted
                              
                              $
                              0.00
                              
                              
                              $
                              0.02
                              
                              
                              $
                              0.00
                              
                              
                              $
                              0.02Weighted
      Common Shares Outstanding - Basic
                              
                              
                              130,097,418
                              
                              
                              
                              96,363,982
                              
                              
                              
                              123,529,525
                              
                              
                              
                              96,363,982Weighted
      Common Shares Outstanding - Diluted
                              
                              
                              130,115,837
                              
                              
                              
                              139,679,254
                              
                              
                              
                              123,529,525
                              
                              
                              
                              139,679,254See
      accompanying notes to Consolidated Financial Statements
 - 2
-
 Table of Contents
  DRAGON INTERNATIONAL GROUP CORP. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)For the Six
      Months EndedDecember
      31,2008
                                          
                                          
                                          2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                                          
                                          $
                                          (1,822
                                          )
                                          
                                          $
                                          1,959,410Adjustments
      to reconcile net (loss) income to net cash provided from (used
      in) operating activities:Depreciation
      and amortization
                                          
                                          
                                          207,183
                                          
                                          
                                          
                                          258,447Common
      stock issued for services
                                          
                                          
                                          330,000
                                          
                                          
                                          
                                          -Allowance
      for doubtful accounts
                                          
                                          
                                          (570,256
                                          )
                                          
                                          
                                          (40,674
                                          )Minority
      interest
                                          
                                          
                                          -
                                          
                                          
                                          
                                          75,870Changes
      in assets and liabilities:Accounts
      receivable
                                          
                                          
                                          6,131,826
                                          
                                          
                                          
                                          (1,549,783
                                          )Inventories
                                          
                                          
                                          1,350,392
                                          
                                          
                                          
                                          (776,969
                                          )Prepaid
      and other current assets
                                          
                                          
                                          (51,726
                                          )
                                          
                                          
                                          (947,566
                                          )Notes
      receivable
                                          
                                          
                                          -
                                          
                                          
                                          
                                          284,008Other
      receivables
                                          
                                          
                                          (69,886
                                          )
                                          
                                          
                                          (54,419
                                          )Advances
      to employees
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (7,424
                                          )Advances
      on purchases
                                          
                                          
                                          (841,676
                                          )
                                          
                                          
                                          11,273Other
      assets
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (18,531
                                          )Intangible
      assets
                                          
                                          
                                          (29,065
                                          )
                                          
                                          
                                          -Accounts
      payable
                                          
                                          
                                          (5,167,049
                                          )
                                          
                                          
                                          2,012,928Tax
      payable
                                          
                                          
                                          (70,799
                                          )
                                          
                                          
                                          (1,445,698
                                          )Other
      payables
                                          
                                          
                                          (97,102
                                          )
                                          
                                          
                                          (42,774
                                          )Accrued
      expenses
                                          
                                          
                                          53,502
                                          
                                          
                                          
                                          (170,583
                                          )Advances
      from customers
                                          
                                          
                                          49,374
                                          
                                          
                                          
                                          20,935NET
      CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES
                                          
                                          
                                          1,222,896
                                          
                                          
                                          
                                          (431,550
                                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                                          
                                          
                                          (280,917
                                          )
                                          
                                          
                                          (390,251
                                          )NET
      CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES
                                          
                                          
                                          (280,917
                                          )
                                          
                                          
                                          (390,251
                                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from notes payable
                                          
                                          
                                          72,960
                                          
                                          
                                          
                                          171,566Proceeds
      from the exercise of warrants
                                          
                                          
                                          24,750
                                          
                                          
                                          
                                          -Decrease
      in restricted cash
                                          
                                          
                                          240,768
                                          
                                          
                                          
                                          -Repayment
      of related parties advances
                                          
                                          
                                          (584,154
                                          )
                                          
                                          
                                          -NET
      CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES
                                          
                                          
                                          (245,676
                                          )
                                          
                                          
                                          171,566EFFECT
      OF EXCHANGE RATE ON CASH
                                          
                                          
                                          338
                                          
                                          
                                          
                                          163,947NET
      INCREASE (DECREASE) IN CASH
                                          
                                          
                                          696,641
                                          
                                          
                                          
                                          (486,288
                                          )CASH  -
      beginning of the period
                                          
                                          
                                          213,110
                                          
                                          
                                          
                                          1,032,519CASH
      - end of the period
                                          
                                          $
                                          909,751
                                          
                                          
                                          $
                                          546,231SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid  for:Interest
                                          
                                          $
                                          158,449
                                          
                                          
                                          $
                                          174,523Income Taxes
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          262,907Non-cash
      investing and financing activities:Common stock issued for acquisitions
                                          
                                          $
                                          300,000
                                          
                                          
                                          $
                                          -Acquisition of minority interest in subsidiary
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          679,428
  - 3
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 NOTE1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
  Dragon
International Group Corp. ("we," "our", "us", "Dragon" or "Dragon Nevada") is a
holding company that, through our subsidiary companies, manufactures and
distributes assorted industrial paper and packaging products.  Our
operations are conducted through subsidiaries located in the Peoples Republic of
China ("PRC") and the British Virgin Islands (“BVI”).
  We are a
manufacturer and distributor of a variety of paper products and packaging
materials. Our principal executive offices and manufacturing facilities are
located approximately 200 miles south of Shanghai in Ningbo, Zhejiang Province,
China.  Our manufacturing operations are led by Shanghai JinKui
Packaging Material Co., Ltd. and Ningbo Dragon International Trade Co., Ltd. and
its subsidiary companies.  The main customers of our manufacturing
products are pharmaceutical companies in the People’s Republic of China,
Pakistan, and India.  Our distribution operations are led by Wellton
International Fiber Corp. domiciled in the British Virgin
Islands.  Wellton is an agent and supplier of paper pulp, waste paper,
and recycled paper products.  Its main customers are manufacturers of
paper and packaging products ranging from office paper to industrial
cardboard.
 
 We
operate various entities engaged in the paper industry. However, we evaluate the
business and our products under two core segments: (i) Pulp and Paper and (ii)
Packaging.  Our Pulp and Paper segment consists of the operations of
Wellton and our Packaging segment consists of the operations of Shanghai JinKui
and Ningbo Dragon and its subsidiaries.  Our various entities enable
us to be diversified within the paper industry and support our goal to become a
leader in the manufacture and distribution of a) pharmaceutical packaging
products and b) pulp and paper products within China.
  We are on
a fiscal year; as such the three month period ending December 31, is our
second quarter.  The fiscal year ended June 30, 2008 is referred to as
“fiscal 2008”, the fiscal year ended June 30, 2007 is referred to as “fiscal
2007”, and the coming fiscal year ending June 30, 2009 is referred to as “fiscal
2009”. Our
operations are conducted through the following subsidiaries of Dragon
Nevada.
 
 PULP
AND PAPER SEGMENT:
 
 Wellton
International Fiber Corp. ("Wellton")
 
 Wellton
is a wholly owned subsidiary of Dragon Nevada.  Dragon Nevada
acquired a 51% interest on June 29, 2007 and acquired the
remaining 49% interest in Wellton on October 1, 2007.  Wellton was formed
in February 2002 under the laws of the British Virgin Islands and operates as an
agent and supplier of paper pulp, waste paper, and recycled paper
products. Revenues for Wellton are derived from a diverse customer base
located primarily in the PRC where no single customer represents more than 10%
of revenues.
 
 PACKAGING
SEGMENT:
 
 Shanghai
JinKui Packaging Material Co., Ltd. (“Shanghai JinKui”)
 
 Shanghai
JinKui is a wholly owned subsidiary of Dragon Nevada. Dragon Nevada acquired
Shanghai JinKui on June 30, 2006.  Shanghai JinKui is a manufacturer of
packaging products, for the pharmaceutical and food industry.  In 2005,
Shanghai JinKui obtained the Good Manufacturer Practice ("GMP") status from the
Chinese State Food and Drug Administration ("SFDA") and ISO9000 Quality
Assurance System.
 
 Dragon
International Group Corp., a Florida corporation ("Dragon Florida")
 
 Dragon
Florida is a wholly owned subsidiary of Dragon Nevada. Dragon Nevada
acquired Dragon Florida on October 4, 2004. Dragon Florida is a holding company
and operates Ningbo Dragon International Trade Co., Ltd.
 
 Ningbo
Dragon International Trade Co., Ltd. ("Ningbo Dragon")
 
 Ningbo
Dragon is a wholly owned subsidiary of Dragon Florida.  Ningbo Dragon was
formed on August 29, 1997.  Dragon Florida acquired a 70% interest in
Ningbo Dragon on June 21, 2004 and acquired the remaining 30% interest on
December 31, 2004. Ningbo Dragon is a manufacturer and distributor of paper and
integrated packaging paper products. Ningbo Dragon, through a subsidiary,
holds an ISO9000 certificate and national license to import and export paper
products. Revenues for Ningbo Dragon are derived primarily from operations
within China with a diverse customer base where no single customer represents
more than 10% of revenues. In addition to its own operations, Ningbo Dragon
directly operates the following three subsidiaries: Ningbo City Jiangdong
Yonglongxin Packaging Technology Co., Ltd.; Ningbo Dragon Packaging Technology
Co., Ltd. ; and, Hangzhou Yongxin Paper Co., Ltd.
  - 4
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 DECEMBER
31, 2008
 Ningbo
City Jiangdong Yonglongxin Packaging Technology Co., Ltd.
("Yonglongxin")
 
 Yonglongxin
is a wholly owned subsidiary of Ningbo Dragon.  Yonglongxin was formed on
November 8, 1999.  Yonglongxin is a manufacturer of specialty
paperboard products and holds an ISO9000 certificate.  Yonglongxin
operates a civil welfare manufacturing facility, which enjoys government
subsidies for employing handicapped citizens in Zhang'ai Village, Fuming County,
near Ningbo, China.  Yonglongxin also operates the Xianyang Naite
Research & Development Center ("R&D Center").  The R&D
Center was created to develop, design and improve production
methods.
  Ningbo
Dragon Packaging Technology Co., Ltd. ("Dragon Packaging")
 Dragon
Packaging is a wholly owned subsidiary of Ningbo Dragon. Ningbo Dragon
acquired Dragon Packaging on June 1, 2005.  Dragon Packaging
manufactures assorted packaging materials for the pharmaceutical and food
industry.  In December 2008, Dragon Packaging received approval from
China’s State Food and Drug Administration ("SFDA") to manufacture
polyethylene and foil based cold forming products for use in pharmaceutical
packaging.  The SFDA approval allows Dragon Packaging to produce and
market packaging products to the pharmaceutical industry in
China.  The approval expires in December 2013.  Dragon Packaging
expects to manufacture the recently approved pharmaceutical packaging
products at Dragon Packaging’s packaging facility located in Ningbo
city.  Ningbo’s manufacturing facility includes a 40,000 square foot
production plant and has the capacity to produce 2,400 metric tons of
pharmaceutical packaging products per year.
  Hangzhou
Yongxin Paper Co., Ltd. ("Yongxin”)
 
 Ningbo
Dragon holds a 60% interest in Yongxin. Ningbo Dragon acquired a 60%
interest on July 1, 2005.  Yongxin manufactures, sells, and distributes
cigarette packaging materials and is located in Hengjie Village of the Liuxia
town in Hangzhou, Zhejiang Province, China.
  BASIS OF
PRESENTATION
 
 The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, all significant inter-company balances and
transactions have been eliminated. These
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”) and the
instructions to Form 10-Q. Accordingly, certain information and footnote
disclosures normally included in the financial statements included in our Annual
Report on Form 10-K have been condensed or omitted.
 
 The
accompanying consolidated 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 fiscal year ended June 30, 2008 and notes
thereto contained on Form 10-K for the fiscal year ended June 30, 2008 of the
Company as filed with the Securities and Exchange Commission. The results
of operations for the three month and six month periods ended December 31,
2008 are not necessarily indicative of the results for our full fiscal year
ending June 30, 2009.
  RECLASSIFICATION
 
 Certain
reclassifications of amounts previously reported have been made to the
accompanying consolidated financial statements in order to maintain consistency
and comparability between the periods presented. Certain
payables previously classified as Accounts Payable are now classified as Due to
Related Parties.
 
 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 materially from those
estimates. Significant estimates in fiscal years 2009 and 2008 include the
allowance for doubtful accounts of accounts receivable, valuation of
inventories, the useful life of property, plant and equipment and land use
rights.
 
 CASH AND
CASH EQUIVALENTS
 
 For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less
and money market accounts to be cash equivalents.  At December 31, 2008,
the Company maintained a cash balance of $909,751.  Of this amount $899,197
is held in China, and $10,554 is held in the U.S.
 
 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 against the allowance when it is
determined that the amounts are uncollectible. The allowance for doubtful
accounts totaled $764,381 at December 31, 2008 and $1,333,501 at June 30,
2008.
  - 5
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 DECEMBER
31, 2008
 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 weighted average
method.
  ADVANCES
ON PURCHASES
 
 Advances
on purchases amounted to $5,918,110 and $5,034,567 at December 31, 2008 and June
30, 2008, respectively.  This amount consists of prepayments by the Company
for merchandise orders that had not yet been shipped to the
Company.
 
 INTANGIBLE
ASSETS / INTELLECTUAL PROPERTY
  The
Company recognizes the value and amortizes intangible assets and intellectual
property acquired in connection with their various acquisitions, including
goodwill.  The Company amortizes these assets based on the expected useful
lives of these assets, based on Company management projecting forward future
revenue and expense streams related to these acquired assets.  If no
expected useful life can be determined, as is the case with goodwill, the
Company will test the asset for impairment on an annual basis.  For the six
months ended December 31, 2008 and 2007, amortization expenses for intangible
assets amounted to $32,215 and $32,816, respectively.
 
 LONG -
LIVED ASSETS
  In
accordance with the provisions of SFAS No. 144,Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company evaluates its long-lived
assets for possible impairment when changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Long-lived assets
under certain circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of carrying amount or
fair value less related costs to sell.  To the extent carrying values
exceed fair values; an impairment loss is recognized in operating
results.
 
 STOCK-BASED
COMPENSATION
  In
December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No.
123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the
statement of operations the grant-date fair value of stock options and other
equity based compensation issued to employees. The Company adopted FAS No.123R
in the first quarter of fiscal 2006.
  NET
INCOME (LOSS) PER SHARE
  Basic
income (loss) per common share is computed by dividing income available to
common shareholders by the weighted average number of shares of common stock
outstanding for the periods presented. Diluted income per share reflects the
potential dilution that could occur if securities were exercised or converted
into common stock or other contracts to issue common stock resulted in the
issuance of common stock that would then share in our income, subject to
anti-dilution limitations.
 The
following table represents a reconciliation of basic and diluted earnings per
share:
  For
      the Three Months Ended December 31,
                                            
                                            
                                            For
      the Six Months Ended December 31,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2008
                                            
                                            
                                            2007Net
      Income (Loss) available to common shareholders for basic and diluted
      earnings per share
                                            
                                            $
                                            147,066
                                            
                                            
                                            $
                                            1,976,758
                                            
                                            
                                            $
                                            (1,822
                                            )
                                            
                                            $
                                            1,959,410Weighted
      average shares outstanding - basic
                                            
                                            
                                            130,097,418
                                            
                                            
                                            
                                            96,363,982
                                            
                                            
                                            
                                            123,529,525
                                            
                                            
                                            
                                            96,363,982Effect
      of dilutive securities:Unexercised warrants
                                            
                                            
                                            18,419
                                            
                                            
                                            
                                            43,315,272
                                            
                                            
                                            
                                            23,432
                                            
                                            
                                            
                                            43,315,272Weighted
      average shares outstanding - diluted
                                            
                                            
                                            130,115,837
                                            
                                            
                                            
                                            139,679,254
                                            
                                            
                                            
                                            123,529,525
                                            
                                            
                                            
                                            139,679,254Earnings
      (loss) per share - basic
                                            
                                            $
                                            0.00
                                            
                                            
                                            $
                                            0.02
                                            
                                            
                                            $
                                            0.00
                                            
                                            
                                            $
                                            0.02Earnings
      (loss) per share -diluted
                                            
                                            $
                                            0.00
                                            
                                            
                                            $
                                            0.02
                                            
                                            
                                            $
                                            0.00
                                            
                                            
                                            $
                                            0.02
   - 6
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 DECEMBER
31, 2008
 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.
 
 SHIPPING
AND HANDLING COSTS
 
 The
Company accounts for shipping and handling costs as a component of selling
expenses.
 
 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.  At December 31, 2008 and prior fiscal year ended June 30, 2008, the
exchange rates for the Chinese Renminbi, also referred to as the Chinese
dollar (“RMB”), for 1 United States dollar were 6.8542 and 6.8718,
respectively.
  CONCENTRATION
OF CREDIT RISK
 
 Financial
instruments which 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 in the
United States and China. At December 31, 2008, the Company, held a total of
$909,751 in bank deposits.  Of this amount $899,197 is held in China, and
$10,554 is held in the U.S.  The cash balance of $899,197 held in bank
deposits in China is not insured.  The Company has not experienced any
losses in such accounts through December 31, 2008.  The Company also
performs ongoing credit evaluations of its customers to help further reduce
credit risk.
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS
 
 Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments", requires disclosures of information about the fair value
of certain financial instruments for which it is practicable to estimate the
value.  For purpose of this disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation. The
carrying amounts reported in the consolidated balance sheet for cash, accounts
receivable, deferred expenses, advance on purchases, other receivables, accounts
payable, accrued expenses, due to related parties, advance from customers, and
loans approximate their fair market value based on the short-term maturity of
these instruments.
 
 Recent
Accounting Pronouncements
 
 In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We are currently evaluating the requirements of SFAS 161 and the
impact of adoption on our consolidated financial statements.
  - 7
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 DECEMBER
31, 2008
 In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including
Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt
instruments that may be settled in cash upon either mandatory or optional
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14,Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants.
Additionally, FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP APB 14-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. We adopted FSP APB 14-1 as
of the first quarter of fiscal 2009, this standard must be
applied on a retrospective basis. We are evaluating any impact the
adoption of FSP APB 14-1 will have on our consolidated financial position and
results of operations.
 
 In May
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
162,The Hierarchy of
Generally Accepted Accounting Principles. This standard is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS No. 162 is effective 60
days following approval by the U.S. Securities and Exchange Commission (“SEC”)
of the Public Company Accounting Oversight Board’s amendments to AU Section
411,The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles. We do
not expect SFAS No. 162 to have a material impact on the preparation of our
consolidated financial statements.
 
 On
September 16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
The FSP determines that unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective for fiscal years beginning after December 15, 2008.
We are currently evaluating the requirements of (FSP) No. EITF 03-6-1, as well
as the impact of the adoption on our consolidated financial
statements.
 
 On
October 10, 2008, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.This FASB
Staff Position (FSP) clarifies the application of FASB Statement No. 157, Fair
Value Measurements, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. Statement 157 was issued
in September 2006, and is effective for financial assets and financial
liabilities for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years.  We have adopted SFAS 157-3 and determined that it had no
impact as of December 31, 2008, and we will continue to evaluate the impact, if
any, of SFAS 157-3 on our financial statements.
  Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
 
 NOTE
2 - INVENTORIES
 
 At
December 31, 2008 and June 30, 2008, inventories consisted of the
following:
  December
      31, 2008
                                                      
                                                      
                                                      June
      30, 2008Raw
      Materials
                                                      
                                                      $
                                                      881,986
                                                      
                                                      
                                                      $
                                                      669,322Work
      in Progress
                                                      
                                                      
                                                      904,204
                                                      
                                                      
                                                      
                                                      1,608,582Finished
      Goods
                                                      
                                                      
                                                      1,689,677
                                                      
                                                      
                                                      
                                                      2,541,531$
                                                      3,475,867
                                                      
                                                      
                                                      $
                                                      4,819,435
 - 8
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 DECEMBER
31, 2008
 NOTE
3 – PROPERTY AND EQUIPMENT
 
 Depreciation
expense for the six month periods ending December 31, 2008 and December 31, 2007
was $174,968 and $133,538 respectively.  At December 31, 2008 and June 30,
2008, property and equipment consisted of the following:
  Asset
      class
                                
                                Estimated
      Life
                                
                                December
      31, 2008
                                
                                
                                June
      30, 2008Manufacturing
      Equipment
                                
                                5
      years
                                
                                $
                                2,692,386
                                
                                
                                $
                                2,590,684Building
      and Improvements
                                
                                20
      years
                                
                                
                                1,429,264
                                
                                
                                
                                1,287,304Office
      Equipment
                                
                                5
      years
                                
                                
                                105,630
                                
                                
                                
                                74,876Construction
      in Progress
                                
                                
                                
                                
                                360,829
                                
                                
                                
                                343,3434,588,109
                                
                                
                                
                                4,296,207Less:
      Accumulated Depreciation
                                
                                
                                (1,348,353
                                )
                                
                                
                                (1,170,410
                                )Fixed
      Assets - Net
                                
                                
                                
                                $
                                3,239,756
                                
                                
                                $
                                3,125,797
  NOTE
4 - INTANGIBLE ASSETS
 
 In
connection with the acquisition of Dragon Packaging on June 1, 2005, the Company
acquired land use rights valued as of December 31, 2008 at $3,042,276 (Local
currency of RMB 20,852,366) through an agreement with the Chinese government,
whereby the Company has rights to use certain land until March 4, 2053.
 The Company commenced amortizing these land use rights over the
contract period beginning July 1, 2005.  For the six months ended December
31, 2008 and 2007, amortization expenses amounted to $32,215 and $32,816,
respectively.  The value of the land use rights remained constant in the
local currency of RMB, the change in the valuation as it relates to U.S. dollars
is associated with the currency fluctuation.
 
 In
connection with the acquisition of Shanghai JinKui on June 30, 2006, we settled
a previously disputed contingent consideration payment in October, 2008. In
accordance with SFAS 141, “Business Combinations” we
accounted for the additional shares as part of the purchase price and allocated
the amount to goodwill when the contingency was resolved and additional
consideration was distributable. Please refer to Note 7 – Stockholders’
Equity for further discussion.
 December
      31, 2008
                              
                              
                              June
      30, 2008Land
      Use Rights (Estimated Useful Life: 45 years)
                              
                              $
                              3,042,276
                              
                              
                              $
                              3,005,379Goodwill
                              
                              
                              300,000
                              
                              
                              
                              -Less:
      Accumulated Amortization
                              
                              
                              (224,535
                              )
                              
                              
                              (191,713
                              )$
                              3,117,741
                              
                              
                              $
                              2,813,666
 NOTE
5 - RELATED PARTY TRANSACTIONS
 
 DUE TO
RELATED PARTIES
 
 At
December 31, 2008, the Company owed $18,354 to David Wu, Chief Executive Officer
of the Company, for a shareholder loan used for working capital purposes at
Shanghai JinKui. At June 30, 2008, the Company owed $602,511 to Kung Ming (Eric)
Kuo, general manager of Wellton, for unpaid salary, unpaid dividend liability
assumed as part of the acquisition of Wellton, and a shareholder loan used for
working capital purposes at Wellton. The due to related party balances consist
of the following
 
 December
      31, 2008
                            
                            
                            June
      30, 2008Unpaid
      Salary
                            
                            $
                            -
                            
                            
                            $
                            106,200Dividend
      Liability
                            
                            
                            -
                            
                            
                            
                            242,000Shareholder
      Loan
                            
                            
                            18,354
                            
                            
                            
                            254,311$
                            18,354
                            
                            
                            $
                            602,511




- 9
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 DECEMBER
31, 2008
 NOTE
6 - NOTES PAYABLE
 
 A summary
of notes payable as of December 31, 2008 and June 30, 2008 is as
follows:
 
 December
      31, 2008
                                            
                                            
                                            June
      30, 2008Bank
      Acceptance note payable to Bank of Communications, due on November 23,
      2008. Non-interest bearing. 50% secured by restricted
cash.
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            189,179Note
      payable to Bank of Agriculture, due on February 15, 2009*. Interest only
      payable monthly at a variable prime rate. As of December 31, 2008, the
      prime rate was 5.31%. Secured by the property of the
    Company.
                                            
                                            
                                            948,324
                                            
                                            
                                            
                                            945,895Note
      payable to Ningbo Jiangdong Yongke Co., Ltd. due on Feburary 19, 2009** at
      an annual rate of 10%.
                                            
                                            
                                            102,127
                                            
                                            
                                            
                                            -Notes
      payable to Yafen Wei, due on February 28, 2009 at an annual rate of 12%.
      Secured by property of third party: Ningbo Jiangdong Yongke Co.,
      Ltd.
                                            
                                            
                                            175,075
                                            
                                            
                                            
                                            -Note
      payable to Ningbo Jiangdong Yongke Co., Ltd. due on March 8, 2009 at an
      annual rate of 12%.
                                            
                                            
                                            72,948
                                            
                                            
                                            
                                            -Note
      payable to Ningbo Jiangdong Yongke Co., Ltd. due on May 20, 2009.
      Intereste payable at a variable prime rate. As of December 31, 2008, the
      prime rate was 5.31%.
                                            
                                            
                                            87,538
                                            
                                            
                                            
                                            -Note
      payable to Shanghai Agriculture Commercial Bank, due on June 2 ,
      2009.  Interest only payable monthly at a variable prime
      rate.  As of December 31, 2008, the prime rate was 5.31%.
      Secured by the property of third party: Lijian Lu.
                                            
                                            
                                            218,843
                                            
                                            
                                            
                                            218,283Note
      payable to James Wang, CEO of China Direct, Inc., interest only payable
      annually at the rate of 8%, $43,000 due on April 11, 2009 and $100,000 due
      on January 10, 2010.  Unsecured.
                                            
                                            
                                            143,000
                                            
                                            
                                            
                                            143,000Note
      payable to Bank of Agriculture, due on June 12, 2009. Interest only
      payable monthly at a variable prime rate. As of December 31, 2008 the
      prime rate was 5.31%. Secured by property of the Company.
                                            
                                            
                                            1,823,699
                                            
                                            
                                            
                                            1,819,028Note
      payable to Bank of Agriculture, due on June 15, 2009. Interest only
      payable monthly at a variable prime rate. As of December 31, 2008, the
      prime rate was 5.31%. Secured by property of the CEO, David
      Wu.
                                            
                                            
                                            291,792
                                            
                                            
                                            
                                            291,044Note
      payable to Bank of Agriculture, due on November 10, 2009. Interest only
      payable monthly at variable prime rate. As of December 31, 2008, prime
      rate was 5.31%. Secured by property of third party: Ningbo Jiangdong
      Yongke Co., Ltd.
                                            
                                            
                                            583,584
                                            
                                            
                                            
                                            582,089Notes
      payable to Yafen Wei, due on November 30, 2009 at an annual rate of 12%.
      Secured by property of third party: Ningbo Jiangdong Yongke Co.,
      Ltd.
                                            
                                            
                                            116,717
                                            
                                            
                                            
                                            -Note
      payable to Capital One Resource Co., Ltd. due on December 31, 2009 at a
      rate of 6%. Secured by the property of the Company, David Wu and third
      party: Yonghua Cai.
                                            
                                            
                                            1,021,272
                                            
                                            
                                            
                                            1,018,657Bank
      Acceptance note payable to Bank of Communications, due on December 4,
      2009. Non-interest bearing.  50% secured by restricted
      cash.
                                            
                                            
                                            -
                                            
                                            
                                            
                                            291,045Total
                                            
                                            $
                                            5,584,919
                                            
                                            
                                            $
                                            5,498,220Less:
      current portion
                                            
                                            
                                            (5,584,919
                                            )
                                            
                                            
                                            (5,498,220
                                            )Long-term
      portion
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
 *
                
                The
      Company plans to renew this loan and extend the maturity to February 15,
      2010.**
                
                The
      Company plans to renew this loan and extend the maturity to February 19,
      2010.
 
 - 10
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 DECEMBER
31, 2008
  NOTE
7 - STOCKHOLDERS' EQUITY
 
 CONSULTANT
 
 In July
2008, as amended in October 2008, we entered into a one year agreement with
Capital One Resource Co., Ltd. a wholly owned subsidiary of China Direct,
Inc.  Under the terms of the current agreement, they have been engaged
to provide support to us in a variety of areas, including general business
consulting, translation services, management of professional resources,
identification of potential acquisition targets and investment sources,
development of marketing plans and coordination of our public
disclosure.  As compensation for its services, we will issue Capital
One Resource Co., Ltd. an aggregate of 5,000,000 shares of our common stock as
follows: 1,250,000 shares of our common stock earned for services provided
from July 1, 2008 through September 30, 2008 and earned on or before
September 30, 2008; 1,250,000 shares of our common stock earned for
services provided from October 1, 2008 through December 31, 2008 and earned
on or before December 31, 2008; 1,250,000 shares of our common stock shall be
earned for services provided from January 1, 2009 through March 31, 2009 and
shall be earned on or before March 31, 2009; 1,250,000 shares of our common
stock shall be earned for services provided from April 1, 2009 through June 30,
2009 and shall be earned on or before June 30, 2009.  The agreement
may be terminated by either party upon 30 days notice.  The Company
will issue and expense 1,250,000 per quarter for services rendered and earned
during each quarter; the fair value of the shares will be measured upon the date
of issuance.
 
 On
October 8, 2008, China Direct, Inc. exercised a warrant to purchase 165,000
shares of our common stock at an exercise price of $0.15 per share.
 
 On
October 15, 2008, we issued 5,000,000 shares of common stock to Capital One
Resource Co., Ltd.; 3,000,000 shares were for payment of consulting services
rendered during our fiscal year ended June 30, 2008 and 2,000,000 shares were
for payment of consulting services rendered and to be rendered during our fiscal
year ending June 30, 2009.
  ADDITIONAL
CONSIDERATION FOR ACQUISITION
 
 In
October, 2008 the Company issued 10,000,000 shares of common stock, assigned to
H.K. Mingtai Investment Co., Ltd. as partial payment of our acquisition of
Shanghai JinKui.  The shares were issued upon the request of Haobo Zhu
and Shaobo Ouyang, former shareholders of Shanghai JinKui, as contingent
consideration in connection with the acquisition of Shanghai
JinKui.  Pursuant to section 1.2 of the stock purchase agreement
entered into by and among Dragon Nevada and Shanghai JinKui dated June 10, 2006,
filed as an exhibit to our 10-KSB/A for the fiscal year ended June 30, 2006, we
agreed to a contingent payment of additional shares related to the purchase,
based on Shanghai JinKui achieving specified net income targets subsequent to
the purchase.  The fulfillment of the contingent conditions has been
in dispute since December 31, 2006; specifically, the parties have disagreed
regarding the definition of net income.  On October 13, 2008 the
parties reached an agreement to issue 10,000,000 shares of common stock with a
fair value of $300,000.  In accordance with SFAS 141, “Business Combinations” we
accounted for the additional shares as part of the purchase price of Shanghai
JinKui when the contingency was resolved and additional consideration was
distributed.  We valued the additional consideration at fair value
based on the market price of $0.03 per share on the date of
issuance.
 
 COMMON
STOCK PURCHASE WARRANTS
 
 A summary
of the status of the Company's outstanding stock warrants as of December 31,
2008 and changes during the six month period ended December 31, 2008 is as
follows:
 
 Shares
                        
                        
                        Weighted
      Average Exercise PriceOutstanding
      at July 1, 2008
                        
                        
                        42,697,282
                        
                        
                        $
                        0.139Granted
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        (165,000
                        )
                        
                        
                        0.15Forfeited
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at December 31, 2008
                        
                        
                        42,532,282
                        
                        
                        
                        0.139Warrants
      exercisable at end of period
                        
                        
                        42,532,282
                        
                        
                        $
                        0.139
 - 11
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 DECEMBER
31, 2008
 The
following information applies to all warrants outstanding at December 31,
2008:
 
 Warrants
      Outstanding and ExercisableRange
      of Exercise Prices
                                                
                                                
                                                Weighted
      Average Remaining Contractual Shares
                                                
                                                
                                                Weighted
      Average Exercise Life (Years) Contractual Shares
                                                
                                                
                                                Weighted
      Average Exercise Price$
                                                0.30
                                                
                                                
                                                
                                                150,000
                                                
                                                
                                                
                                                1.53
                                                
                                                
                                                $
                                                0.300.15
                                                
                                                
                                                
                                                23,852,940
                                                
                                                
                                                
                                                2.35
                                                
                                                
                                                
                                                0.150.125
                                                
                                                
                                                
                                                18,333,342
                                                
                                                
                                                
                                                3.09
                                                
                                                
                                                
                                                0.1250.01
                                                
                                                
                                                
                                                196,000
                                                
                                                
                                                
                                                1.53
                                                
                                                
                                                
                                                0.0142,532,282
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.139
  NOTE 8 –
SEGMENT INFORMATION
 
 The
following information is presented in accordance with SFAS No. 131,
“Disclosure about segments of an Enterprise and Related Information”. For the
three and six months ended December 31, 2008, the Company operated in
two reportable business segments as follows:
  PULP
AND PAPER SEGMENT:
 
 ·
                Wellton,
      a wholly owned subsidiary of Dragon
Nevada
  PACKAGING
SEGMENT:
 
 ·
              Shanghai
      JinKui , a wholly owned subsidiary of Dragon Nevada·
              Dragon
      Florida, a wholly owned subsidiary of Dragon Nevada·
              Ningbo
      Dragon, a wholly owned subsidiary of Dragon Florida·
              Yonglongxin,
      a wholly owned subsidiary of Ningbo Dragon·
              R&D
      Center, a wholly owned subsidiary of Yonglongxin·
              Yongxin,
      a 60% interest subsidiary of Ningbo Dragon·
              Dragon
      Packaging, a wholly owned subsidiary of Ningbo
  Dragon
  The
Company's reportable segments are strategic business units that offer different
products and services. Each segment and each company or group of
companies are managed and reported separately based on the fundamental
differences in their operations. Condensed information with respect to these
reportable segments for the three and six months ended December 31, 2008
and 2007 are as follows:
  Pulp
      and Paper
                          
                          
                          Packaging
                          
                          
                          Corporate
      Items and Elimations
                          
                          
                          ConsolidatedFor
      the three months ended December 31,
                          
                          
                          For
      the three months ended December 31,
                          
                          
                          For
      the three months ended December 31,
                          
                          
                          For
      the three months ended December 31,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007Net
      Revenues
                          
                          $
                          4,190,243
                          
                          
                          $
                          11,178,474
                          
                          
                          $
                          1,470,515
                          
                          
                          $
                          1,878,053
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          5,660,758
                          
                          
                          $
                          13,056,527Cost
      of Sales
                          
                          
                          3,806,951
                          
                          
                          
                          10,533,297
                          
                          
                          
                          1,146,826
                          
                          
                          
                          1,589,691
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,953,777
                          
                          
                          
                          12,122,988Gross
      Profit
                          
                          
                          383,292
                          
                          
                          
                          645,177
                          
                          
                          
                          323,689
                          
                          
                          
                          288,362
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          706,981
                          
                          
                          
                          933,539Total
      Operating Expenses
                          
                          
                          156,064
                          
                          
                          
                          230,115
                          
                          
                          
                          228,150
                          
                          
                          
                          151,436
                          
                          
                          
                          116,250
                          
                          
                          
                          165
                          
                          
                          
                          500,464
                          
                          
                          
                          381,716Total
      Operating Income
                          
                          
                          227,228
                          
                          
                          
                          415,062
                          
                          
                          
                          95,539
                          
                          
                          
                          136,926
                          
                          
                          
                          (116,250
                          )
                          
                          
                          (165
                          )
                          
                          
                          206,517
                          
                          
                          
                          551,823Net
      (loss) income
                          
                          
                          273,621
                          
                          
                          
                          1,941,378
                          
                          
                          
                          (10,070
                          )
                          
                          
                          35,445
                          
                          
                          
                          (116,485
                          )
                          
                          
                          (65
                          )
                          
                          
                          147,066
                          
                          
                          
                          1,976,758Segment
      Assets
                          
                          $
                          3,562,645
                          
                          
                          $
                          7,653,643
                          
                          
                          $
                          17,402,923
                          
                          
                          $
                          16,458,110
                          
                          
                          $
                          310,554
                          
                          
                          $
                          12,754
                          
                          
                          $
                          21,276,122
                          
                          
                          $
                          24,124,507
  Pulp
      and Paper
                                
                                
                                Packaging
                                
                                
                                Corporate
      Items and Elimations
                                
                                
                                ConsolidatedFor
      the six months ended December 31,
                                
                                
                                For
      the six months ended December 31,
                                
                                
                                For
      the six months ended December 31,
                                
                                
                                For
      the six months ended December 31,2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007Net
      Revenues
                                
                                $
                                12,630,681
                                
                                
                                $
                                18,221,470
                                
                                
                                $
                                2,845,063
                                
                                
                                $
                                2,764,555
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                15,475,744
                                
                                
                                $
                                20,986,025Cost
      of Sales
                                
                                
                                11,743,488
                                
                                
                                
                                17,159,351
                                
                                
                                
                                2,277,806
                                
                                
                                
                                2,294,970
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                14,021,294
                                
                                
                                
                                19,454,321Gross
      Profit
                                
                                
                                887,193
                                
                                
                                
                                1,062,119
                                
                                
                                
                                567,257
                                
                                
                                
                                469,585
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,454,450
                                
                                
                                
                                1,531,704Total
      Operating Expenses
                                
                                
                                588,482
                                
                                
                                
                                450,464
                                
                                
                                
                                471,893
                                
                                
                                
                                357,614
                                
                                
                                
                                210,000
                                
                                
                                
                                285
                                
                                
                                
                                1,270,375
                                
                                
                                
                                808,363Total
      Operating Income
                                
                                
                                298,711
                                
                                
                                
                                611,655
                                
                                
                                
                                95,364
                                
                                
                                
                                111,971
                                
                                
                                
                                (210,000
                                )
                                
                                
                                (285
                                )
                                
                                
                                184,075
                                
                                
                                
                                723,341Net
      (loss) income
                                
                                
                                287,009
                                
                                
                                
                                2,020,345
                                
                                
                                
                                (78,451
                                )
                                
                                
                                (60,750
                                )
                                
                                
                                (210,380
                                )
                                
                                
                                (185
                                )
                                
                                
                                (1,822
                                )
                                
                                
                                1,959,410Segment
      Assets
                                
                                $
                                3,562,645
                                
                                
                                $
                                7,653,643
                                
                                
                                $
                                17,402,923
                                
                                
                                $
                                16,458,110
                                
                                
                                $
                                310,554
                                
                                
                                $
                                12,754
                                
                                
                                $
                                21,276,122
                                
                                
                                $
                                24,124,507
  - 12
-
 Table of Contents
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 DECEMBER
31, 2008
  NOTE 9 –
SUBSEQUENT EVENTS


INTEREST
PAYMENT
 
 On
January 13, 2009, we issued 2,554,750 shares of common stock as payment of
interest on an outstanding loan in the amount of $1,021,272 due to Capital One
Resource Co., Ltd. a wholly owned subsidiary of China Direct,
Inc.


- 13
-
 Table of Contents
 
 Item
2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations
  The
following discussion should be read in conjunction with the information
contained in our unaudited consolidated financial statements and the notes
thereto appearing elsewhere herein and in conjunction with the Management’s
Discussion and Analysis set forth in our Annual Report on Form 10-K for the year
ended June 30, 2008.
 
 We are on
a fiscal year; as such the three month period ending December 31, is our
second quarter.  The fiscal year ended June 30, 2008 is referred to as
“fiscal 2008”, the fiscal year ended June 30, 2007 is referred to as “fiscal
2007”, and the coming fiscal year ending June 30, 2009 is referred to as “fiscal
2009”.
 
 OVERVIEW
  Dragon
International Group Corp. ("we", "our", "us", "Dragon" or "Dragon Nevada") is a
holding company that, through our subsidiary companies, manufactures and
distributes assorted industrial paper and packaging products.  Our
operations are conducted through subsidiaries located in the Peoples Republic of
China ("PRC") and the British Virgin Islands (“BVI”).
  We are a
manufacturer and distributor of a variety of paper products and packaging
materials. Our principal executive offices and manufacturing facilities are
located approximately 200 miles south of Shanghai in Ningbo, Zhejiang Province,
China.  Our manufacturing operations are led by Shanghai JinKui
Packaging Material Co., Ltd. (“Shanghai JinKui ”) and Ningbo Dragon
International Trade Co., Ltd. (“Ningbo Dragon”) and its subsidiary
companies.  The main customers of our manufacturing products are
pharmaceutical companies in the People’s Republic of China, Pakistan, and
India.  Our distribution operations are led by Wellton International
Fiber Corp. (“Wellton”) domiciled in the British Virgin
Islands.  Wellton is an agent and supplier of paper pulp, waste paper,
and recycled paper products.  Its main customers are manufacturers of
paper and packaging products ranging from office paper to industrial
cardboard.
 
 We
operate various entities engaged in the paper industry. However, we evaluate the
business and our products under two core segments: (i) Pulp and Paper and (ii)
Packaging. Our Pulp and Paper segment consists of the operations of Wellton and
our Packaging segment consists of the operations of JinKui and Ningbo Dragon and
its subsidiaries.  Our various entities enable us to be diversified
within the paper industry and support our goal to become a leader in the
manufacture and distribution of a) pharmaceutical packaging products and b) pulp
and paper products within China.
  Our
operations are conducted through the following subsidiaries of Dragon
Nevada:
 
 PULP
AND PAPER SEGMENT:
 
 Wellton
International Fiber Corp. ("Wellton")
  Wellton
is a wholly owned subsidiary of Dragon Nevada.  Dragon Nevada
acquired a 51% interest on June 29, 2007 and acquired the
remaining 49% interest in Wellton on October 1, 2007. Wellton was formed in
February 2002 under the laws of the British Virgin Islands and operates as an
agent and supplier for two categories of goods: paper pulp and waste paper
products. Revenues for Wellton are derived from a diverse customer base
located primarily in the PRC where no customer represents more than 10% of
revenues.
 
 PACKAGING
SEGMENT:
 
 Shanghai
JinKui Packaging Material Co., Ltd. (“JinKui”)
  Shanghai
JinKui is a wholly owned subsidiary of Dragon Nevada. Dragon Nevada acquired
Shanghai JinKui on June 30, 2006. JinKui is a manufacturer of specialized
packaging products, e.g. blister packs, for the pharmaceutical and food
industry. In 2005, Shanghai JinKui obtained Good Manufacturer Practice ("GMP")
status from the Chinese State Food and Drug Administration ("SFDA") and ISO9000
Quality Assurance System.
 
 Dragon
International Group Corp., a Florida corporation ("Dragon Florida")
  Dragon
Florida is a wholly owned subsidiary of Dragon Nevada. Dragon Nevada
acquired Dragon Florida on October 4, 2004.  Dragon Florida is a
holding company and operates Ningbo Dragon International Trade Co., Ltd.
 
 Ningbo
Dragon International Trade Co., Ltd. ("Ningbo Dragon")
  Ningbo
Dragon is a wholly owned subsidiary of Dragon Florida. Ningbo Dragon was formed
on August 29, 1997. Dragon Florida acquired a 70% interest in Ningbo Dragon on
June 21, 2004 and acquired the remaining 30% interest on December 31, 2004.
Ningbo Dragon is a manufacturer and distributor of paper and integrated
packaging paper products. Ningbo Dragon, through a subsidiary, holds an
ISO9000 certificate and national license to import and export
products. Revenues for Ningbo Dragon are derived primarily from operations
within China with a diverse customer base where no customer represents more than
10% of revenues. In addition to its own operations, Ningbo Dragon directly
operates the following three subsidiaries: Ningbo City Jiangdong Yonglongxin
Packaging Technology Co., Ltd.; Ningbo Dragon Packaging Technology Co., Ltd.;
and, Hangzhou Yongxin Paper Co., Ltd.
 - 14
-
 Table of Contents
  Ningbo
City Jiangdong Yonglongxin Packaging Technology Co., Ltd.
("Yonglongxin")
 
 Yonglongxin
is a wholly owned subsidiary of Ningbo Dragon.  Yonglongxin was formed on
November 8, 1999.  Yonglongxin is a manufacturer of specialty
paperboard products and holds an ISO9000 certificate.  Yonglongxin
operates a civil welfare manufacturing facility, which enjoys government
subsidies for employing handicapped citizens in Zhang'ai Village, Fuming County,
near Ningbo, China.  Yonglongxin also operates the Xianyang Naite
Research & Development Center ("R&D Center").  The R&D
Center was created to develop, design and improve production
methods.
  Ningbo
Dragon Packaging Technology Co., Ltd. ("Dragon Packaging")
  Dragon
Packaging is a wholly owned subsidiary of Ningbo Dragon. Ningbo Dragon
acquired Dragon Packaging on June 1, 2005.  Dragon Packaging
manufactures assorted packaging materials for the pharmaceutical and food
industry.  In December 2008, Dragon Packaging received approval from
China’s State Food and Drug Administration ("SFDA") to manufacture
polyethylene and foil based cold forming products for use in pharmaceutical
packaging.  The SFDA approval allows Dragon Packaging to produce and
market packaging products to the pharmaceutical industry in
China.  The approval expires in December 2013.  Dragon Packaging
expects to manufacture the recently approved pharmaceutical packaging
products at Dragon Packaging’s packaging facility located in Ningbo
city.  Ningbo’s manufacturing facility includes a 40,000 square foot
production plant and has the capacity to produce 2,400 metric tons of
pharmaceutical packaging products per year.
 Hangzhou
Yongxin Paper Co., Ltd. ("Yongxin”)
  Ningbo
Dragon holds a 60% interest in Yongxin. Ningbo Dragon acquired a 60%
interest on July 1, 2005.  Yongxin manufactures, sells, and distributes
cigarette packaging materials and is located in Hengjie Village of the Liuxia
town in Hangzhou, Zhejiang Province, China.
 
 FOREIGN
EXCHANGE CONSIDERATIONS
 
 Since the
local currency for all of our net revenues for the six months ended
December 31, 2008 and 2007 is the Chinese Renminbi, also referred to as the
Chinese dollar (“RMB”), how we report net revenues from our operations based in
China is of particular importance to understanding our financial statements.
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 prevailing exchange rate on the respective 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.
 
 The
functional currency of our Chinese subsidiaries is the RMB.  The financial
statements of our subsidiaries are translated to U.S. dollars using period and
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.  Since 1994, the value of the RMB relative to the U.S.
dollar has remained relatively stable; appreciating slightly against the U.S.
dollar. On July 21, 2005, the PRC announced that the Renminbi would be pegged to
a basket of currencies rather than tied to a fixed exchange rate to the
U.S. dollar.
 
 If any
devaluation of the RMB were to occur in the future, returns on our operations in
China, which are expected to be in the form of Renminbi, will be negatively
impacted upon conversion to U.S. dollars.  Although we attempt to have most
future payments, mainly repayments of loans and capital contributions
denominated in U.S. dollars, if any decrease in the value of the Renminbi were
to occur in the future, our product sales in China and in other countries may be
negatively affected.
 
 CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 2009 and 2008 include inventory valuation, the
allowance for doubtful accounts, the valuation of equity instruments, the
useful life of property, plant and equipment and value of land use
rights.
 
 Inventories,
consisting of raw materials and finished goods related to our products are
stated at the lower of cost or market utilizing the weighted average
method.
 
 Our
financial instruments at December 31, 2008 contain accounts receivable, accounts
payable and short-term debt.  The fair values of financial instruments
approximate their recorded values.
 
 We review
the carrying value of property and equipment and land-use rights for impairment
at least annually or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.  Recoverability of
long-lived assets is measured by comparison of its carrying amount to the
undiscounted cash flows that the asset or asset group is expected to generate.
 If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
property, if any, exceeds its fair market value.
 - 15
-
 Table of Contents
 Recent
Accounting Pronouncements
 
 In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We are currently evaluating the requirements of SFAS 161 and
the impact of adoption on our consolidated financial statements.
 
 In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1,Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement . FSP
APB 14-1 clarifies that convertible debt instruments that may be settled in cash
upon either mandatory or optional conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14,Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants . Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We will adopt FSP APB 14-1 beginning in the first quarter of
fiscal 2009, and this
standard must be applied on a retrospective basis. We are evaluating the impact
the adoption of FSP APB 14-1 will have on our consolidated financial position
and results of operations.
 
 In May
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
162,The Hierarchy of
Generally Accepted Accounting Principles. This standard is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS No. 162 is effective 60
days following approval by the U.S. Securities and Exchange Commission (“SEC”)
of the Public Company Accounting Oversight Board’s amendments to AU Section
411,The Meaning of Present
Fairly in Conformity
with Generally Accepted Accounting Principles. We do not expect SFAS No.
162 to have a material impact on the preparation of our consolidated financial
statements.
 
 On
September 16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
The FSP determines that unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective for fiscal years beginning after December 15, 2008.
We are currently evaluating the requirements of (FSP) No. EITF 03-6-1, as well
as the impact of the adoption on our consolidated financial
statements.
 
 On
October 10, 2008, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.This FASB Staff Position (FSP)
clarifies the application of FASB Statement No. 157, Fair Value Measurements, in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. Statement 157 was issued in
September 2006, and is effective for financial assets and financial liabilities
for financial statements issued for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years.  We have
adopted SFAS 157-3 and determined that it had no impact as of December 31, 2008,
and we will continue to evaluate the impact, if any, of SFAS 157-3 on our
financial statements.
 
 During
the three months ended December 31, 2008, there have been no material
changes to our critical accounting policies that impacted our consolidated
financial condition or results of operations.
 
 REVENUE
RECOGNITION
 
 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.
 - 16
-
 Table of Contents
 RESULTS
OF OPERATIONS
 
 For the
three months and six months ended December 31, 2008 as compared to the three
months and six months ended December 31, 2007.
 
 The
following table provides certain comparative information based on our
consolidated results of operations for the three months ended December 31, 2008
and December 31, 2007:
 
 For
      the Three Months ended December 31, 2008
                        
                        
                        For
      the Three Months ended December 31, 2007
                        
                        
                        $
      Change
                        
                        
                        %
      ChangeNet
      Revenues
                        
                        $
                        5,660,758
                        
                        
                        $
                        13,056,527
                        
                        
                        $
                        (7,395,769
                        )
                        
                        
                        -56.64
                        %Cost
      of Sales
                        
                        
                        4,953,777
                        
                        
                        
                        12,122,988
                        
                        
                        
                        (7,169,211
                        )
                        
                        
                        -59.14
                        %Gross
      Profit
                        
                        
                        706,981
                        
                        
                        
                        933,539
                        
                        
                        
                        (226,558
                        )
                        
                        
                        -24.27
                        %Selling
      Expenses
                        
                        
                        163,453
                        
                        
                        
                        92,716
                        
                        
                        
                        70,737
                        
                        
                        
                        76.29
                        %General
      and Administrative Expenses
                        
                        
                        337,011
                        
                        
                        
                        289,000
                        
                        
                        
                        48,011
                        
                        
                        
                        16.61
                        %Total
      Operating Expenses
                        
                        
                        500,464
                        
                        
                        
                        381,716
                        
                        
                        
                        118,748
                        
                        
                        
                        31.11
                        %Income
      from Operations
                        
                        
                        206,517
                        
                        
                        
                        551,823
                        
                        
                        
                        (345,306
                        )
                        
                        
                        -62.58
                        %Total
      Other (Expense) Income
                        
                        
                        (53,477
                        )
                        
                        
                        1,596,944
                        
                        
                        
                        (1,650,421
                        )
                        
                        
                        -103.35
                        %Taxes
                        
                        
                        5,974
                        
                        
                        
                        172,009
                        
                        
                        
                        (166,035
                        )
                        
                        
                        -96.53
                        %Minority
      Interest
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      Income
                        
                        $
                        147,066
                        
                        
                        $
                        1,976,758
                        
                        
                        $
                        (1,829,692
                        )
                        
                        
                        -92.56
                        %
  The
following table provides certain comparative information based on our
consolidated results of operations for the six months ended December 31, 2008
and December 31, 2007:
 
 For
      the Six Months ended December 31, 2008
                          
                          
                          For
      the Six Months ended December 31, 2007
                          
                          
                          $
      Change
                          
                          
                          %
      ChangeNet
      Revenues
                          
                          $
                          15,475,744
                          
                          
                          $
                          20,986,025
                          
                          
                          $
                          (5,510,281
                          )
                          
                          
                          -26.26
                          %Cost
      of Sales
                          
                          
                          14,021,294
                          
                          
                          
                          19,454,321
                          
                          
                          
                          (5,433,027
                          )
                          
                          
                          -27.93
                          %Gross
      Profit
                          
                          
                          1,454,450
                          
                          
                          
                          1,531,704
                          
                          
                          
                          (77,254
                          )
                          
                          
                          -5.04
                          %Selling
      Expenses
                          
                          
                          545,028
                          
                          
                          
                          285,024
                          
                          
                          
                          260,004
                          
                          
                          
                          91.22
                          %General
      and Administration Expenses
                          
                          
                          725,347
                          
                          
                          
                          523,339
                          
                          
                          
                          202,008
                          
                          
                          
                          38.60
                          %Total
      Operating Expenses
                          
                          
                          1,270,375
                          
                          
                          
                          808,363
                          
                          
                          
                          462,012
                          
                          
                          
                          57.15
                          %Income
      from Operations
                          
                          
                          184,075
                          
                          
                          
                          723,341
                          
                          
                          
                          (539,266
                          )
                          
                          
                          -74.55
                          %Total
      Other (Expense) Income
                          
                          
                          (173,611
                          )
                          
                          
                          1,574,846
                          
                          
                          
                          (1,748,457
                          )
                          
                          
                          -111.02
                          %Taxes
                          
                          
                          12,286
                          
                          
                          
                          262,907
                          
                          
                          
                          (250,621
                          )
                          
                          
                          -95.33
                          %Minority
      Interest
                          
                          
                          -
                          
                          
                          
                          75,870
                          
                          
                          
                          (75,870
                          )
                          
                          
                          -100.00
                          %Net
      (Loss) Income
                          
                          $
                          (1,822
                          )
                          
                          $
                          1,959,410
                          
                          
                          $
                          (1,961,232
                          )
                          
                          
                          -100.09
                          %
 - 17
-
 Table of Contents
  OTHER KEY
INDICATORS
  For
      the Three Months ended December 31, 2008
                                              
                                              
                                              For
      the Three Months ended December 31, 2007Cost
      of Sales as a percentage of Net Revenues
                                              
                                              
                                              88
                                              %
                                              
                                              
                                              93
                                              %Gross
      Profit Margin
                                              
                                              
                                              12
                                              %
                                              
                                              
                                              7
                                              %Selling
      Expenses as a percentage of Net Revenues
                                              
                                              
                                              3
                                              %
                                              
                                              
                                              1
                                              %General
      and Administration Expenses as a percentage of Net
Revenues
                                              
                                              
                                              6
                                              %
                                              
                                              
                                              2
                                              %Total
      Operating Expenses as a percentage of Net Revenues
                                              
                                              
                                              9
                                              %
                                              
                                              
                                              3
                                              %
  For
      the Six Months ended December 31, 2008
                                          
                                          
                                          For
      the Six Months ended December 31, 2007Cost
      of Sales as a percentage of Net Revenues
                                          
                                          
                                          91
                                          %
                                          
                                          
                                          93
                                          %Gross
      Profit Margin
                                          
                                          
                                          9
                                          %
                                          
                                          
                                          7
                                          %Selling
      Expenses as a percentage of Net Revenues
                                          
                                          
                                          4
                                          %
                                          
                                          
                                          1
                                          %General
      and Administration Expenses as a percentage of Net
Revenues
                                          
                                          
                                          5
                                          %
                                          
                                          
                                          2
                                          %Total
      Operating Expenses as a percentage of Net Revenues
                                          
                                          
                                          8
                                          %
                                          
                                          
                                          4
                                          %
  Segment
Information
 
 During
fiscal 2008 and 2009, our operations were conducted in two operating segments as
defined in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information.  Our operating decisions,
on-site management, internal reporting and performance assessments are conducted
within each of the following two identified segments:
 
 ·
              Pulp
      and Paper·
              Packaging
 
 The
following table summarizes the operating results for the three months and six
months ended December 31, 2008 and December 31, 2007 by segment:
 
 Pulp
      and Paper
                    
                    
                    Packaging
                    
                    
                    Corporate
      Items and Elimations
                    
                    
                    ConsolidatedFor
      the three months ended December 31,
                    
                    
                    For
      the three months ended December 31,
                    
                    
                    For
      the three months ended December 31,
                    
                    
                    For
      the three months ended December 31,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Net
      Revenues
                    
                    $
                    4,190,243
                    
                    
                    $
                    11,178,474
                    
                    
                    $
                    1,470,515
                    
                    
                    $
                    1,878,053
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    5,660,758
                    
                    
                    $
                    13,056,527Cost
      of Sales
                    
                    
                    3,806,951
                    
                    
                    
                    10,533,297
                    
                    
                    
                    1,146,826
                    
                    
                    
                    1,589,691
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,953,777
                    
                    
                    
                    12,122,988Gross
      Profit
                    
                    
                    383,292
                    
                    
                    
                    645,177
                    
                    
                    
                    323,689
                    
                    
                    
                    288,362
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    706,981
                    
                    
                    
                    933,539Total
      Operating Expenses
                    
                    
                    156,064
                    
                    
                    
                    230,115
                    
                    
                    
                    228,150
                    
                    
                    
                    151,436
                    
                    
                    
                    116,250
                    
                    
                    
                    165
                    
                    
                    
                    500,464
                    
                    
                    
                    381,716Total
      Operating Income
                    
                    
                    227,228
                    
                    
                    
                    415,062
                    
                    
                    
                    95,539
                    
                    
                    
                    136,926
                    
                    
                    
                    (116,250
                    )
                    
                    
                    (165
                    )
                    
                    
                    206,517
                    
                    
                    
                    551,823Net
      (loss) income
                    
                    
                    273,621
                    
                    
                    
                    1,941,378
                    
                    
                    
                    (10,070
                    )
                    
                    
                    35,445
                    
                    
                    
                    (116,485
                    )
                    
                    
                    (65
                    )
                    
                    
                    147,066
                    
                    
                    
                    1,976,758Segment
      Assets
                    
                    $
                    3,562,645
                    
                    
                    $
                    7,653,643
                    
                    
                    $
                    17,402,923
                    
                    
                    $
                    16,458,110
                    
                    
                    $
                    310,554
                    
                    
                    $
                    12,754
                    
                    
                    $
                    21,276,122
                    
                    
                    $
                    24,124,507
 - 18
-
 Table of Contents
  Pulp
      and Paper
                              
                              
                              Packaging
                              
                              
                              Corporate
      Items and Elimations
                              
                              
                              ConsolidatedFor
      the six months ended December 31,
                              
                              
                              For
      the six months ended December 31,
                              
                              
                              For
      the six months ended December 31,
                              
                              
                              For
      the six months ended December 31,2008
                              
                              
                              2007
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2008
                              
                              
                              2007Net
      Revenues
                              
                              $
                              12,630,681
                              
                              
                              $
                              18,221,470
                              
                              
                              $
                              2,845,063
                              
                              
                              $
                              2,764,555
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              15,475,744
                              
                              
                              $
                              20,986,025Cost
      of Sales
                              
                              
                              11,743,488
                              
                              
                              
                              17,159,351
                              
                              
                              
                              2,277,806
                              
                              
                              
                              2,294,970
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              14,021,294
                              
                              
                              
                              19,454,321Gross
      Profit
                              
                              
                              887,193
                              
                              
                              
                              1,062,119
                              
                              
                              
                              567,257
                              
                              
                              
                              469,585
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,454,450
                              
                              
                              
                              1,531,704Total
      Operating Expenses
                              
                              
                              588,482
                              
                              
                              
                              450,464
                              
                              
                              
                              471,893
                              
                              
                              
                              357,614
                              
                              
                              
                              210,000
                              
                              
                              
                              285
                              
                              
                              
                              1,270,375
                              
                              
                              
                              808,363Total
      Operating Income
                              
                              
                              298,711
                              
                              
                              
                              611,655
                              
                              
                              
                              95,364
                              
                              
                              
                              111,971
                              
                              
                              
                              (210,000
                              )
                              
                              
                              (285
                              )
                              
                              
                              184,075
                              
                              
                              
                              723,341Net
      (loss) income
                              
                              
                              287,009
                              
                              
                              
                              2,020,345
                              
                              
                              
                              (78,451
                              )
                              
                              
                              (60,750
                              )
                              
                              
                              (210,380
                              )
                              
                              
                              (185
                              )
                              
                              
                              (1,822
                              )
                              
                              
                              1,959,410Segment
      Assets
                              
                              $
                              3,562,645
                              
                              
                              $
                              7,653,643
                              
                              
                              $
                              17,402,923
                              
                              
                              $
                              16,458,110
                              
                              
                              $
                              310,554
                              
                              
                              $
                              12,754
                              
                              
                              $
                              21,276,122
                              
                              
                              $
                              24,124,507
 REVENUES
 
 Our
consolidated revenues for the three months ended December 31, 2008 were down
$7,395,769 or approximately 56.64%, decreasing from $13,056,527 for the three
months ending December 31, 2007 to $5,660,758 for the three months ending
December 31, 2008.
 
 Our
consolidated revenues for the six months ended December 31, 2008 were down
$5,510,281 or approximately 26.26%, decreasing from $20,986,025 for the six
months ending December 31, 2007 to $15,475,744 for the six months ending
December 31, 2008.
 
 Pulp and Paper
Segment
  Wellton represents
our pulp and paper segment; this segment contributed $4,190,243 in revenue this
quarter, or approximately 74% of total revenues.  Segment revenues
decreased $6,988,231 or 63%, from $11,178,474 for the three month period ended
December 31, 2007 to $4,190,243 for the same period in the current fiscal
year.  We experienced a sharp decrease in sales orders in December of
2008.  This decrease is primarily due to tightened credit markets as a
result of the global economic crisis.  Clients of our pulp and paper
segment have been negatively impacted as a result of the lack of credit
available.  We are unable to predict when the credit markets will
improve, and we do not expect our business will improve until our customers have
access to credit.
 
 Packaging
Segment
 
 Shanghai
JinKui and Ningbo Dragon and its subsidiaries make up our packaging segment;
this segment contributed $1,470,515, or approximately 26% of total
revenues.  Segment revenues decreased $407,538 or 22%, from $1,878,053
for the three month period ended December 31, 2007 to $1,470,515 for the same
period in the current fiscal year.
 
 Similar
to our Pulp and Paper segment, we note the decrease in revenue in this segment
during the quarter is mainly due to the economic slowdown and lower worldwide
demand for the products we package.  We are unable to predict when the
credit markets will improve, and we do not expect our business will improve
until our customers have access to credit.
 
 COST OF
SALES AND GROSS PROFIT
 
 Our
consolidated cost of sales decreased $7,169,211, or 59.14%, from $12,122,988
during the three months ended December 31, 2007 to $4,953,777 during the three
months ended December 31, 2008.  Cost of sales as a percentage of net
revenues decreased between periods, from 93% for the three months ended December
31, 2007 to 88% for the three months ended December 31, 2008.  This
decrease in cost of sales as a percentage of net revenues contributed to our
positive gross profit during the current fiscal year and positive net
income.
 
 Consolidated
gross profit decreased $226,558, from a gross loss of $933,539 for the three
months ended December 31, 2007 to a gross profit of $706,981 for the three
months ended December 31, 2008.  Gross profit as a percentage
of net revenues increased from 7% for the three months ended December
31, 2007 to 12% for the three months ended December 31, 2008.
 
 Our
consolidated cost of sales decreased $5,433,027, or 27.93%, from $19,454,321
during the six months ended December 31, 2007 to $14,021,294 during the six
months ended December 31, 2008.  Cost of sales as a percentage of net
revenues decreased between periods, from 93% for the six months ended December
31, 2007 to 91% for the six months ended December 31, 2008.  This
decrease in cost of sales as a percentage of net revenues contributed to our
positive gross profit during the current fiscal year and positive net
income.
 
 Consolidated
gross profit decreased $77,254, from $1,531,704 for the six months ended
December 31, 2007 to $1,454,450 for the six months ended December 31,
2008.  Gross profit as a percentage of net
revenues increased 7% for the six months ended December 31, 2007 to 9% for
the six months ended December 31, 2008.
 - 19
-
 Table of Contents
 Pulp and Paper
Segment
  Gross
Profit decreased $261,885 or 41%, from $645,177 for the three months ended
December 31, 2007 to $383,292 for the three months ended December 31,
2008.  Gross profit as a percentage of net
revenues increased from 5.8% for the three months ended December 31, 2007
to 9.1% during the current quarter.
 
 Packaging
Segment
  Gross
profit increased $35,327, or 12%, from $288,362 for the three months ended
December 31, 2007 to $323, 689 for the three months ended December 31, 2008.
Gross profit as a percentage of net revenues increased from 15.4%
during the second quarter of the prior year to 22.0% during the current quarter;
this increase is largely due to increased efficiencies in the production
process.  This segment continues to focus on higher margin
pharmaceutical products; even with the decrease in revenues for this segment,
gross margin continued to grow and is significantly higher than our Pulp and
Paper segment.
 
 TOTAL
OPERATING EXPENSES
 
 Total
operating expenses increased $118,748, or 31.11%, from $381,716 for the three
months ended December 31, 2007 to $500,464 for the three months ended December
31, 2008.  Operating expense as a percentage of net revenues increased
from 3% the in the prior fiscal year to 9% during the current fiscal
year.
 
 Total
operating expenses increased $462,012, or 57.15%, from $808,363 for the six
months ended December 31, 2007 to $1,270,375 for the six months ended December
31, 2008.  Operating expense as a percentage of net revenues increased
from 4% the in the prior fiscal year to 8% during the current fiscal
year.
 
 Selling
expenses increased $70, 737, or 76%, from $92,716 for the three months ended
December 31, 2007 to $163,453 for the three months ended December 31, 2008.
Selling expenses as a percentage of net revenues increased from 1% during the
second quarter in the prior year to 3% in the current quarter. This increase is
primarily due to an increase in commissions paid for Wellton
agents.
 
 General
and administrative expenses increased $48,011 or 17% from $289,000 for the three
months ended December 31, 2007 to $337,011 for the three months ended December
31, 2008. General and administrative expenses as a percentage of net revenues
increased from 2% during the second quarter in the prior year to 6% in the
current quarter.  The increase is due primarily to a $93,750 expense
related to the issuance of 1,250,000 shares of common stock pursuant to a
consulting agreement.
 
 TOTAL
OTHER INCOME (EXPENSE)
 
 We
reported total other expense of $53,477 for the three months ended December 31,
2008, representing a decrease of $1,650,421 from total other income of
$1,596,944 for the three months ended December 31, 2007.
 
 Also, we
reported total other expense of $173,611 for the six months ended December 31,
2008, representing a decrease of $1,748,457 from total other income of
$1,574,846 for the six months ended December 31, 2007.
 
 In fiscal
2008, we recognized a one-time gain of approximately $1.6 million related to a
reversal of a tax liability for amounts which had previously been
accrued.  This one-time gain was recognized during the three month
period ended December 31, 2007 and did not impact the current periods ended
December 31, 2008.  Further, interest expense increased $147,158; this
increase is primarily due to an increase in average interest rates on our
outstanding notes and an increase in our notes payable balance.
 
 For the
six months ended December 31, 2008 we reported a net loss of $1,882; this
represents a $1,961,232 decrease compared to the prior year’s six months ended
December 31, 2007 net income of $1,959,410.
 
 For the
three months ended December 31, 2008 we reported net income of $147,066; this
represents a $1,829,692 decrease compared to the prior year’s three months ended
December 31, 2007 net income of $1,976,758.
 
 The
decrease in our net income between the periods is due to decreased sales as a
result of the global economic crisis, and increased interest
expense.  The decrease is also due to the absence of the impact of the
one-time gain during the three month period ended December 31,
2007.
 - 20
-
 Table of Contents
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
At December 31, 2008 our working capital was approximately $5.6 million as
compared to approximately $5.1 million at June 30, 2008.
 
 As of
December 31, 2008, we had $909,751 in unrestricted cash and an accumulated
deficit since inception of ($1,802,665).  Our restricted cash balance
at December 31, 2008, totaled $0.
 
 Cash
provided from operating activities totaled $1,222,896 for the six months
ended December 31, 2008 compared to cash used in operating activities for
the same period of the preceding year of $431,551.  This overall
increase in cash provided by operating activities of $1,654,447 was primarily
attributable to efficient cash management relating to collection of accounts
receivable and payments on accounts payable.  The largest sources of
cash include funding from the following: $6,131,826 from collection of accounts
receivable and $1,350,392 from the decrease of inventory. These sources of cash
were offset primarily by the following uses of cash: $5,167,049 to pay
down accounts payable, and $841,676 increase in advance on
purchases.
 
 We used
$280,917 of cash for investing activities during the period, all of which
related to capital expenditures.  We also used $245,676 of cash from
financing activities for related party payments to Kung Ming (“Eric”)
Kuo.
 
 We have
historically supplemented our operational cash flow, as needed, through PRC
based bank borrowings.  These borrowings have been primarily with the
Agricultural Bank of China and the Bank of Communications.  The level
of these borrowings remained relatively stable totaling $5,584,919 as of
December 31, 2008, increasing slightly from $5,498,220 at June 30,
2008.  We believe our relationship with these banks remains good and
we will be able to replace or renew these loans as they become
due.  We are current with our payment obligations relating to these
loans.  Our inability to renew these obligations as they become due or find
alternate sources of funding will adversely affect our operations.
  OFF
BALANCE SHEET ARRANGEMENTS
 
 As of the
date of this report, we do not have any off-balance sheet arrangements that are
likely to have a current or future effect on our financial condition material to
our shareholders. In the ordinary course of business, we enter into operating
lease commitments, purchase commitments and other contractual obligations. These
transactions are recognized in our financial statements in accordance with
generally accepted accounting principles in the United States.
 
 Cautionary
Note Regarding Forward-Looking Information and Factors That May Affect Future
Results
 
 This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The Securities and Exchange Commission
encourages companies to disclose forward-looking information so that investors
can better understand a company's future prospects and make informed investment
decisions. This Quarterly Report on Form 10-Q and other written and oral
statements that we make from time to time contain such forward-looking
statements that set out anticipated results based on management's plans and
assumptions regarding future events or performance. We have tried, wherever
possible, to identify such statements by using words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," "will" and similar
expressions in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to future actions,
future performance or results of current and anticipated sales efforts,
expenses, the outcome of contingencies, such as legal proceedings, and financial
results. A list of factors that could cause our actual results of operations and
financial condition to differ materially is set forth below, and these factors
are discussed in greater detail under Item 1. Description of Business--Risk
Factors in our Annual Report on Form 10-K  for the fiscal year ended
June 30, 2008:
  The loss
of the services of any of our executive officers or the loss of services of any
of our key persons responsible for the management, sales, marketing and
operations efforts of our subsidiaries; our ability to successfully transition
the internal operations of companies which we acquired in the PRC from their
prior status as privately held Chinese companies to their current status as
subsidiaries of a publicly-held U.S. company; our acquisition efforts in
the future may result in significant dilution to existing holders of our
securities; difficulties in raising capital in the future as a result of the
terms of our January 2007 financing; our ability to effectively integrate our
acquisitions and manage our growth; the lack of various legal protections
customary in certain agreements to which we are party and which are material to
our operations which are customarily contained in similar contracts prepared in
the United States; our dependence upon advisory services provided by a U.S.
company due to our management’s location in the Peoples Republic of China
(“PRC”); intense competition in the packaging products and paperboard
industries; the demand for our products is dependent upon the demand for the
industry which we supply, the impact of economic downturn in the PRC on our
revenues from our operations in the PRC; the impact of changes in the political
and economic policies and reforms of the Chinese government; fluctuations in the
exchange rate between the U.S. dollars and Chinese Renminbi; the limitation on
our ability to receive and use our revenue effectively as a result of
restrictions on currency exchange in China; the impact of changes to the tax
structure in the PRC; our inability to enforce our legal rights in China
due to policies regarding the regulation of foreign investments; and the
existence of extended payment terms which are customary in China; uncertainties
related to PRC regulations relating to acquisitions of PRC companies by
foreign entities that could restrict or limit our ability to operate, and could
negatively affect our acquisition strategy.
 
 We
caution that the factors described herein and other factors could cause our
actual results of operations and financial condition to differ materially from
those expressed in any forward-looking statements we make and that investors
should not place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of anticipated or unanticipated events or
circumstances.  New factors emerge from time to time, and it is not
possible for us to predict all of such factors. Further, we cannot assess the
impact of each such factor on our results of operations or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
 - 21
-
 Table of Contents
 ITEM 4T.  CONTROLS AND PROCEDURES
 
 As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended as
of September 30, 2008, the end of the period covered by this quarterly report,
our management concluded its evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures.
 
 Our
management, including our Chief Executive Officer and Chief Financial Officer,
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.
  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 Chief Executive Officer
and Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.
 
 Based
upon that evaluation, our Company's Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were not
effective because of the significant deficiency and the material weakness
described below. Measures are being taken to include documentation of management
oversight and review as part of the appropriate functional
procedures.
  All of
our employees and the bulk of accounting staff are located in the PRC and we do
not presently have a Chief Financial Officer, comptroller or similarly titled
senior financial officer who is bilingual and experienced in the application of
U.S. Generally Accepted Accounting Principles. During fiscal 2006 we began a
search for an appropriate candidate who can fill such a position; however, as of
February 2009, the Company has not engaged one and we are unable to predict when
such a person will be hired. During fiscal 2006 we also began providing
additional training to our accounting staff in the application of U.S. GAAP. As
a result, our management believes that a deficiency in our internal controls
continues to exist. Until we expand our staff to include a bilingual senior
financial officer who has the requisite experience necessary, and supplement the
accounting knowledge of our staff, it is likely that we will continue to have
material weaknesses in our disclosure controls and procedures.
 
 Restatement
of Financial Statements.
  The
financial statements for fiscal 2007 have been restated to correct the
accounting treatment previously accorded certain transactions.
 
 For
fiscal 2007, we filed financial statements wherein we erroneously presented the
decrease of restricted cash as an investing activity in our statement of
cash flows.  We are now presenting this item as a financing activity,
in accordance with SAS 95 “Statement of Cash Flows”.  This error did
not affect the balance sheet as of December 31, 2007, or the statements of
operations for the six month period ended December 31, 2007.  This
error did not affect the statements of cash flows for the six month period ended
December 31, 2007.
 
 For
fiscal 2007 we erroneously did not value the reduction in exercise price of
existing warrants associated with an induced conversion offer.  The
value of the reduction in exercise price has been calculated at $447,238, and
was reflected in the statement of operations as an increase in interest expense,
and a resultant increase in net loss and net loss per share for the fiscal year
ended June 30, 2007.  The Company had recorded the valuation of the
reduction in exercise price as an increase in additional paid-in
capital.
 
 For
fiscal 2007 we erroneously deferred, over a three year period commencing in
January 2006, $540,000 in consulting expense related to the issuance of
6,000,000 shares of our common stock and $395,675 related to the issuance of
4,700,000 common stock purchase warrants exercisable at $0.15 per share over a
five year period.  In addition, in February 2006, we issued warrants
to purchase 500,000 shares of common stock, exercisable for five years at $.15
per share, as compensation pursuant to a one year financial advisory consulting
agreement.  The Company had incorrectly deferred the fair value of
these warrants of $71,243 over the contract term.  The Company has
restated the related financial statements to recognize the full expense of these
agreements immediately upon entering into the consulting agreements in January
2006 and February 2006, under the provisions of EITF 96-18 and SFAS
123R.  These corrections resulted in an increase in consulting expense
for the fiscal year ended June 30, 2006 and a reduction in consulting expense
for subsequent periods, as detailed in the tables below.
 
 In March
2007, pursuant to a consulting agreement, we issued 4,000,000 shares of our
common stock.  Initially, we had recorded and reported this issuance
incorrectly as a cost of raising capital related to the private placement of
$1,500,000 in units sold during the quarter.  We restated the
financial statements to recognize the full expense of this agreement immediately
upon entering into the consulting agreement in March 2007 under the provisions
of EITF 96-18 and SFAS 123.  This correction resulted in an increase
in our accumulated deficit for the three month period ended September 30, 2007
of $360,000.
 
 Other
than the items 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.
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 Table of Contents
 
 PART II - OTHER INFORMATION
 
 ITEM 1.
                  LEGAL
      PROCEEDINGS
  None
  ITEM2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 In
October, 2008 the Company issued 10,000,000 shares of common stock, assigned to
H.K. Mingtai Investment Co., Ltd. as partial payment of our acquisition of
Shanghai JinKui.  The shares were issued upon the request of Haobo Zhu
and Shaobo Ouyang, former shareholders of Shanghai JinKui, as contingent
consideration in connection with the acquisition of Shanghai
JinKui.  Pursuant to section 1.2 of the stock purchase agreement
entered into by and among Dragon Nevada and Shanghai JinKui dated June 10, 2006,
filed as an exhibit to our Form 10-KSB/A for the fiscal year ended June 30,
2006, we agreed to a contingent payment of additional shares related to the
purchase, based on Shanghai JinKui achieving specified net income targets
subsequent to the purchase.  The fulfillment of the contingent
conditions has been in dispute since December 31, 2006; specifically, the
parties have disagreed regarding the definition of net income.  On
October 13, 2008 the parties reached an agreement to issue 10,000,000 shares of
common stock with a fair value of $300,000.  In accordance with SFAS
141, “Business
Combinations” we accounted for the additional shares as part of the
purchase price of Shanghai JinKui when the contingency was resolved and
additional consideration was distributed.  We valued the additional
consideration at fair value based on the market price of $0.03 per share on the
date of issuance.  It should be noted that no further consideration in is
dispute or due.
 
 These
shares were issued in reliance upon Section 4(2) of the Securities Act of
1933.  The offering and sale of the common stock in this transaction
qualified for exemption under Section 4(2) of the Securities Act of 1933, as
amended (“the Act”), since the issuance by us did not involve a public offering.
This offering was done with no general solicitation or advertising by
us.  The investor was an accredited investor and had an opportunity to
ask questions of our management.  The offering was not a public
offering as defined in Section 4(2) because the offer was made to an
insubstantial number of persons and because of the manner of the
offering.   In addition, the investor had the necessary
investment intent as required by Section 4(2) since it agreed to, and received,
share certificates bearing a legend stating that such shares are
restricted.  This restriction ensures that these shares will not be
immediately redistributed into the market and therefore not part of a public
offering.  Based on the analysis of the above factors, we have met the
requirements to qualify for exemption under Section 4(2) of the Act for this
transaction.
  ITEM 3.
              DEFAULTS
      UPON SENIOR SECURITIES
 
 None
 
 ITEM
      4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
 
 None
 
 ITEM 5.
              OTHER
      INFORMATION
 
 None
  ITEM 6.
              EXHIBITS
      AND REPORTS ON FORM 8-K
 
 Item No.
                  
                  Description31.1
                  
                  Certification of the Chief Executive Officer,
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.31.2
                  
                  Certification of the Chief Financial Officer,
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.32.1
                  
                  Certification of Chief Executive Officer Pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act32.2
                  
                  Certification of Chief Financial Officer Pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act
 
  - 23
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 Table of Contents
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 DRAGON
      INTERNATIONAL GROUP CORP.February
      13, 2009
                By:
                /s/ David
      WuDavid
      Wu,Chief
      Executive Officer(Principal
      Executive Officer)
  February
      13, 2009
                  By:
                  /s/ Xiali
      GanXiali
      Gan,Chief
      Financial Officer(Principal
      Financial Officer)
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