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 March 31, 2009
  [  
]      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 has submitted electronically and posted on
its corporate website, if any, every interactive data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
  Yes [ ]
   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 May 8, 2009.
  
  DRAGON
INTERNATIONAL GROUP CORP.
 QUARTERLY
PERIOD ENDED MARCH 31, 2009
  TABLE
OF CONTENTS
 
 PART
      I. FINANCIAL INFORMATIONItem
      1.
              Financial
      Statements
              Page No.1.
              Consolidated balance sheets as of March 31,
      2009(Unaudited) and June
      30, 2008
              32.
              Consolidated
      statements ofoperations for the
      three and ninemonths
      ended March 31, 2009 and 2008 (Unaudited)
              43.
              Consolidated
      statements of cash flows for the ninemonths ended March 31, 2009 and 2008
      (Unaudited)
              54.
              Notes to consolidated
      financial statements
              6Item
      2.
              Management’s Discussion and Analysis of
      Financial
      Condition and Results of Operations
              17Item
      4A(T).
              Controls and
      Procedures
              27PART
      II. OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              29Item
      1A
              Risk
      Factors
              29Item
      2.
              Unregistered Sales
      of Equity Securities and Use of Proceeds
              30Item
      3.
              Defaults Upon Senior
      Securities
              30Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              30Item
      5.
              Other
      Information
              30Item
      6.
              Exhibits
              30SIGNATURES
              
              32
   
  Part I–Financial
Information
 Item
1 – Financial Statements
 DRAGON INTERNATIONAL GROUP CORP. AND
      SUBSIDIARIES
                        CONSOLIDATED
      BALANCE SHEETSMarch
      31, 2009
                      
                      
                      June
      30, 2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                      
                      $
                      96,217
                      
                      
                      $
                      139,714Accounts
      receivable, net
                      
                      
                      1,526,136
                      
                      
                      
                      2,961,450Inventories
                      
                      
                      2,435,135
                      
                      
                      
                      2,701,656Advances
      on purchases
                      
                      
                      6,494,989
                      
                      
                      
                      5,034,567Other
      receivables
                      
                      
                      102,595
                      
                      
                      
                      57,536Prepaid
      expenses and other current assets
                      
                      
                      85,452
                      
                      
                      
                      39,291Subsidiaries
      held for sale
                      
                      
                      -
                      
                      
                      
                      9,149,516Total
      Current Assets
                      
                      
                      10,740,524
                      
                      
                      
                      20,083,730CASH
      RESTRICTED
                      
                      
                      -
                      
                      
                      
                      240,112PROPERTY
      AND EQUIPMENT - Net
                      
                      
                      3,058,823
                      
                      
                      
                      3,125,797IINTANGIBLE
      ASSETS
                      
                      
                      3,104,923
                      
                      
                      
                      2,813,666DEFERRED
      EXPENSE
                      
                      
                      24,309
                      
                      
                      
                      28,525TAXES
      RECEIVABLE
                      
                      
                      35,206
                      
                      
                      
                      -Total
      Assets
                      
                      $
                      16,963,785
                      
                      
                      $
                      26,291,830LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Notes
      payable - current portion
                      
                      $
                      4,569,200
                      
                      
                      $
                      4,479,563Notes
      payable - related party
                      
                      
                      1,022,555
                      
                      
                      
                      1,018,657Accounts
      payable
                      
                      
                      2,775,766
                      
                      
                      
                      2,921,503Accrued
      expenses
                      
                      
                      334,125
                      
                      
                      
                      283,616Advances
      from customers
                      
                      
                      102,521
                      
                      
                      
                      62,504Tax
      payable
                      
                      
                      -
                      
                      
                      
                      40,015Due
      to related parties
                      
                      
                      93,176
                      
                      
                      
                      -Subsidiaries
      held for sale
                      
                      
                      -
                      
                      
                      
                      6,186,118Total
      Current Liabilities
                      
                      
                      8,897,343
                      
                      
                      
                      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;134,752,772
      and 117,033,022 shares issued and outstanding at March 31, 2009 and June
      30, 2008, respectively
                      
                      
                      134,753
                      
                      
                      
                      117,033Additional
      paid-in capital
                      
                      
                      12,329,088
                      
                      
                      
                      11,640,962Accumulated
      deficit
                      
                      
                      (5,586,098
                      )
                      
                      
                      (1,800,842
                      )Subscription
      receivable
                      
                      
                      (187,413
                      )
                      
                      
                      -Other
      comprehensive income - foreign currency
                      
                      
                      1,376,112
                      
                      
                      
                      1,342,701Total
      Stockholders' Equity
                      
                      
                      8,066,442
                      
                      
                      
                      11,299,854Total
      Liabilities and Stockholders' Equity
                      
                      $
                      16,963,785
                      
                      
                      $
                      26,291,830See
      notes to consolidated financial statements
  - 3
-
 DRAGON INTERNATIONAL GROUP CORP. AND
      SUBSIDIARIES
                                CONSOLIDATED
      STATEMENT OF OPERATIONS
                                (Unaudited)For
      the Three Months Ended
                              
                              
                              For
      the Nine Months EndedMarch
      31,
                              
                              
                              March
      31,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008NET
      REVENUES
                              
                              $
                              1,347,775
                              
                              
                              $
                              1,779,312
                              
                              
                              $
                              4,192,838
                              
                              
                              $
                              4,543,867COST
      OF SALES
                              
                              
                              1,445,597
                              
                              
                              
                              1,466,659
                              
                              
                              
                              3,723,403
                              
                              
                              
                              3,761,629GROSS
      (LOSS) PROFIT
                              
                              
                              (97,822
                              )
                              
                              
                              312,653
                              
                              
                              
                              469,435
                              
                              
                              
                              782,238OPERATING
      EXPENSES:Selling
      expenses
                              
                              
                              51,419
                              
                              
                              
                              33,782
                              
                              
                              
                              174,347
                              
                              
                              
                              104,043Consulting
      expense-related party
                              
                              
                              37,500
                              
                              
                              
                              140,000
                              
                              
                              
                              225,000
                              
                              
                              
                              140,000General
      and administrative expenses
                              
                              
                              365,463
                              
                              
                              
                              355,244
                              
                              
                              
                              735,285
                              
                              
                              
                              602,994Total
      Operating Expenses
                              
                              
                              454,382
                              
                              
                              
                              529,026
                              
                              
                              
                              1,134,632
                              
                              
                              
                              847,037LOSS
      FROM OPERATIONS
                              
                              
                              (552,204
                              )
                              
                              
                              (216,373
                              )
                              
                              
                              (665,197
                              )
                              
                              
                              (64,799
                              )OTHER
      INCOME (EXPENSE):Other
      income (expense)
                              
                              
                              (64,859
                              )
                              
                              
                              7,338
                              
                              
                              
                              4,442
                              
                              
                              
                              16,825Interest income (expense)
                              
                              
                              (97,844
                              )
                              
                              
                              14,044
                              
                              
                              
                              (329,054
                              )
                              
                              
                              (132,706
                              )Foreign currency transaction gain (loss)
                              
                              
                              (968
                              )
                              
                              
                              125,427
                              
                              
                              
                              (2,611
                              )
                              
                              
                              85,539Total Other Income (expense)
                              
                              
                              (163,671
                              )
                              
                              
                              146,809
                              
                              
                              
                              (327,223
                              )
                              
                              
                              (30,342
                              )LOSS
      FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
                              
                              
                              (715,875
                              )
                              
                              
                              (69,564
                              )
                              
                              
                              (992,420
                              )
                              
                              
                              (95,141
                              )INCOME
      TAXES
                              
                              
                              (4,564
                              )
                              
                              
                              (11,109
                              )
                              
                              
                              (16,850
                              )
                              
                              
                              (46,467
                              )LOSS
      FROM CONTINUING OPERATIONS
                              
                              
                              (720,439
                              )
                              
                              
                              (80,673
                              )
                              
                              
                              (1,009,270
                              )
                              
                              
                              (141,608
                              )DISCOUNTINUED
      OPERATIONS:Loss
      on sale of Welton subsidiaries
                              
                              
                              (2,385,004
                              )
                              
                              
                              -
                              
                              
                              
                              (2,385,004
                              )
                              
                              
                              -(Loss)
      income  from discontinued operations
                              
                              
                              (677,989
                              )
                              
                              
                              318,667
                              
                              
                              
                              (390,980
                              )
                              
                              
                              2,339,012(LOSS)
      INCOME  FROM DISCONTINUED OPERATIONS
                              
                              
                              (3,062,993
                              )
                              
                              
                              318,667
                              
                              
                              
                              (2,775,984
                              )
                              
                              
                              2,339,012NET
      (LOSS) INCOME
                              
                              $
                              (3,783,432
                              )
                              
                              $
                              237,994
                              
                              
                              $
                              (3,785,254
                              )
                              
                              $
                              2,197,404OTHER
      COMPREHENSIVE INCOME:Unrealized
      gain on foreign currency translation
                              
                              $
                              10,615
                              
                              
                              $
                              346,505
                              
                              
                              $
                              33,411
                              
                              
                              $
                              662,705COMPREHENSIVE (LOSS)
      INCOME
                              
                              $
                              (3,772,817
                              )
                              
                              $
                              584,499
                              
                              
                              $
                              (3,751,843
                              )
                              
                              $
                              2,860,109NET
      (LOSS) INCOME PER COMMON SHAREBasic
                              
                              $
                              (0.03
                              )
                              
                              $
                              -
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              0.02Diluted
                              
                              $
                              (0.03
                              )
                              
                              $
                              -
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              0.02Weighted
      Common Shares Outstanding - Basic
                              
                              
                              134,408,311
                              
                              
                              
                              113,799,637
                              
                              
                              
                              127,107,842
                              
                              
                              
                              110,299,200Weighted
      Common Shares Outstanding - Diluted
                              
                              
                              134,408,311
                              
                              
                              
                              114,075,530
                              
                              
                              
                              127,107,842
                              
                              
                              
                              110,572,068See
      notes to consolidated financial statements
 - 4
-
 DRAGON INTERNATIONAL GROUP CORP. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)For
      the Nine Months EndedMarch
      31,2009
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Loss
      from opetrations
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            (1,009,270
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            (141,608
                                                                                                                                            )Adjustments
      to reconcile loss from operations to net cash used incontinuing
      operations:Depreciation
      and amortization
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            262,800
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            420,165Stock-based
      compensation
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            330,000
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            140,000Allowance
      for doubtful accounts
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            108,599
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            12,926Changes
      in assets and liabilities:Accounts
      receivable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,338,933
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            824,725Inventories
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            276,645
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (1,286,080
                                                                                                                                            )Prepaid
      and other current assets
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (75,010
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (5,378
                                                                                                                                            )Notes
      receivables
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            419,511Other
      receivable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (42,495
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (82,468
                                                                                                                                            )Advances
      to employees
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (29,738
                                                                                                                                            )Advances
      on purchases
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (1,410,995
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (1,119,497
                                                                                                                                            )Other
      assets
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (19,417
                                                                                                                                            )Accounts
      payable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            114,417
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (605,367
                                                                                                                                            )Tax
      payable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (75,314
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -Other
      payable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (195,164
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            31,210Accrued
      expenses
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            101,334
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (72,113
                                                                                                                                            )Advances
      from customers
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            39,746
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            114,634Net
      cash used in continuing operating activities
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (235,774
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (1,398,495
                                                                                                                                            )(Loss)
      income from discontinued operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (2,775,984
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2,339,012Adjustments to
      reconcile loss from discontinued operations to net cashused
      in discontinued operations:Non-cash loss
      from discontined operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2,385,005
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -Assets
      from discontinued operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            5,693,974
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (2,677,546
                                                                                                                                            )Liabilities
      from discontinued operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (5,302,995
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            338,534Net
      cash provided by discontinued operations
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -NET
      CASH USED IN OPERATING ACTIVITIES
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (235,774
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (1,398,495
                                                                                                                                            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (135,352
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (644,484
                                                                                                                                            )Intangile
      assets-land use right
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (29,074
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -NET
      CASH USED IN INVESTING ACTIVITIES
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (164,426
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (644,484
                                                                                                                                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from notes payable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            72,983
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            906,005Proceeds
      from exercised warrants
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            24,750
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -Decrease
      (increase)  in restricted cash
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            240,843
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (22,509
                                                                                                                                            )Proceeds
      from related parties
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            17,654
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            309,353NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            356,230
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,192,849EFFECT
      OF EXCHANGE RATE ON CASH
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            473
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            8,133NET
      DECREASE IN CASH
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (43,497
                                                                                                                                            )
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (841,997
                                                                                                                                            )CASH  -
      beginning of the period
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            139,714
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,032,519CASH
      - end of the period
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            96,217
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            190,522SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid  for:Interest
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            573,022Income
      taxes
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            679,428Non cash activities:Subscription
      receivable for disposal of Welton
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            187,413
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            -Common
      stock issued for interest expense
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            51,095
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            -See
      notes to consolidated financial statements
   - 5
-
  NOTE
1 – 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 People's Republic
of China ("PRC").
  We are a
manufacturer and distributor 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.
 
 We
operate various entities engaged in the paper industry. As of March 31, 2009 we
evaluate the business and our products under one
segment, Packaging.  Our Packaging segment consists of the
operations of Shanghai JinKui and Ningbo Dragon and its
subsidiaries.  Our Pulp and Paper segment was discontinued and sold as
of March 31, 2009.
  We are on
a fiscal year; as such the nine month period ending March 31, is our
third quarter.  The fiscal year ended June 30, 2008 is referred
to as “fiscal 2008”, 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.
 
 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.
 
 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.
   - 6
-
  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 nine month periods ended
March 31, 2009 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 March 31, 2009, the
Company maintained a cash balance of $96,217.  Of this amount $96,123 is
held in China, and $94 is held in the U.S.
 
  - 7
-
  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 $552,105 at March 31, 2009 and $441,730 at June 30,
2008.
 
 INVENTORIES
 
 Inventories,
consisting of raw materials, work in progress, 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 $6,494,989 and $5,034,567 at March 31, 2009 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
nine months ended March 31, 2009 and 2008, amortization expenses for intangible
assets amounted to $48,570 and $98,368, 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.
   - 8
-
  The
following table represents a reconciliation of basic and diluted earnings per
share:
  For
      the Three Months Ended March 31,
                    
                    
                    For
      the Nine Months Ended  March 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      Income (Loss) for basic and diluted earnings per
    share
                    
                    $
                    (3,783,432)
                    
                    
                    $
                    237,994
                    
                    
                    $
                    (3,785,254)
                    )
                    
                    $
                    2,197,404Weighted
      average shares outstanding - basic
                    
                    
                    134,408,311
                    
                    
                    
                    113,799,637
                    
                    
                    
                    127,107,842
                    
                    
                    
                    110,299,200Effect
      of dilutive securities:Unexercised warrants
                    
                    
                    -
                    
                    
                    
                    275,893
                    
                    
                    
                    -
                    
                    
                    
                    272,868Weighted
      average shares outstanding - diluted
                    
                    
                    134,408,311
                    
                    
                    
                    114,075,530
                    
                    
                    
                    127,107,842
                    
                    
                    
                    110,572,068Earnings
      (loss) per share - basic
                    
                    $
                    (0.03)
                    
                    
                    $
                    0.00
                    
                    
                    $
                    (0.03)
                    
                    
                    $
                    0.02Earnings
      (loss) per share -diluted
                    
                    $
                    (0.03)
                    
                    
                    $
                    0.00
                    
                    
                    $
                    (0.03)
                    
                    
                    $
                    0.02
  Unexercised
warrants of 19,940 and 22,574 for the three and nine months ended March 31, 2009
are anti-dilutive and are not included in the calculation of the denominator of
diluted weighted average shares outstanding.
 
 REVENUE
RECOGNITION
 
 The
Company follows the guidance of the Securities and Exchange Commission's Staff
Accounting Bulletin 104 and Topic 13 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 March 31, 2009 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 6.8456 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 March 31, 2009, the Company, held a total of $96,217
in bank deposits.  Of this amount $96,123 is held in China, and $94 is held
in the U.S.  The cash balance of $96,123 held in bank deposits in
China is not insured.  The Company has not experienced any losses in such
accounts through March 31, 2009.  The Company also performs ongoing credit
evaluations of its customers to help further reduce credit risk.
 
  - 9
-
  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
December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations".
SFAS 141R is a revision to SFAS 141 and includes substantial changes to the
acquisition method used to account for business combinations (formerly the
"purchase accounting" method), including broadening the definition of a
business, as well as revisions to accounting methods for contingent
consideration and other contingencies related to the acquired business,
accounting for transaction costs, and accounting for adjustments to provisional
amounts recorded in connection with acquisitions. SFAS 141R retains the
fundamental requirement of SFAS 141 that the acquisition method of accounting be
used for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141R is effective for periods beginning on or after
December 15, 2008, and will apply to all business combinations occurring after
the effective date. The Company has adopted SFAS 141 effective January 1,
2009.
 
 In
December 2007, the FASB issued SFAS 160, "Non-controlling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51, Consolidated Financial Statements" ("ARB 51"). This Statement amends ARB
51 to establish new standards that will govern the (1) accounting for and
reporting of non-controlling interests in partially owned consolidated
subsidiaries and (2) the loss of control of subsidiaries. Non-controlling
interest will be reported as part of equity in the consolidated financial
statements. Losses will be allocated to the non-controlling interest, and, if
control is maintained, changes in ownership interests will be treated as equity
transactions. Upon a loss of control, any gain or loss on the interest sold will
be recognized in earnings. SFAS 160 is effective for periods beginning after
December 15, 2008. The Company has adopted and evaluated SFAS 160 and determined
that there was no impact as of March 31, 2009.
 
 In March
2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments and
Hedging Activities". The new standard 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. The
Company has evaluated SFAS 161 and determined that there was no impact as of
March 31, 2009.
 
 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 non-convertible 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 2010, and this standard must be applied on a retrospective basis. The
Company has evaluated FSP APB 14-1 and determined that there was no impact as of
March 31, 2009.
 
 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 June
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. The Company has adopted and evaluated FSP 03-6-1 and
determined that there was no impact as of March 31, 2009.
  - 10
-
 A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to our consolidated financial statements.
 
 NOTE
2 - INVENTORIES
 
 At March
31, 2009 and June 30, 2008, inventories consisted of the following:
  March
      31, 2009
                    
                    
                    June
      30, 2008Raw
      Materials
                    
                    $
                    750,141
                    
                    
                    $
                    669,322Work
      in Progress
                    
                    
                    624,540
                    
                    
                    
                    1,608,582Finished
      Goods
                    
                    
                    1,060,454
                    
                    
                    
                    423,752$
                    2,435,135
                    
                    
                    $
                    2,701,656
  NOTE
3 – PROPERTY AND EQUIPMENT
 
 Depreciation
expense for the nine month periods ending March 31, 2009 and 2008 was $214,230
and $98,002 respectively.  At March 31, 2009 and June 30, 2008, property
and equipment consisted of the following:
  Asset
      class
                    Estimated
      Life
                    
                    March
      31, 2009
                    
                    
                    June
      30, 2008Manufacturing
      Equipment
                    5
      years
                    
                    $
                    2,592,584
                    
                    
                    $
                    2,590,684Building
      and Improvements
                    20
      years
                    
                    
                    1,431,060
                    
                    
                    
                    1,287,304Office
      Equipment
                    5
      years
                    
                    
                    104,594
                    
                    
                    
                    74,876Construction
      in Progress
                    
                    
                    
                    319,870
                    
                    
                    
                    343,3434,448,108
                    
                    
                    
                    4,296,207Less:
      Accumulated Depreciation
                    
                    
                    (1,389,285
                    )
                    
                    
                    (1,170,410
                    )Fixed
      Assets - Net
                    
                    
                    $
                    3,058,823
                    
                    
                    $
                    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 March 31, 2009 at $3,046,098 (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 nine months ended March
31, 2009 and 2008, amortization expenses amounted to $48,570 and 98,368
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.
  March
      31, 2009
                      
                      
                      June
      30, 2008Land
      Use Rights (Estimated Useful Life: 45 years)
                      
                      $
                      3,046,098
                      
                      
                      $
                      3,005,379Goodwill
                      
                      
                      300,000
                      
                      
                      
                      -Less:
      Accumulated Amortization
                      
                      
                      (241,175
                      )
                      
                      
                      (191,713
                      )$
                      3,104,923
                      
                      
                      $
                      2,813,666
  NOTE
5 - RELATED PARTY TRANSACTIONS
 
 DUE TO
RELATED PARTIES AND SIGNIFICANT HOLDERS
 
 At March
31, 2009, the Company owed $17,676 to David Wu, Chief Executive Officer of the
Company, for a shareholder loan used for working capital purposes at Shanghai
JinKui.
 - 11
-
  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 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 disclosures, The
Company will issue and expense 1,250,000 shares of common stock per quarter for
services rendered and earned during each quarter; the fair value of the shares
will be measured upon the date of issuance. China Direct is a significant
shareholder,owning in excess of 10% of our common stock. At March 31, 2009, the
Company had a due to China Direct Industries, Inc. of $75,500 related to this
agreement.
 
 March
      31, 2009
                        
                        
                        June
      30, 2008Due
      to China Direct Industries, Inc
                        
                        $
                        75,500
                        
                        
                        $
                        0Shareholder
      Loan
                        
                        
                        17,676
                        
                        
                        
                        0$
                        93,176
                        
                        
                        $
                        0
  NOTE
6 - NOTES PAYABLE
 
 A summary
of notes payable as of March 31, 2009 and June 30, 2008 is as
follows:
 
 March
      31, 2009
                  
                  
                  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 January 15, 2010. Interest only
      payable monthly at a variable prime rate. As of March 31, 2008, the prime
      rate was 5.31%. Secured by the property of the
    Company.
                  
                  
                  949,515
                  
                  
                  
                  945,895Note
      payable to Ningbo Jiangdong Yongke Co., Ltd. due on May 20, 2009 at an
      annual rate of 10%.
                  
                  
                  262,943
                  
                  
                  
                  -Note
      payable to Shanghai Agriculture Commercial Bank, due on June 2,
      2009.  Interest only payable monthly at a variable prime
      rate.  As of March 31, 2009, the prime rate was 5.31%. Secured
      by the property of third party: Lijian Lu.
                  
                  
                  219,119
                  
                  
                  
                  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 March 31, 2009 the prime
      rate was 5.31%. Secured by property of the Company.
                  
                  
                  1,825,990
                  
                  
                  
                  1,819,028Note
      payable to Bank of Agriculture, due on June 15, 2009. Interest only
      payable monthly at a variable prime rate. As of March 31, 2009, the prime
      rate was 5.31%. Secured by property of the CEO, David
      Wu.
                  
                  
                  292,158
                  
                  
                  
                  291,044Note
      payable to Bank of Agriculture, due on November 10, 2009. Interest only
      payable monthly at variable prime rate. As of March 31, 2009, prime rate
      was 5.31%. Secured by property of third party: Ningbo Jiangdong Yongke
      Co., Ltd.
                  
                  
                  584,317
                  
                  
                  
                  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.
                  
                  
                  292,158
                  
                  
                  
                  -Bank
      Acceptance note payable to Bank of Communications, due on June 3, 2008.
      Non-interest bearing.  50% secured by restricted
      cash.
                  
                  
                  -
                  
                  
                  
                  291,045Total
                  
                  $
                  4,569,200
                  
                  
                  $
                  4,479,563Less:
      current portion
                  
                  
                  (4,569,200
                  )
                  
                  
                  (4,479,563)Long-term
      portion
                  
                  $
                  -
                  
                  
                  $
                  -
  - 12
-
 NOTE
7 – NOTES PAYABLE-RELATED PARTY
 
 In
January 2008, the Company borrowed $1,022,555 (RMB7, 000,000) from China Direct,
Inc., a shareholder of the Company. The note has been extended from December 31,
2008 to December 31, 2009 with interest due at 6% per annum and secured by
property of the company, David Wu and third party-Yonghu Cai.
 
 A summary
of notes payable-related party as of March 31, 2009 and June 30, 2008 is as
follows:
 
 
 March
      31, 2009
                      
                      
                      June
      30, 2008Note
      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.
                      
                      $
                      1,022,555
                      
                      
                      $
                      1,018,657
 
  NOTE
8 - 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 shares 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.
 
 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
  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.
 
  - 13
-
  COMMON
STOCK PURCHASE WARRANTS
 
 A summary
of the status of the Company's outstanding stock warrants as of March 31,
2009 and changes during the nine month period ended March 31,
2009 is as follows:
 
 Shares
                      
                      
                      Weighted
      Average Exercise PriceOutstanding
      at July 1, 2008
                      
                      
                      42,697,282
                      
                      
                      $
                      0.139Granted
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      (165,000
                      )
                      
                      
                      0.15Forfeited
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at March 31, 2009
                      
                      
                      42,532,282
                      
                      
                      
                      0.139Warrants
      exercisable at end of period
                      
                      
                      42,532,282
                      
                      
                      $
                      0.139
  The
following information applies to all warrants outstanding at March 31,
2009:
 
 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
                  
                  
                  
                  1.28
                  
                  
                  $
                  0.300.15
                  
                  
                  
                  23,852,940
                  
                  
                  
                  2.10
                  
                  
                  
                  0.150.125
                  
                  
                  
                  18,333,342
                  
                  
                  
                  2.84
                  
                  
                  
                  0.1250.01
                  
                  
                  
                  196,000
                  
                  
                  
                  1.28
                  
                  
                  
                  0.0142,532,282
                  
                  
                  
                  
                  
                  
                  $
                  0.139
  NOTE 9 –
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 nine months ended March 31, 2009, the Company operated in one
reportable business segment: (i) Packaging segment
 
 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
   - 14
-
  The
condensed information with respect to the only reportable segment for the three
and nine months ended March 31, 2009 and 2008 are
as follows:
 
 
 Packaging
                                    
                                    
                                    Corporate
      Items
                                    
                                    
                                    ConsolidatedFor
      the three months ended March 31,
                                    
                                    
                                    For
      the three months ended March 31,
                                    
                                    
                                    For
      the three months ended March 31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Revenue
                                    
                                    $
                                    1,347,775
                                    
                                    
                                    $
                                    1,779,312
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    1,347,775
                                    
                                    
                                    $
                                    1,779,312Cost
      of Revenue
                                    
                                    
                                    1,445,597
                                    
                                    
                                    
                                    1,466,659
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,445,597
                                    
                                    
                                    
                                    1,466,659Gross
      Profit
                                    
                                    
                                    (97,822
                                    )
                                    
                                    
                                    312,653
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (97,822
                                    )
                                    
                                    
                                    312,653Total
      Operating Expenses
                                    
                                    
                                    405,542
                                    
                                    
                                    
                                    389,311
                                    
                                    
                                    
                                    48,840
                                    
                                    
                                    
                                    139,715
                                    
                                    
                                    
                                    454,382
                                    
                                    
                                    
                                    529,026Total
      Loss from Operations
                                    
                                    
                                    (503,364
                                    )
                                    
                                    
                                    (76,658
                                    )
                                    
                                    
                                    (48,840
                                    )
                                    
                                    
                                    (139,715
                                    )
                                    
                                    
                                    (552,204
                                    )
                                    
                                    
                                    (216,373
                                    )Net
      (Loss) Income
                                    
                                    $
                                    (663,423
                                    )
                                    
                                    $
                                    58,857
                                    
                                    
                                    $
                                    (57,016
                                    )
                                    
                                    $
                                    (139,530
                                    )
                                    
                                    $
                                    (720,439
                                    )
                                    
                                    $
                                    (80,673
                                    )Segment
      Assets
                                    
                                    $
                                    16,663,691
                                    
                                    
                                    $
                                    17,858,588
                                    
                                    
                                    $
                                    300,094
                                    
                                    
                                    $
                                    7,395,659
                                    
                                    
                                    $
                                    16,963,785
                                    
                                    
                                    $
                                    25,254,247
 Packaging
                    
                    
                    Corporate
      Items
                    
                    
                    ConsolidatedFor
      the nine months ended March 31,
                    
                    
                    For
      the nine months ended March 31,
                    
                    
                    For
      the nine months ended March 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    $
                    4,192,838
                    
                    
                    $
                    4,543,867
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,192,838
                    
                    
                    $
                    4,543,867Cost
      of Revenue
                    
                    
                    3,723,403
                    
                    
                    
                    3,761,629
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,723,403
                    
                    
                    
                    3,761,629Gross
      Profit
                    
                    
                    469,435
                    
                    
                    
                    782,238
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    469,435
                    
                    
                    
                    782,238Total
      Operating Expenses
                    
                    
                    875,792
                    
                    
                    
                    707,037
                    
                    
                    
                    258,840
                    
                    
                    
                    140,000
                    
                    
                    
                    1,134,632
                    
                    
                    
                    847,037Total
      (Loss) Income from Operations
                    
                    
                    (406,357
                    )
                    
                    
                    75,201
                    
                    
                    
                    (258,840
                    )
                    
                    
                    (140,000
                    )
                    
                    
                    (665,197
                    )
                    
                    
                    (64,799
                    )Net
      (Loss) Income
                    
                    $
                    (741,874
                    )
                    
                    $
                    (1,293
                    )
                    
                    $
                    (267,396
                    )
                    
                    $
                    (140,315
                    )
                    
                    $
                    (1,009,270
                    )
                    
                    $
                    (141,608
                    )Segment
      Assets
                    
                    $
                    16,663,691
                    
                    
                    $
                    17,858,588
                    
                    
                    $
                    300,094
                    
                    
                    $
                    7,395,659
                    
                    
                    $
                    16,963,785
                    
                    
                    $
                    25,254,247
 
  
 NOTE 10 –
DISCONTINUED OPERATIONS
 
 PULP
AND PAPER SEGMENT:
 
 Wellton
International Fiber Corp. ("Wellton")
 
 Our Pulp
and Paper segment was discontinued as of March 31, 2009 and was sold effective
as of that date. 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.  We discontinued this segment during the three
months ended March 31, 2009 when we entered into an agreement with York Smooth
Limited, the former shareholder of Wellton, pursuant to which we transferred all
of our rights, title and interest in Wellton to York Smooth, Limited in exchange
for 6,247,115 shares of our common stock. As a result 6,247,115 shares of the
Company’s common stock held by York Smooth, Limited will be
cancelled.
 
  - 15
-
  The
following data represents the pulp and paper segment segment for the nine
months ended March 31, 2009.
 March
      31,2009
                      
                      
                      2008Revenues
                      
                      $
                      13,901,839
                      
                      
                      $
                      28,745,005Cost
      of sales
                      
                      
                      12,926,448
                      
                      
                      
                      27,059,774Gross
      profit
                      
                      
                      975,391
                      
                      
                      
                      1,685,231Operating
      and other non-operating (expenses) income
                      
                      
                      (1,366,371)
                      
                      
                      
                      653,781(Loss)
      income from discontinued operations
                      
                      
                      (390.980)
                      
                      
                      
                      2,339,012Loss
      from disposal of discontinued operations
                      
                      
                      (2,385,004)
                      
                      
                      
                      --Total
      (loss) income  from discontinued operations
                      
                      $
                      (2,775,984)
                      
                      
                      $
                      2,339,012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  - 16
-
  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 nine month period ending March 31, is our third
quarter.  The fiscal year ended June 30, 2007 is referred to as “fiscal
2007”, the fiscal year ended June 30, 2008 is referred to as “fiscal 2008”, 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 People's Republic
of China ("PRC").
  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.
 
 We
operate various entities engaged in the paper industry. As of March 31, 2009 we
evaluate the business and our products under one segment,
Packaging.  Our Packaging segment consists of the operations of
Shanghai JinKui and Ningbo Dragon and its subsidiaries.  Since our
acquisition of a 51% interest of Wellton International Fiber Corp. on June
29, 2007 and the remaining 49% interest in Wellton on October 1, 2007
through March 31, 2009 we evaluated the business and our products under an
additional segment, Pulp and Paper.  This segment, which consisted of
the operations of Wellton, was discontinued and sold as of March 31,
2009.
  We are on
a fiscal year; as such the nine month period ending March 31, is our
third quarter.  The fiscal year ended une 30, 2007 is referred to as
“fiscal 2007”, the fiscal year ended June 30, 2008 is referred to as “fiscal
2008”, 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.
 
 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 ISO
9000 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.
 
  - 17
-
 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.
 
 DISCONTINUED
OPERATIONS
 
 Wellton
International Fiber Corp. ("Wellton")
 
 Our Pulp
and Paper segment was discontinued as of March 31, 2009 and was sold effective
as of March 31, 2009. 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.  We discontinued this segment during the three
months ended March 31, 2009 when we entered into an agreement with York Smooth
Limited, the former shareholder of Wellton, pursuant to which we transferred all
of our rights, title and interest in Wellton to York Smooth, Limited in exchange
for 6,247,115 shares of our  common stock.  As a result
6,247,115 shares of the company’s common stock held by York Smooth, Limited will
be cancelled.
 
 FOREIGN
EXCHANGE CONSIDERATIONS
 
 Since the
local currency for all of our net revenues for the nine months ended March
31, 2009 and 2008 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.
 - 18
-
  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, work in progress, 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 March 31, 2009 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, goodwill, 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.
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations".
SFAS 141R is a revision to SFAS 141 and includes substantial changes to the
acquisition method used to account for business combinations (formerly the
"purchase accounting" method), including broadening the definition of a
business, as well as revisions to accounting methods for contingent
consideration and other contingencies related to the acquired business,
accounting for transaction costs, and accounting for adjustments to provisional
amounts recorded in connection with acquisitions. SFAS 141R retains the
fundamental requirement of SFAS 141 that the acquisition method of accounting be
used for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141R is effective for periods beginning on or after
December 15, 2008, and will apply to all business combinations occurring after
the effective date. The Company has adopted SFAS 141 effective January 1,
2009.
 
 In
December 2007, the FASB issued SFAS 160, "Non-controlling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51, Consolidated Financial Statements" ("ARB 51"). This Statement amends ARB
51 to establish new standards that will govern the (1) accounting for and
reporting of non-controlling interests in partially owned consolidated
subsidiaries and (2) the loss of control of subsidiaries. Non-controlling
interest will be reported as part of equity in the consolidated financial
statements. Losses will be allocated to the non-controlling interest, and, if
control is maintained, changes in ownership interests will be treated as equity
transactions. Upon a loss of control, any gain or loss on the interest sold will
be recognized in earnings. SFAS 160 is effective for periods beginning after
December 15, 2008. The Company has adopted and evaluated SFAS 160 and determined
that there was no impact as of March 31, 2009.
 
 In March
2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments and
Hedging Activities". The new standard 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. The
Company has evaluated SFAS 161 and determined that there were no impact as of
March 31, 2009.
 
 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 non-convertible 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. The
Company has evaluated FSP APB 14-1 and determined that there was no impact as of
March 31, 2009.
 
  - 19
-
  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 June
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. The Company has adopted and evaluated FSP 03-6-1 and
determined that there was no impact as of March 31, 2009.
 
 A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to our consolidated financial statements.
 
 REVENUE
RECOGNITION
 
 We follow
the guidance of the Securities and Exchange Commission's Staff Accounting
Bulletin 104 and Topic 13 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.
 
 RESULTS
OF OPERATIONS
 
 For the
three and nine months ended March 31, 2009 as compared to the three and nine
months ended 2008.
 
 The
following table provides certain comparative information based on our
consolidated results of operations for the three months ended March 31, 2009
and 2008:
 
 
 For
      the Three Months ended March 31, 2009
                    
                    
                    For
      the Three Months ended March 31, 2008
                    
                    
                    $
      Change
                    
                    
                    %
      ChangeNet
      Revenues
                    
                    $
                    1,347,775
                    
                    
                    $
                    1,779,312
                    
                    
                    $
                    (431,537
                    )
                    
                    
                    -24.3
                    %Cost
      of Sales
                    
                    
                    1,445,597
                    
                    
                    
                    1,466,659
                    
                    
                    
                    (21,062
                    )
                    
                    
                    -1.4
                    %Gross
      (Loss) Profit
                    
                    
                    (97,822)
                    
                    
                    
                    312,653
                    
                    
                    
                    (410,475
                    )
                    
                    
                    -131.3
                    %Selling
      Expenses
                    
                    
                    51,419
                    
                    
                    
                    33,782
                    
                    
                    
                    17,637
                    
                    
                    
                    52.2
                    %Consulting
      Fee
                    
                    
                    37,500
                    
                    
                    
                    140,000
                    
                    
                    
                    (102,500)
                    
                    
                    
                    73.2
                    %General
      and Administrative Expenses
                    
                    
                    365,463
                    
                    
                    
                    355,244
                    
                    
                    
                    10,219
                    
                    
                    
                    2.9
                    %Total
      Operating Expenses
                    
                    
                    454,382
                    
                    
                    
                    529,026
                    
                    
                    
                    (74,644)
                    
                    
                    
                    -14.1
                    %Loss
      from Operations
                    
                    
                    (552,204)
                    
                    
                    
                    (216,373)
                    
                    
                    
                    (335,831
                    )
                    
                    
                    -155.2
                    %Total
      Other (Expense) Income
                    
                    
                    (163,671
                    )
                    
                    
                    146,809
                    
                    
                    
                    (310,480
                    )
                    
                    
                    -211.5
                    %Taxes
                    
                    
                    (4,564)
                    
                    
                    
                    (11,109)
                    
                    
                    
                    (6,545
                    )
                    
                    
                    58.0
                    %Net
      (Loss) Income  from Discontinued Operation
                    
                    
                    (3,062,993)
                    
                    
                    
                    318,667
                    
                    
                    
                    (3,381,660)
                    
                    
                    
                    -1,061.2
                    %Net
      (Loss) Income
                    
                    $
                    (3,783,432)
                    
                    
                    $
                    237,994
                    
                    
                    $
                    (4,021,426
                    )
                    
                    
                    -1,689.7
                    %
 
  - 20
-
  The
following table provides certain comparative information based on our
consolidated results of operations for the nine months ended March 31, 2009
and 2008:
 
 For
      the Nine Months ended March 31, 2009
                    
                    
                    For
      the Nine Months ended March 31, 2008
                    
                    
                    $
      Change
                    
                    
                    %
      ChangeNet
      Revenues
                    
                    $
                    4,192,838
                    
                    
                    $
                    4,543,867
                    
                    
                    $
                    (351,029
                    )
                    
                    
                    -7.7
                    %Cost
      of Sales
                    
                    
                    3,723,403
                    
                    
                    
                    3,761,629
                    
                    
                    
                    (38,226
                    )
                    
                    
                    -1.0
                    %Gross
      Profit
                    
                    
                    469,435
                    
                    
                    
                    782,238
                    
                    
                    
                    (312,803
                    )
                    
                    
                    -40.0
                    %Selling
      Expenses
                    
                    
                    174,347
                    
                    
                    
                    104,043
                    
                    
                    
                    70,304
                    
                    
                    
                    67.6
                    %Consulting
      Fee
                    
                    
                    225,000
                    
                    
                    
                    140,000
                    
                    
                    
                    85,000
                    
                    
                    
                    60.7
                    %General
      and Administration Expenses
                    
                    
                    735,285
                    
                    
                    
                    602,994
                    
                    
                    
                    132,291
                    
                    
                    
                    21.9
                    %Total
      Operating Expenses
                    
                    
                    1,134,632
                    
                    
                    
                    847,037
                    
                    
                    
                    287,595
                    
                    
                    
                    34.0
                    %Income
      from Operations
                    
                    
                    (665,197
                    )
                    
                    
                    (64,799
                    )
                    
                    
                    (591,398
                    )
                    
                    
                    -912.7
                    %Total
      Other (Expense) Income
                    
                    
                    (327,223
                    )
                    
                    
                    (30,342
                    )
                    
                    
                    (296,881
                    )
                    
                    
                    978.4
                    %Taxes
                    
                    
                    (16,850
                    )
                    
                    
                    (46,467
                    )
                    
                    
                    29,617
                    
                    
                    
                    -63.7
                    %Net
      income(loss )from discontinue operation
                    
                    
                    (2,775,984
                    )
                    
                    
                    2,339,012
                    
                    
                    
                    (5,114,996
                    )
                    
                    
                    -218.7
                    %Net
      (Loss) Income
                    
                    $
                    (3,785,254
                    )
                    
                    $
                    2,197,404
                    
                    
                    $
                    (5,982,658
                    )
                    
                    
                    -272.3
                    %
 
  - 21
-
  For
      the Three Months ended March 31, 2009
                  
                  
                  For
      the Three Months ended March 31, 2008Cost
      of Sales as a percentage of Net Revenues
                  
                  
                  107.3
                  %
                  
                  
                  82.4
                  %Gross
      Profit Margin
                  
                  
                  -7.3
                  %
                  
                  
                  17.6
                  %Selling
      Expenses as a percentage of Net Revenues
                  
                  
                  3.8
                  %
                  
                  
                  1.9
                  %General
      and Administration Expenses as a percentage of Net
      Revenues
                  
                  
                  27.1
                  %
                  
                  
                  20.0
                  %Total
      Operating Expenses as a percentage of Net Revenues
                  
                  
                  33.72
                  %
                  
                  
                  29.73
                  %
 
 For
      the Nine Months ended March 31, 2009
                  
                  
                  For
      the Nine Months ended March 31, 2008Cost
      of Sales as a percentage of Net Revenues
                  
                  
                  88.8
                  %
                  
                  
                  82.8
                  %Gross
      Profit Margin
                  
                  
                  11.2
                  %
                  
                  
                  17.2
                  %Selling
      Expenses as a percentage of Net Revenues
                  
                  
                  4.2
                  %
                  
                  
                  2.3
                  %General
      and Administration Expenses as a percentage of Net
      Revenues
                  
                  
                  17.5
                  %
                  
                  
                  13.3
                  %Total
      Operating Expenses as a percentage of Net Revenues
                  
                  
                  27.1
                  %
                  
                  
                  18.6
                  %
 
 Segment
Information
 
 As of
March 31, 2009, our operations were conducted in one operating segment 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 were
conducted within  the following identified segment:
 
 Packaging
      Segment
              
 
 The
following tables summarizes the operating results for the three months ended
March 31, 2009 and 2008 by segment:
 
 
 Packaging
                        
                        
                        Corporate
      Items
                        
                        
                        ConsolidatedFor
      the three months ended March 31,
                        
                        
                        For
      the three months ended March 31,
                        
                        
                        For
      the three months ended March 31,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Revenue
                        
                        $
                        1,347,775
                        
                        
                        $
                        1,779,312
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        1,347,775
                        
                        
                        $
                        1,779,312Cost
      of Revenue
                        
                        
                        1,445,597
                        
                        
                        
                        1,466,659
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,445,597
                        
                        
                        
                        1,466,659Gross
      Profit
                        
                        
                        (97,822
                        )
                        
                        
                        312,653
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (97,822
                        )
                        
                        
                        312,653Total
      Operating Expenses
                        
                        
                        405,542
                        
                        
                        
                        389,311
                        
                        
                        
                        48,840
                        
                        
                        
                        139,715
                        
                        
                        
                        454,382
                        
                        
                        
                        529,026Total
      Loss from Operations
                        
                        
                        (503,364
                        )
                        
                        
                        (76,658
                        )
                        
                        
                        (48,840
                        )
                        
                        
                        (139,715
                        )
                        
                        
                        (552,204
                        )
                        
                        
                        (216,373
                        )Net
      (Loss) Income
                        
                        $
                        (663,423
                        )
                        
                        $
                        58,857
                        
                        
                        $
                        (57,016
                        )
                        
                        $
                        (139,530
                        )
                        
                        $
                        (720,439
                        )
                        
                        $
                        (80,673
                        )Segment
      Assets
                        
                        $
                        16,663,691
                        
                        
                        $
                        17,858,588
                        
                        
                        $
                        300,094
                        
                        
                        $
                        7,395,659
                        
                        
                        $
                        16,963,785
                        
                        
                        $
                        25,254,247
 
 
  - 22
-
  The
following table summarizes the operating results for the nine months ended March
31, 2009 and 2008 by segment:
 
 
 Packaging
                    
                    
                    Corporate
      Items
                    
                    
                    ConsolidatedFor
      the nine months ended March 31,
                    
                    
                    For
      the nine months ended March 31,
                    
                    
                    For
      the nine months ended March 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    $
                    4,192,838
                    
                    
                    $
                    4,543,867
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,192,838
                    
                    
                    $
                    4,543,867Cost
      of Revenue
                    
                    
                    3,723,403
                    
                    
                    
                    3,761,629
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,723,403
                    
                    
                    
                    3,761,629Gross
      Profit
                    
                    
                    469,435
                    
                    
                    
                    782,238
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    469,435
                    
                    
                    
                    782,238Total
      Operating Expenses
                    
                    
                    875,792
                    
                    
                    
                    707,037
                    
                    
                    
                    258,840
                    
                    
                    
                    140,000
                    
                    
                    
                    1,134,632
                    
                    
                    
                    847,037Total
      Income from Operations
                    
                    
                    (406,357
                    )
                    
                    
                    75,201
                    
                    
                    
                    (258,840
                    )
                    
                    
                    (140,000
                    )
                    
                    
                    (665,197
                    )
                    
                    
                    (64,799
                    )Net
      (loss) income
                    
                    $
                    (741,874
                    )
                    
                    $
                    (1,293
                    )
                    
                    $
                    (267,396
                    )
                    
                    $
                    (140,315
                    )
                    
                    $
                    (1,009,270
                    )
                    
                    $
                    (141,608
                    )Segment
      Assets
                    
                    $
                    16,663,691
                    
                    
                    $
                    17,858,588
                    
                    
                    $
                    300,094
                    
                    
                    $
                    7,395,659
                    
                    
                    $
                    16,963,785
                    
                    
                    $
                    25,254,247
 
 
  - 23
-
 REVENUES
 
 During
the three months ended March 31, 2009, our consolidated net revenues were
$1,347,775 as compared to $1,779,312 for the three months ending March 31, 2008,
a $431,537 decrease, or approximately 24.3%.
 
 During
the nine months ended March 31, 2009, our consolidated net revenues were
$4,192,838 as compared to $4,543,867 for the nine months ending March 31, 2008,
a $351,029 decrease, or approximately 7.7%.
 
 The
decline in our net revenues was mainly due to the economic slowdown and lower
worldwide demand for packaging products.  We are unable to predict
when conditions will improve, and if conditions do improve we do not expect our
business will improve until our customers have access to credit.
 
 COST OF
SALES AND GROSS PROFIT
 
 Cost of
sales as a percentage of net revenues increased between periods, from 82.4% for
the three months ended March 31, 2008 to 107.3% for the three months ended March
31, 2009.  This increase in cost of sales as a percentage of net
revenues resulted in our gross profit decrease from $312,653 to a gross
operating loss of $97,822 for the three months ended March 31, 2008 and 2009,
respectively.
 
 Cost of
sales as a percentage of net revenues increased between periods, from 82.8% for
the nine months ended March 31, 2008 to 88.8% for the nine months ended March
31, 2009.
 
 The
decline in our gross profits were mainly due to fixed overhead costs included in
our total cost of sales, therefore our decrease in sales volume had a negative
impact on our gross profit margins for the three and nine months ended March 31,
2009.
 
 TOTAL
OPERATING EXPENSES
 
 Total
operating expenses decreased $74,644, or 14.1%, from $529,026 for the three
months ended March 31, 2008 to $454,382 for the three months ended March 31,
2009.  Operating expense as a percentage of net revenues increased
from 29.73% to 33.7% for the three months ended March 31, 2008 and 2009,
respectively.
 
 Total
operating expenses increased $287,595, or 34.0%, from $847,037 for the nine
months ended March 31, 2008 to $1,134,632 for the nine months ended March 31,
2009.  Operating expense as a percentage of net revenues increased
from 29.7% to 33.7% for the three months ended March 31, 2008 and 2009,
respectively. .
 
 Selling
expenses increased $17,637, or 52%, from $33,782 for the three months ended
March 31, 2008 to $51,419 for the three months ended March 31, 2009. Selling
expenses as a percentage of net revenues increased from 1.9% to 3.8% for the
three months ended March 31, 2008 and 2009, respectively.
 
 General
and administrative expenses increased $10, 219 or 2.9% from $355,244 for
the three months ended March 31, 2008 to $365,463 for the three months ended
March 31, 2009. General and administrative expenses as a percentage of net
revenues increased from 20.0% to 27.1% for the three months ended March 31, 2008
and 2009, respectively.
 
 TOTAL
OTHER INCOME (EXPENSE)
 
 We
reported total other expense of $163,671 for the three months ended March 31,
2009, representing a increase of $310,480 from total other income of $146,809
for the three months ended March 31, 2008.
 
 Also, we
reported total other expense of $327,223 for the nine months ended March 31,
2009, representing a increase of $296,881 from total other expense of $30,342
for the nine months ended March 31, 2008.
 
 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
March 31, 2009.  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.
 
 TOTAL
INCOME (LOSS) FROM DISCOUNTINUNED OPERATION
 
 We
reported a loss of $3.1 million and $2.8 million from discontinued operations
for the three and nine months ended March 31, 2009. We recognized a loss on the
disposition of our discontinued operations of $2,385,004 for the three and nine
months ended March 31, 2009.
 - 24
-
  For the
three and nine months ended March, 2009 we reported a net loss of
$3,783,432 and $3,785,254, respectively, compared to net income of $237,994
and $2,197,404 for the three and nine months ended March 31, 2008.
 
 The
decrease in our net income between the periods is mainly due to the decline in
net revenues caused by the global economic crisis, increased interest expense,
and the loss related to our discontinued operations of $3,062,993 during the
three months ended March 31, 2009.
 
 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 March 31, 2009 our working capital was approximately $1.8 million as compared
to approximately $5.1 million at June 30, 2008.
 
 As of
March 31, 2009, we had $96,217 in cash and an accumulated deficit since
inception of $5,586,098.  We had no restricted cash balance at March
31, 2009.
 
 Cash
used in operating activities for the nine months ended March 31, 2009
totaled $235,774 and was mainly comprised of our loss from operations of
$1.0 million, advances on purchases of $1.4 million, and a decrease in other
payables of $195,164, these were offset by a decrease in accounts receivables of
$1.3 million, a decrease in inventories of $276,645, and non cash charges of
$701,399 which included depreciation and amortization expense of $262,800, stock
based compensation of $330,000 and allowances for doubtful accounts of
$108,599.
 
 For the
nine months ended March 31, 2008 cash used in operating activities was
$1,398,495 and was mainly comprised of an increase in inventories of $1.3
million, a decrease on advances on purchases of $1.1 million, and a decrease in
accounts payables of $605,367. These were partially offset by a decrease in
accounts receivable of $824,725 and a decrease in notes receivable of $419,511
and the non cash charges adjustments of depreciation and amortization of
$420,165.
 
 During
the nine months ended March 31, 2009 cash used in investing activities was
$164,426 related to capital expenditures, as compared to cash used in investing
activities of $644,484 related to capital expenditures during the nine months
ended March 31, 2008.
 
 Cash
provided by financing activities of $356,230 during the nine months
ended March 31, 2009 was mainly comprised of proceeds from notes payables,
exercise of warrants, and a reduction in restricted cash. Cash provided by
financing activities during the nine months ended March 31, 2008 was
$1,192,849 related to proceeds of notes payable.
 
 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.  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.
  Our Pulp
and Paper segment was discontinued as of March 31, 2009 and was sold effective
as of that date. Dragon Nevada acquired a 51% interest on June 29,
2007 and acquired the remaining 49% interest in Wellton on October 1,
2007.  We entered into an agreement with York Smooth Limited, the
former shareholder of Wellton, pursuant to which we transferred all of our
rights, title and interest in Wellton to York Smooth, Limited in exchange for
6,247,115 shares of our common stock. As a result 6,247,115 shares of the
Company’s common stock held by York Smooth, Limited will be cancelled.  As
of March 31, 2009, we recorded a loss on sales of discontinued operations of
$2,385,004.  We recorded a loss of from discontinued operations for
the three and nine months ended March 31, 2009 of $672,989 and $390,980,
respectively.
  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:
  - 25
-
  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; our dependence upon one industry and segment of that
industry; 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 People's 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.
 
  - 26
-
  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 May 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. In general there is a lack of accountants in the PRC that meet our
qualifications of being bilingual and well practiced in U.S.
GAAP.  The lack of qualified accountants, coupled with the fact that
the few accountants in the PRC that are bilingual and well practiced in U.S.
GAAP demand a compensation package which far exceeds our financial resources,
have been the principal impediments to our fulfillment of  such
position with an appropriate candidate. During fiscal 2006 we also began
providing additional training to our accounting staff in the application of U.S.
GAAP.   In 2008, we engaged a consulting firm to assist in the
creation, implementation and testing of internal controls, including disclosure
controls and procedures.  In addition to performing test work in the
PRC, the consulting firm trained and assisted our accounting staff as to
appropriate processes and procedures.   However, 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.
 
  - 27
-
  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.
  - 28
-
  PART II -
OTHER INFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS
  None
 
 ITEM
1A                      RISK
FACTORS
 
 In addition to the other information
set forth in this Form 10-Q, you should carefully consider the factors discussed
in Part I, Item 1A, subsection “Risk Factors” of our Annual Report on Form 10-K
for the fiscal year ended June 30, 2008 which could materially affect our
business, financial condition or future results of operations.  The
risks described in our Annual Report on Form 10-K for the fiscal year ended June
30, 2008 are not the only risks that we face. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial may also
materially adversely affect our business, financial condition and future results
of operations.  Other than as set forth below, there have been no
material changes from the risk factors previously disclosed in Item 1A,
subsection “Risk Factors” to Part I of our Annual Report on Form 10-K for the
fiscal year ended June 30, 2008
 
 If
we were to lose the services of any of our executive officers, our business and
operations would be materially adversely affected.
  Our
success is largely dependent on the personal efforts of our executive officers,
specifically David Wu, our Chief Executive Officer, President and Chairman of
the board of directors and Ms. Xiali Gan, our Chief Financial Officer and
director, The loss of the services of either of these members of management
would have a material adverse effect on our business and
prospects.  In addition, in order for us to undertake our operations
as contemplated, it will be necessary for us to locate and hire experienced
personnel.  Our failure to attract and retain such experienced
personnel on acceptable terms will have a material adverse impact on our ability
to grow our business.
  If
we were to lose the services of key persons responsible for the management,
sales, marketing and operations efforts of our subsidiaries, our business and
operations would be materially adversely affected.
  Our
success is, to a certain extent, attributable to the management, sales and
marketing, and operational expertise of key personnel at our subsidiaries who
perform key functions in the operation of our business.  Specifically
we have identified Mr. Zhongming Yang, the vice general manager of our Yongxin
subsidiary and Mr. Feng Yang, vice general manager of our Jin Kui subsidiary, as
key employees.  Mr. David Wu, our President, CEO and Chairman, is the
general manager of our Dragon Packaging subsidiary, our Ningbo Dragon
subsidiary, and our Yonglongxin subsidiary.  There can be no assurance
that we will be able to retain these officers as our employees.  The
loss of these officers could have a material adverse effect upon our business,
financial condition, and results of operations and the results of operations at
these subsidiaries could be adversely impacted.
  We are materially reliant on revenues from our operations in the
PRC. An economic downturn in the PRC would likely affect us and may cause you to
lose your entire investment.
  While our goal is to both expand our operations within the PRC as well as to
countries outside the PRC, in the foreseeable future our growth and success will
remain tied to our existing operations in the PRC. We derive substantially
all of our revenue from operations in China. As a result, economic, political
and legal developments in China have a significant effect on our financial
condition and results of operations, as well as our future
prospects.  In recent years China has been a fast growing
economy.  However, such growth may not be sustained in the
future.  Moreover, slowdown in other economies may cause a slowdown in
the Chinese economy.  Our financial results could be materially and
adversely affected by an economic downturn in China.
   - 29
-
  Demand
for our products is substantially dependent upon the demand for the industry to
which we supply products.
  Demand
for packaging materials is directly related to the demand for the products we
package. For example, China and other global markets have witnessed an increase
in demand for pharmaceutical products; therefore, demand for pharmaceutical
packaging has similarly increased. Accordingly, we have shifted our focus
towards the pharmaceutical industry and away from the tobacco
industry.  While we believe that the demand for pharmaceutical
packaging will continue as  pharmaceutical products become more
advanced and  require increased protection in the form of packaging,
there can be no assurance that such demand will continue or if that it does
continue that customers continue to purchase our products. If such demand for
pharmaceutical products should decrease, we expect demand for our product to
decrease which may require us to once again shift our focus in order to maintain
our revenue levels. There can be no assurance that we will be able to shift our
focus and even if we are able to shift our focus that we will be able to do so
successfully.
  Our
business is substantially dependent upon the paper industry in
general.
  All of our revenue is derived from the manufacture and supply of paper
products.  If there were to be a shortage of pulp or an oversupply of
paper products our business would suffer.
  We
have discontinued the operations of Wellton, and are now solely dependent upon
one segment of the paper industry.
  We
are no longer as diversified as we were in the past and currently evaluate our
business and our products in one segment, the packaging
segment.  During the fiscal year ended June 30, 2008 and
until  March 31, 2009, we evaluated our business and products in two
segments: pulp and paper and packaging.  During the fiscal year ended
June 30, 2008, we derived 87% of our revenue from the operations of
Wellton.  As of March 31, 2009, due to the economic crisis, we
discontinued the operations of Wellton and transferred all of our right, title
and interest in Wellton to its previous owner.  Therefore our business
is now entirely dependent upon the packaging segment.   If demand for
our packaging products should suffer, our financial results would be
harmed.
   ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 On
January 13, 2009 we issued 2,554,750 shares of common stock to Capital One
Resource Co., Ltd, a wholly owned subsidiary of China Direct Industries, Inc. as
payment of interest on an outstanding laon in the amount of
$1,021,272.
 
 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
 did you
issue any other securities this quarter?.
  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
 
  - 30
-
  
 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
 
 
  - 31
-
  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.May
      19, 2009
              By:
              /s/ David
      WuDavid
      Wu,Chief
      Executive Officer(Principal
      Executive Officer)
 
 May
      19, 2009
              By:
              /s/ Xiali
      GanXiali
      Gan,Chief
      Financial Officer(Principal
      Financial Officer)