United States


Securities and Exchange
Commission


Washington, D.C.
20549








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




For the
quarter ended September 30, 2006




Commission
File Number: 0-23485




DRAGON INTERNATIONAL GROUP
CORP.


(Exact
name of registrant as specified in its charter)




Nevada
            98-0177646(State
      or other jurisdiction ofincorporation or
    organization)
            (I.R.S.
      EmployerIdentification No.)




Bldg 14


Suite A09, International Trading
Center,


29 Dongdu Road


Ningbo, China
315000


(Address
of principal executive offices)




(86) 574-56169308


(Registrant's
telephone number, including area code)




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




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




State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 74,627,643 shares at November 13,
2006




Transitional
Small Business Disclosure Format (Check one): Yes  No 






·
                      In July 2005, the Company entered into a consulting
      agreement with China Direct Investments, Inc. to provide business
      development and management service.  In connection with this
      agreement, the Company issued 400,000 shares of common stock with a fair
      value on the date of grant of $.26 per share totaling
      $104,000.  Initially, the Company had recorded deferred
      consulting expense and amortized the cost over the one year term of the
      agreement.  Due to the absence of vesting and forfeiture
      provisions, as provided in EITF 96-18, the Company determined that the
      measurement date of the transaction was triggered and, absent a
      sufficiently large disincentive for non-performance, which was not
      provided in the agreement, the financial statements have been restated to
      expense the entire fair value of $104,000 as of the effective date of the
      agreement.
 
 ·
                  For the fiscal year ended June 30, 2006 and quarter
      ended September 30, 2006, the Company erroneously filed financial
      statements presenting in their statement of cash flows the decrease of
      restricted cash as an investing activity.  The Company is now
      presenting this as a financing activity, in accordance with SFAS 95
      “Statement of Cash Flows”.  This error did not affect the
      balance sheet as of September 30, 2006, nor the statements of operations
      for the three month periods ended September 30, 2006 or September 30,
      2005.  With these corrections, the statements of cash flows for
      the three month periods ended September 30, 2006 and September 30, 2005
      reflect an increase in cash flows from financing activities of $13,503 and
      $236,232, respectively.
   ·
                  For the fiscal year ended June 30, 2006, the Company
      erroneously did not value the reduction in exercise price of existing
      warrants (from $0.30 to $0.15 for the 3,704,800 July
      2005 Warrants and the reduction in exercise price from $0.40 to $0.15
      for the 1,787,500 March 2005 Warrants) associated with an induced
      conversion offer.  The value of the reduction in exercise price
      was 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 year ended June 30,
      2006.  The Company had recorded the valuation of the reduction
      in exercise price as an increase in additional paid-in capital.
   ·
                  For the fiscal year ended June 30, 2006, the Company
      erroneously had deferred, over a three year period, $540,000 in consulting
      expense related to the issuance of 6,000,000 shares of its common stock to
      China Direct, Inc. 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, also to China Direct, Inc.  In
      addition, in February 2006, the Company issued warrants to purchase
      500,000 shares of common stock, exercisable for five years at $.15 per
      share, to Skybanc, Inc. for 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 123.  These corrections
      resulted in an increase in consulting expense for year ended June 30, 2006
      and a reduction in consulting expense for subsequent periods and deferred
      compensation on our balance sheet for a similar amount for the periods
      affected.




DRAGON
INTERNATIONAL GROUP CORP.


FORM
10-QSB/A


QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2006




INDEX




PagePART
      I - FINANCIAL INFORMATIONItem
      1 - Financial StatementsConsolidated
      Balance Sheet September 30, 2006 (Unaudited)
              3Consolidated
      Statements of Operations (Unaudited) For the Three Months Ended September
      30, 2006 and 2005
              4Consolidated
      Statements of Cash Flows (Unaudited) For the Three Months Ended September
      30, 2006 and 2005
              5Notes
      to Consolidated Financial Statements
              6-15Item
      2 - Management's Discussion and Analysis of Financial Condition and
      Results of Operations
              16-28Item
      3 - Controls and Procedures
              29-30PART
      II - OTHER INFORMATIONItem
      1 - Legal Proceedings
              31Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
              31Item
      3 - Default upon Senior Securities
              31Item
      4 - Submission of Matters to a Vote of Security Holders
              31Item
      5 - Other Information
              31Item
      6 - Exhibits
              31Signatures
              32






-2-


DRAGON
      INTERNATIONAL GROUP CORP. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSeptember
      30, 2006(Unaudited)





ASSETSRestatedCURRENT ASSETS:Cash
            
            $
            262,462Accounts receivable (net of allowance for doubtful accounts
      of $335,499)
            
            
            4,762,590Inventories
            
            
            2,199,301Advances on purchases
            
            
            497,657Other receivables
            
            
            381,632Due from related Party
            
            
            9,474Prepaid expenses and other
            
            
            2,707,711Total Current Assets
            
            
            10,820,827CASH - RESTRICTED
            
            
            252,627PROPERTY AND EQUIPMENT - Net
            
            
            2,164,628LAND USE RIGHTS-Net
            
            
            2,539,296INTANGIBLE ASSETS-Net
            
            
            373,492OHER ASSETS
            
            
            65,972Total Assets
            
            $
            16,216,842LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Notes payable
            
            $
            2,794,537Accounts payable
            
            
            4,325,398Accrued expenses
            
            
            1,948,211Advance from customers
            
            
            47,720Liability in connection with acquisition
            
            
            1,141,476Total Current Liabilities
            
            
            10,257,342STOCKHOLDERS' 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;64,532,069 shares issued and outstanding)
            
            
            64,532Common stock issuable (890,000 shares)
            
            
            890Additional paid-in capital
            
            
            7,335,468Accumulated deficit
            
            
            (1,697,396
            )Other comprehensive income
            
            
            256,006Total Stockholders' Equity
            
            
            5,959,500Total Liabilities and Stockholders' Equity
            
            $
            16,216,842





See
      notes to unaudited consolidated financial
  statements




-3-




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





For the Three Months EndedSeptember 30,2006
            
            
            2005Restated
            
            
            RestatedNET REVENUES
            
            $
            4,832,984
            
            
            $
            4,622,110COST OF SALES
            
            
            4,460,470
            
            
            
            4,515,664GROSS PROFIT
            
            
            372,514
            
            
            
            106,446OPERATING EXPENSES:Selling expenses
            
            
            114,833
            
            
            
            48,835General and administrative
            
            
            313,360
            
            
            
            337,125Total Operating Expenses
            
            
            428,193
            
            
            
            385,960LOSS FROM OPERATIONS
            
            
            (55,679
            )
            
            
            (279,514
            )OTHER INCOME (EXPENSE):Other income
            
            
            93,663
            
            
            
            185,254Debt issuance costs
            
            
            -
            
            
            
            (55,295
            )Interest expense, net
            
            
            (33,432
            )
            
            
            (377,136
            )Total Other Income (Expense)
            
            
            60,231
            
            
            
            (247,177
            )NET INCOME (LOSS) BEFORE MINORITY INTEREST
            
            
            4,552
            
            
            
            (526,691
            )MINORITY INTEREST IN INCOME OF SUBSIDIARY
            
            
            -
            
            
            
            2,334NET INCOME (LOSS)
            
            
            4,552
            
            
            
            (524,357
            )OTHER COMPREHENSIVE INCOMEUnrealized foreign currency translation
            
            
            83,054
            
            
            
            98,174COMPREHENSIVE INCOME (LOSS)
            
            $
            87,606
            
            
            $
            (426,183
            )NET INCOME (LOSS) PER COMMON SHAREBasic
            
            $
            (0.00
            )
            
            $
            (0.01
            )Diluted
            
            $
            (0.00
            )
            
            $
            (0.01
            )Weighted Common Shares Outstanding - Basic
            
            
            64,532,069
            
            
            
            39,296,104Weighted Common Shares Outstanding - Diluted
            
            
            64,532,069
            
            
            
            39,296,104





See
      notes to unaudited consolidated financial
  statements




-4-




DRAGON
      INTERNATIONAL GROUP CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)





For the Three Months Ended September 30,2006
            
            
            2005Restated
            
            
            RestatedCASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
            
            $
            4,552
            
            
            $
            (524,357
            )Adjustments to reconcile net loss to net cash provided by
      (used in)operating activities:Depreciation and amortization
            
            
            94,884
            
            
            
            32,277Stock-based compensation
            
            
            -
            
            
            
            104,000Amortization of discount on debentures payable
            
            
            -
            
            
            
            324,460Amortization of debt issuance costs
            
            
            -
            
            
            
            55,295Allowance for doubtful accounts
            
            
            152,412
            
            
            
            (32,134
            )Minority interest
            
            
            -
            
            
            
            (2,334
            )Changes in assets and liabilities:Accounts receivable
            
            
            23,983
            
            
            
            694,460Inventories
            
            
            1,094,545
            
            
            
            (133,120
            )Prepaid and other current assets
            
            
            (2,626,547
            )
            
            
            (3,730
            )Other receivables
            
            
            3,284
            
            
            
            (408,687
            )Advances to employees
            
            
            -
            
            
            
            -Advances on purchases
            
            
            308,005
            
            
            
            254,729Other assets
            
            
            12,787
            
            
            
            4,154Accounts payable
            
            
            923,959
            
            
            
            (352,069
            )Accrued expenses
            
            
            (93,902
            )
            
            
            (455,755
            )Advances from customers
            
            
            (20,974
            )
            
            
            (22,945
            )NET CASH USED IN OPERATING ACTIVITIES
            
            
            (123,012
            )
            
            
            (465,756
            )CASH FLOWS FROM INVESTING ACTIVITIES:Due to related parties
            
            
            (5,976
            )
            
            
            -Cash in subsidiaries on date of acquisition
            
            
            -
            
            
            
            33,654Capital expenditures
            
            
            (165,061
            )
            
            
            (163,819
            )NET CASH FLOWS USED IN INVESTING ACTIVITIES
            
            
            (171,037
            )
            
            
            (130,165
            )CASH FLOWS FROM FINANCING ACTIVITIES:


Proceeds from loans payable
            
            
            67,000
            
            
            
            -Repayment of loans payable
            
            
            (63,157
            )
            
            
            (376,097
            )Proceeds from debentures payable
            
            
            -
            
            
            
            503,500Decrease in restricted cash
            
            
            9,660
            
            
            
            157,179Placement fees paid
            
            
            -
            
            
            
            (48,350
            )NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
            
            
            13,503
            
            
            
            236,232EFFECT OF EXCHANGE RATE ON CASH
            
            
            76,736
            
            
            
            13,316NET DECREASE IN CASH
            
            
            (203,810
            )
            
            
            (346,373
            )CASH - beginning of year
            
            
            466,272
            
            
            
            902,559CASH - of the end of period
            
            $
            262,462
            
            
            $
            556,186SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for:Interest
            
            $
            33,432
            
            
            $
            95,625Income Taxes
            
            $
            1,651
            
            
            $
            54,766Non-cash investing and financing activitiesIssuance of common stock for future services
            
            $
            -
            
            
            $
            104,000Deferred discount and beneficial conversion on debentures
      payable
            
            $
            -
            
            
            $
            420,845Acquisition details:Fair value of assets acquired
            
            $
            -
            
            
            $
            1,142,348Common stock issued in connection with acquisition
            
            $
            -
            
            
            $
            480,000Liabilities assumed
            
            $
            -
            
            
            $
            1,148,468





See
      notes to unaudited consolidated financial
  statements.




-5-




DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




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




The
Company




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




On or
about August 13, 2004, the Dragon Nevada entered into an Agreement and Plan of
Reorganization (the “Merger”), subsequently amended on September 30, 2004 and
effective October 4, 2004. Pursuant to the Merger, Dragon Nevada issued
24,625,000 shares of its common stock for the acquisition of all of the
outstanding capital stock of Dragon International Group Corp., a Florida
corporation ("Dragon Florida"). For financial accounting purposes, the Merger
has been treated as a recapitalization of Dragon Nevada with the former
shareholders of the Dragon Nevada retaining 1,280,234 shares of common stock, or
approximately 5%. Furthermore, Dragon Nevada’s prior management resigned their
respective positions and was replaced by management of Dragon
Florida.




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




Additionally,
as part of the Merger, Dragon Nevada amended its Articles of Incorporation,
whereby Dragon Nevada changed its name to “Dragon International Group Corp.,” as
well as re-established its capitalization to the authorized capital structure
immediately prior to the Merger, which consisted at the date of merger of
25,000,000 shares of Preferred Stock, par value $0.001 per share, and 50,000,000
Common Shares, par value $.001 per share. On May 31, 2005, Dragon Nevada
increased its authorized common shares to 200,000,000.




Effective
June 30, 2004, Dragon Florida entered into a Stock Purchase Agreement to acquire
70% of Ningbo Dragon International Trade Company, Limited (“Ningbo Dragon”),
formerly known as Ningbo Anxin International Trade Company, Limited (“Anxin”).
On December 31, 2004, Dragon Florida acquired the remaining 30% of Ningbo
Dragon. In connection with the acquisition of the remaining 30% of Ningbo
Dragon, the Company issued an additional 4,000,000 shares of common stock. For
financial accounting purposes, the issuance of these shares was treated as part
of the recapitalization of Dragon Nevada and valued at par value. Ningbo Dragon,
established in 1997 and incorporated in the Peoples Republic of China, is
located in the city of Ningbo, located in the Zhejiang Province in the PRC,
approximately 200 miles south of Shanghai. The acquisition of Ningbo Dragon by
Ningbo Florida has been accounted for as a reverse acquisition under the
purchase method for business combinations. Accordingly, the combination of the
two companies is recorded as a recapitalization of Dragon Florida, and
ultimately Dragon Nevada, pursuant to which Ningbo Dragon is treated as the
continuing entity. Ningbo Dragon changed its name to “Ningbo Dragon
International Trading Co., Ltd”, effective July 7, 2005. Ningbo Dragon is
involved in the pulp and paper industry, operating as a manufacturer and
distributor of paper and integrated packaging paper products. Ningbo Dragon,
through a subsidiary, holds an ISO9000 certificate and national license to
import and export products.




-6-




DRAGON
INTERNATIONAL GROUP CORP.


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




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




The
Company (Continued)




In
addition to its own operations, Ningbo Dragon operates four subsidiaries,
including: (i) Ningbo City Jiangdong Yonglongxin Special Paper Company, Limited
(“Yonglongxin”), that holds an ISO9000 certificate and operates a civil welfare
manufacturing facility in Fuming County of the Zhang’ai Village in Ningbo,
China; Yonglongxin operates the Xianyang Naite Research & Development Center
(“R&D Center”), created to develop, design and improve production methods in
the specialty packaging industry in China. (ii) a 60% interest in Hangzhou
Yongxin Paper Company, Limited (“Yongxin”) manufactures, sells, and distributes
cigarette packing materials, (iii) Ningbo Dragon Packaging Technology Company,
Limited (“Dragon Packaging”), formerly known as Ningbo XinYi Paper Product
Industrial Company, Limited ("XinYi") after having changing their name on August
1, 2006, operates a pulp and manufacturing facility and (iv) Shanghai JinKui
Packaging Material Company, Limited (“JinKui”), a manufacturer of specialized
packaging products for the pharmaceutical industry. Ningbo Dragon has a
distribution network covering east and central China.




Henceforth
Dragon Nevada, Dragon Florida, Dragon Ningbo or any of its subsidiaries are to
be referred to as the "Company", unless reference is made to the respective
company for reference to events surrounding that company.




The
accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction with
the financial statements for the year ended June 30, 2006 and notes thereto
contained on Form 10-KSB of the Company as filed with the Securities and
Exchange Commission. The results of operations for the three months ended
September 30, 2006 are not necessarily indicative of the results for the full
fiscal year ending June 30, 2007.




Certain
reclassifications have been made to the prior year to conform to current year
presentation.




·
                    In July 2005, the Company entered into a consulting
      agreement with China Direct Investments, Inc. to provide business
      development and management service.  In connection with this
      agreement, the Company issued 400,000 shares of common stock with a fair
      value on the date of grant of $.26 per share totaling
      $104,000.  Initially, the Company had recorded deferred
      consulting expense and amortized the cost over the one year term of the
      agreement.  Due to the absence of vesting and forfeiture
      provisions, as provided in EITF 96-18, the Company determined that the
      measurement date of the transaction was triggered and, absent a
      sufficiently large disincentive for non-performance, which was not
      provided in the agreement, the financial statements have been restated to
      expense the entire fair value of $104,000 as of the effective date of the
      agreement.
 
 ·
                For the fiscal year ended June 30, 2006 and quarter
      ended September 30, 2006, the Company erroneously filed financial
      statements presenting in their statement of cash flows the decrease of
      restricted cash as an investing activity.  The Company is now
      presenting this as a financing activity, in accordance with SFAS 95
      “Statement of Cash Flows”.  This error did not affect the
      balance sheet as of September 30, 2006, nor the statements of operations
      for the three month periods ended September 30, 2006 or September 30,
      2005.  With these corrections, the statements of cash flows for
      the three month periods ended September 30, 2006 and September 30, 2005
      reflect an increase in cash flows from financing activities of $13,503 and
      $236,232, respectively.
   ·
                For the fiscal year ended June 30, 2006, the Company
      erroneously did not value the reduction in exercise price of existing
      warrants (from $0.30 to $0.15 for the 3,704,800 July
      2005 Warrants and the reduction in exercise price from $0.40 to $0.15
      for the 1,787,500 March 2005 Warrants) associated with an induced
      conversion offer.  The value of the reduction in exercise price
      was 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 year ended June 30,
      2006.  The Company had recorded the valuation of the reduction
      in exercise price as an increase in additional paid-in capital.
   ·
                For the fiscal year ended June 30, 2006, the Company
      erroneously had deferred, over a three year period, $540,000 in consulting
      expense related to the issuance of 6,000,000 shares of its common stock to
      China Direct, Inc. 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, also to China Direct, Inc.  In
      addition, in February 2006, the Company issued warrants to purchase
      500,000 shares of common stock, exercisable for five years at $.15 per
      share, to Skybanc, Inc. for 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 123.  These corrections
      resulted in an increase in consulting expense for year ended June 30, 2006
      and a reduction in consulting expense for subsequent periods and deferred
      compensation on our balance sheet for a similar amount for the periods
      affected.
 
  
 As Filed
              
              
              Adjustment to
                Restate
              
              
              RestatedDeferred Compensation
              
              $
              768,063
              
              (a)
              $
              (768,063
              )
              
              $
              -Additional paid-in capital
              
              
              6,888,230
              
              (b)
              
              447,238
              
              
              
              7,335,468Accumulated deficit
              
              
              (482,095
              )
              (a)(b)
              
              (1,215,301
              )
              
              
              (1,697,396
              )
 
  
 As Filed
              
              
              Adjustment to
                Restate
              
              
              RestatedStock-based consulting expenses
              
              $
              86,878
              
              (a)
              $
              86,878
              
              
              $
              -Net loss per shareBasic
              
              
              (0.00
              )
              
              
              (-
              )
              
              
              (0.00
              )Diluted
              
              
              (0.00
              )
              
              
              (-
              )
              
              
              (0.00
              )
   (a)
              To expense the entire fair value of common stock and
      warrants issued to China Direct Investment, Inc. in January 2006 and
      Skybanc, Inc. in February 2006, previously accounted for as deferred
      compensation and amortized as stock based consulting expenses.
   (b)
              To recognize the fair value of the reduction in
      exercise price of 3,704,800 common stock purchase warrants (July 2005
      warrants) from $.30 to $.15 and 1,787,500 common stock purchase warrants
      (March 2005 warrants) from $.40 to $.15 in January 2006.




Estimates




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






-7-




DRAGON
INTERNATIONAL GROUP CORP.


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




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




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 September 30, 2006, the Company
maintains restricted cash of $252,627 in a bank account that is collateral for
certain letters of credit and is presented as restricted cash on the
accompanying balance sheet.




Accounts
receivable




Accounts
receivable are reported at net realizable value. The Company has established an
allowance for doubtful accounts based upon factors pertaining to the credit risk
of specific customers, historical trends, and other information. Delinquent
accounts are written-off when it is determined that the amounts are
uncollectible. At September 30, 2006, the allowance for doubtful accounts was
$335,499.




Inventories




Inventories,
consisting of raw materials and finished goods related to the Company’s products
are stated at the lower of cost or market utilizing the weighted average
method.




Advances
on purchases




Advances
on purchases at September 30, 2006 of $497,657 consist of a prepayment of the
Company to merchandise that had not yet shipped to the Company. The Company will
recognize the payment as expenses as the Company take delivery of
goods.




Other
Receivable




Other
receivable at September 30, 2006 amounted to $381,632. Ningbo Dragon has
consolidated the operations of two divisions in an effort to reduce fixed
operational expenses. Ningbo Dragon operates the underlying businesses of each
entity from the headquarters located in Ningbo. The two consolidated divisions
are Shanghai An’ Hong Paper Company Limited (“An’ Hong”) and Ningbo Long’ An
Industry and Trade Company Limited (“Long’ An”). In connection with this
consolidation, the Company has a receivable of approximately $171,255 from a
third party which is included in other receivables on the accompanying
consolidated balance sheet.




Intangible Assets / Intellectual
Property




The
Company amortizes the intangible assets and intellectual property acquired in
connection with their various acquisitions. The Company amortizes these assets
based on expected useful lives of these assets, based on Company management
projecting forward future revenue and expense streams of these acquired
entities. For the three months ended September 30, 2006 and 2005, amortization
expenses for intangible assets amounted to $26,015 and $0,
respectively.




-8-




DRAGON
INTERNATIONAL GROUP CORP.


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




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




Long - Lived
Assets




The
Company reviews its long-lived assets for 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 cost 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 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 has adopted FAS No.123R in the first quarter of fiscal year
2006.




Net
income (loss) per share




Basic
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. At September 30,
2005, there were warrants to purchase 6,142,300 shares of common stock,
1,658,400 shares upon conversion of convertible notes payable, and approximately
9,809,000 shares upon conversion of outstanding convertible debentures and
related interest, which could potentially dilute future earnings per share. At
September 30, 2006, there were warrants to purchase 16,834,600 shares of common
stock, which could potentially dilute future earnings per share.




Revenue
recognition




The
Company follows the guidance of the Securities and Exchange Commission’s Staff
Accounting Bulletin 104 for revenue recognition. In general, the Company records
revenue when persuasive evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the sales price to the customer is
fixed or determinable, and collectibility is reasonably assured. The following
policies reflect specific criteria for the various revenue streams of the
Company:




The
Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.






-9-




DRAGON
INTERNATIONAL GROUP CORP.


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




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




Foreign
currency translation




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




For
foreign operations with the local currency as the functional currency, assets
and liabilities are translated from the local currencies into U.S. dollars at
the exchange rate prevailing at the balance sheet date. Revenues and expenses
are translated at weighted average exchange rates for the period to approximate
translation at the exchange rates prevailing at the dates those elements are
recognized in the financial statements. Translation adjustments resulting from
the process of translating the local currency financial statements into U.S.
dollars are included in determining comprehensive loss. As of September 30,
2006, the exchange rate for the Chinese Renminbi (RMB) was $1 USD for 7.9168
RMB.




The
functional and reporting currency is the U.S. dollar. The functional currency of
the Company's Chinese subsidiary, Ningbo Dragon, is the local currency, the
Chinese dollar or Renminbi (“RMB”). The financial statements of the subsidiaries
are translated into United States dollars using year-end rates of exchange for
assets and liabilities, and average rates of exchange for the period for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations
and were not material during the periods presented. The cumulative translation
adjustment and effect of exchange rate changes on cash at September 30, 2006 was
$76,736.




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 September 30, 2006, the Company had approximately $262,000
in China bank deposits, which may not be insured. The Company has not
experienced any losses in such accounts through September 30, 2006. The Company
also performs ongoing credit evaluations of its customers to help further reduce
credit risk.




NOTE 2 -
INVENTORIES




At
September 30, 2006, inventories consisted of the following:




Raw
      materials
            
            $
            527,700Finished
      goods
            
            
            1,671,601$
            2,199,301




-10-




DRAGON
INTERNATIONAL GROUP CORP.


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




NOTE 3 –
LAND USE RIGHTS




In
connection with the acquisition of Ningbo Dragon Packaging Technology Company,
Limited (“Dragon Packaging”), the Company acquired land use rights valued as of
September 30, 2006 at $2,608,676 (Local currency of RMB 20,652,366) through an
agreement with the Chinese government, whereby the Company has rights to use
certain land until March 4, 2053. The Company amortized this land use right over
the contract period beginning July 1, 2005. For the three months ended September
30, 2006, amortization expenses amounted to $14,498.




Land
      Use Rights
            Estimated
      Life
              47
      year
            
            $
            2,608,676Less:
      Accumulated Amortization
            
            
            
            69,380$
            2,539,296




NOTE 4 -
PROPERTY AND EQUIPMENT




At
September 30, 2006, property and equipment consisted of the
following:




Estimated
      LifeAuto
      and truck
              10
      Years
              
              $
              167,984Manufacturing
      equipment
              5
      Years
              
              
              1,554,238Building
      and improvements
              20
      Years
              
              
              944,438Office
      equipment
              5
      Years
              
              
              44,1952,710,855Less:
      Accumulated depreciation
              
              
              
              (546,227
              )$
              2,164,628




For the
years ended September 30, 2006 and 2005, depreciation expense for property and
equipment amounted to $54,371 and $32,277, respectively.




NOTE 5–
RELATED PARTY TRANSACTIONS




Due from
related parties




The
consolidated financial statements include balances and transactions with related
parties. From time to time, the Company receives advances from or advances funds
to several affiliated entities, owned by an officer of the Company, for working
capital purposes. These advanced are payable on demand and are personally
guaranteed by the officer. At September 30, 2006, the Company had outstanding
balances from these affiliated entities of $9,474.




Due to
related party




A
shareholder/consultant advanced funds to the Company for working capital
purposes. At September 30, 2006, the Company owed $5,000 to this
shareholder/consultant that is included in accrued expenses. The advances are
non-interest bearing, unsecured and are due on demand.




-11-




DRAGON
INTERNATIONAL GROUP CORP.


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




NOTE
6-LOANS PAYABLE




Loans
payable consisted of the following at September 30, 2006:




Notes
      payable to Bank of Agriculture, due on September 15, 2007. Interest only
      payable monthly at a rate of 6.732%. Secured by equipment and personal
      guarantee of officer.
            
            $
            126,314Notes
      payable to Bank of Agriculture, due on September 15, 2007. Interest only
      payable monthly at a rate of 6.732%. Secured by equipment and personal
      guarantee of officer.
            
            
            126,314Notes
      payable to Bank of Agriculture, due on March 15, 2007. Interest only
      payable monthly at a rate of 6.732%. Secured by equipment and personal
      guarantee of officer.
            
            
            606,305Notes
      payable to Bank of Agriculture, due on November 15, 2006. Interest only
      payable monthly at a rate of 5.94%. Secured by equipment and personal
      guarantee of officer.
            
            
            618,936Notes
      payable to Bank of Agriculture, due on December 11, 2006. Interest only
      payable monthly at a rate of 6.264%. Secured by equipment and personal
      guarantee of officer.
            
            
            505,255Bank
      acceptances payable. Non-interest bearing. Secured by equipment and
      personal guarantee of officer.
            
            
            496,413SUNWIN
      International Neutraceuticals, Inc. Non-interest bearing, unsecured and
      are due on demand.
            
            
            67,000HK
      Runji Investment Ltd. Non-interest bearing, unsecured and are due on
      demand.
            
            
            100,000Notes
      Payable to two shareholders, interest only payable annually at a rate of
      8%, $100,000 due on January 10, 2007 and $48,000 due on April 11,
      2007
            
            
            148,000Total
            
            $
            2,794,537




-12-




DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




NOTE 7–
STOCKHOLDERS EQUITY




Stock
Warrants




A summary
of the status of the Company's outstanding stock warrants as of September 30,
2006 and changes during the period then ended is as follows:




WeightedAverageExerciseShares
              
              
              PriceOutstanding
      at July 1, 2006
              
              
              16,834,600
              
              
              $
              0.147Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -Outstanding
      at September 30, 2006
              
              
              16,834,600
              
              
              $
              0.147Warrants
      exercisable at end of period
              
              
              16,834,600
              
              
              $
              0.147Weighted-average
      fair value of warrants granted during the period
              
              
              
              
              
              $
              0.147




The
following information applies to all warrants outstanding at September 30,
2006:




Warrants
      Outstanding
              
              
              Warrants
      ExercisableWeightedAverage
              
              
              Weighted
              
              
              WeightedRemaining
              
              
              Average
              
              
              AverageContractual
              
              
              Exercise
              
              
              ExerciseRange
      of Exercise Prices
              
              
              Shares
              
              
              Life
      (Years)
              
              
              Price
              
              
              Shares
              
              
              Price$0.30
              
              
              
              150,000
              
              
              
              3.78
              
              
              
              $
      0.30
              
              
              
              150,000
              
              
              
              $
      0.30$0.15
              
              
              
              16,184,600
              
              
              
              3.84
              
              
              
              $
      0.15
              
              
              
              16,184,600
              
              
              
              $
      0.15$0.01
              
              
              
              500,000
              
              
              
              3.78
              
              
              
              $
      0.01
              
              
              
              500,000
              
              
              
              $
      0.01






-13-


DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




NOTE 8-
OPERATING RISK




(a)
Country risk




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




(b)
Products risk




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




(c)
Exchange risk




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




(d)
Political risk




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




(e) Key
personnel risk




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




-14-






DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2006




NOTE 8-
OPERATING RISK (Continued)




(f)
Performance of subsidiaries risk




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










-15-




CAUTIONARY
STATEMENT REGARDING FOWARD LOOKING INFORMATION




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




ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS




The
following analysis of our results of operations and financial condition should
be read in conjunction with our financial statements. for the years ended June
30, 2006 and 2005 and notes thereto contained in our report on Form 10-KSB o as
filed with the Securities and Exchange Commission.




Overview




Dragon
International Group Corp. (“we,” “us,” “our,” or “Dragon”) was incorporated on
February 17, 1993 pursuant to the laws of the State of Nevada.




We own a
100% interest in Dragon International Group Corp., a Florida corporation
(“Dragon Florida”). Dragon Florida owns 100% interest in Ningbo Dragon
International Trade Company, Limited (“Ningbo Dragon”), , formerly known as
Ningbo Anxin International Trade Company, Limited (“Anxin”). Ningbo Anxin
International Trade Company, Limited changed its name to Ningbo Dragon
International Trade Company, Limited (“Ningbo Dragon”) on July 7, 2005. Ningbo
Dragon is involved in the packing material industry, operating as a manufacturer
and distributor of paper and integrated packaging paper products. Ningbo Dragon,
through a subsidiary, holds an ISO9000 certificate and national license to
import and export products. Our operations are conducted through Ningbo Dragon.
Ningbo Dragon operates four subsidiaries, including; (i) Ningbo City Jiangdong
Yonglongxin Special Paper Company, Limited (“Yonglongxin”) that holds an ISO9000
certificate and operates a civil welfare manufacturing facility in Fuming County
of the Zhang’ai Village in Ningbo, China. Yonglongxin operates the Xianyang
Naite Research & Development Center (the “R&D Center”), created to
develop, design and improve production methods in the specialty packaging
industry in China; (ii) Hangzhou Yongxin Paper Company, Limited (“Yongxin”) that
manufactures, sells, and distributes cigarette packing materials; (iii) Ningbo
Dragon Packaging Technology Company, Limited (“Dragon Packaging”) a manufacturer
of specialized packaging materials products for the pharmaceutical and food
industry; and (iv) Shanghai JinKui Packaging Material Company, Limited
(“JinKui”) a manufacturer of specialized packaging products for the
pharmaceutical and food industry. Ningbo Dragon has a distribution network
covering east and central China.




-16-




Our
principal executive offices are located at Bldg 14, Suite A09, International
Trading Center, 29 Dongdu Road, Ningbo, China 315000, telephone:
86-574-56169308.




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




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




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




Results of
Operations




Comparison of Our Results of
Operations for our three months ended September 30, 2006 and
2005




Although
we operate various entities, we identify our products under one product segment.
The various entities combine their various resources to support the manufacture,
distribution of paper and pulp related products.




Three Months Ended September 30,2006
            
            
            Three Months Ended September 30,2005
            
            
            $
            
            
            %(Unaudited)
            
            
            (Unaudited)
            
            
            Change
            
            
            ChangeRestatedNet Revenues
            
            
            $ 4,832,984
            
            
            
            $ 4,622,110
            
            
            
            $ 210,874
            
            
            
            4.6
            %Cost of sales
            
            
            4,460,470
            
            
            
            4,515,664
            
            
            
            (55,194
            )
            
            
            -1.2
            %Stock based consulting expenses
            
            
            -
            
            
            
            26,000
            
            
            
            (26,000
            )
            
            
            -100.0
            %Selling expenses
            
            
            114,833
            
            
            
            48,835
            
            
            
            65,998
            
            
            
            135.1
            %General and administration expenses
            
            
            313,360
            
            
            
            230,335
            
            
            
            83,025
            
            
            
            36.0
            %Total operating expenses
            
            
            428,193
            
            
            
            305,170
            
            
            
            123,023
            
            
            
            40.3
            %Loss from operations
            
            
            (55,679
            )
            
            
            (198,724
            )
            
            
            143,045
            
            
            
            -72.0
            %Total other income (expense)
            
            
            60,231
            
            
            
            (249,967
            )
            
            
            310,198
            
            
            
            -124.1
            %Net income (loss)
            
            
            $4,552
            
            
            
            $(446,357
            )
            
            
            $ 450,909
            
            
            
            101.0
            %






-17-




Three Months
            
            
            Three MonthsEnded September
            
            
            Ended September2006
            
            
            2005
            
            
            %(Unaudited)
            
            
            (Unaudited)
            
            
            ChangeRestatedOther Key Indicators:Cost of sales as a percentage of revenues
            
            
            92.3
            %
            
            
            97.7
            %
            
            
            -5.4
            %Gross profit margin
            
            
            7.7
            %
            
            
            2.3
            %
            
            
            5.4
            %Selling expenses as a percentage of revenues
            
            
            2.4
            %
            
            
            1.1
            %
            
            
            1.3
            %GA expenses as a percentage of revenues
            
            
            6.5
            %
            
            
            5.0
            %
            
            
            1.5
            %Total operating expenses as a percentage of revenues
            
            
            8.9
            %
            
            
            6.6
            %
            
            
            2.3
            %




Revenue




During
the three months ended September 30, 2006, we generated revenues of $4,832,984,
as compared to revenues of $4,622,110 for the three months ended September 30,
2005, an increase of $210,874 or 4.6%. For the three months ended September 30,
2006, we recorded revenues of approximately $125,469 from our JinKui subsidiary
acquired effective June 30, 2006. The remaining increases during the three
months ended September 30, 2006 of $85,405 were attributable to sales to new
customers and improved sales efforts over the three months ended September 30,
2006.




Cost of
Sales and Gross Profit




During
our three months ended September 30, 2006, our cost of sales was $4,460,470,
compared to $4,515,664 during three months ended September 30, 2005, a decrease
of $55,194, or 1.2%. As a percentage of net revenues, our cost of sales for the
three months ended September 30, 2006 was 92.3%, as compared to 97.7% for the
three months ended September 30, 2005, a decrease as a percentage of our
revenues. For the three months ended September 30, 2006, we spent approximately
$165,061 to upgrade manufacturing machinery. The upgrades were basically
equipment and technology that further improved efficiency. Therefore, the cost
of goods sold decreased for the three months ended September 30, 2006, as
compared to the three months ended September 30, 2005.




For the
three months ended September 30, 2006, gross profit for the period was $372,514,
as compared to gross profit of $106,446 for the three months ended September 30,
2005, an increase of $266,068. For the three months ended September 30, 2006,
gross profit on a percentage basis increased to 7.7% from 2.3% for the same
period ended September 30, 2005, an increase as a percentage of our
revenues.




Total
Operating Expenses








-18-




•      For
the three months ended September 30, 2006, selling expenses amounted to
$114,833, as compared to $48,835 for the three months ended September 30, 2005,
an increase of $65,998 or 135.1%. This increase is attributable to the increase
in shipping costs of approximately $66,960, which is caused by the increase in
the shipping industry for costs on a per unit shipped basis.








•




•      For
the three months ended September 30, 2006, rental expenses amounted to $21,039
as compared to $9,901 for the three months ended September 30, 2005, an increase
of approximately $11,138. The increase is primarily attributable to the rental
expenses incurred by JinKui, a new subsidiary acquired effective June 30, 2006.
The rental expense for JinKui during the three months ended September 30, 2006
amounted to $9,067. Additionally, rental expenses incurred by YongXin were
increased approximately $2,800 from three months ended September 30, 2005 to
September 30, 2006. YongXin was acquired on July 1, 2005, for the three months
ended September 30, 2005, the rent expenses for YongXin only included August and
September expenses since July rental was paid before the acquisition. For the
three months ended September 30, 2006, the rental expenses for YongXin included
all three months during the quarter.




•      For
the three months ended September 30, 2006, research and development expenses
amounted to $20,497, as compared to $960 for the three months ended September
30, 2005, an increase of approximately $19,500. The increase is primarily
attributable to the operation of the R& D Center which was acquired on
August 1, 2005. The R&D Center was not under fully operation until July
2006.




•      For
the three months ended September 30, 2006, salary and wages amounted to $36,799,
as compared to $17,415 for the three months ended September 30, 2005, an
increase of $19,384. During the three months ended September 30, 2006 we
incurred $8,783 salary and wages associated with JinKui that was acquired
effective June 30, 2006. Additionally, we increased salary and wages for
employees for about 40% to 45% effective October 1, 2005. For the three months
ended September 30, 2006, the salary and wages are affected by the new rate
while for the three months ended September 30, 2005, the salary and wages were
under the original rate.




Total
Other Income








-19-




Income
recognized from the value added tax rebates received from the respective tax
authority. For the three months ended September 30, 2006, the income recognized
from the value added tax rebate was $76,157, compared to $182,464 for the three
months ended September 30, 2005. We accrued for value-added taxes (“VAT”)
recorded on the sale of our paper products. Our paper products are subject to
VAT, as imposed by the PRC or the local provincial tax authorities in the PRC.
We charge, collect and remit VAT on the sales of our products. We routinely
receive abatements of VAT, as we participate in our local provincial program of
hiring employees with physical handicaps. The respective tax authorities in the
PRC notify us of our VAT abatements after the VAT is collected. We pass the VAT
on to the customer, incorporating the tax in our cost. Until we receive
notification of the amount of VAT abated from the respective tax authorities,
this VAT remains accrued. Upon notification from the tax authorities that VAT
had been either abated, or has been partially abated, as determined by the
respective tax authority, the excess of accrued VAT is then reclassified into
other income as this rebate is not remitted to the customer. Under PRC tax
regulations; in the event that VAT collected by us from customers are either
abated, or partially abated, the amount of VAT abated is not required to be
refunded to customers.








For the
three months ended September 30, 2006, interest expense was $33,432, as compared
to $377,136 for the three months ended September 30, 2005, a decrease of
$343,704. For the three months ended September 30, 2005, the $377,136 of
interest expense was comprised of $359,189 in amortization of discount on the
July Notes that was included in interest expense related to the March 2005
Private Placement and July 2005 Private Placement and $17,947 of interest
expenses related to borrowings. In February 2006, upon conversion of the July
Notes to common stock, we expensed all unamortized discounts related to the July
Notes and the March Notes.




Net
Loss








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.
The following table provides certain selected balance sheet comparisons between
September 30, 2006 (unaudited) and June 30, 2006:




September 30,
            
            
            June 30,
            
            
            $ of
            
            
            % of2006 (Unaudited)
            
            
            2006
            
            
            Change
            
            
            ChangeRestated
            
            
            RestatedWorking capital
            
            
            563,485
            
            
            
            558,414
            
            
            
            5,071
            
            
            
            0.9
            %Cash
            
            
            262,462
            
            
            
            466,272
            
            
            
            (203,810
            )
            
            
            -43.7
            %Accounts receivable, net
            
            
            4,762,590
            
            
            
            4,938,985
            
            
            
            (176,395
            )
            
            
            -3.6
            %Inventories
            
            
            2,199,301
            
            
            
            3,293,846
            
            
            
            (1,094,545
            )
            
            
            -33.2
            %Prepaid expenses and other
            
            
            2,707,711
            
            
            
            81,164
            
            
            
            2,626,547
            
            
            
            3236.1
            %




-20-




Advance
      on purchases
            
            
            497,657
            
            
            
            805,662
            
            
            
            (308,005
            )
            
            
            -38.2
            %Other
      receivable
            
            
            381,632
            
            
            
            384,916
            
            
            
            (3,284
            )
            
            
            -0.9
            %Due
      from related parties
            
            
            9,474
            
            
            
            3,498
            
            
            
            5,976
            
            
            
            170.8
            %Total
      current assets
            
            
            10,820,827
            
            
            
            9,974,343
            
            
            
            846,484
            
            
            
            8.5
            %Cash
      restricted
            
            
            252,627
            
            
            
            262,287
            
            
            
            (9,660
            )
            
            
            -3.7
            %Property
      and equipment, net
            
            
            2,164,628
            
            
            
            2,053,938
            
            
            
            110,690
            
            
            
            5.4
            %Land
      use rights, net
            
            
            2,539,296
            
            
            
            2,524,568
            
            
            
            14,728
            
            
            
            0.6
            %Intangible
      assets, net
            
            
            373,492
            
            
            
            393,928
            
            
            
            (20,436
            )
            
            
            -5.2
            %Other
      assets
            
            
            65,972
            
            
            
            78,759
            
            
            
            (12,787
            )
            
            
            -16.2
            %Notes
      payable
            
            
            2,794,537
            
            
            
            2,762,207
            
            
            
            32,330
            
            
            
            1.2
            %Accounts
      payable
            
            
            4,325,398
            
            
            
            3,401,439
            
            
            
            923,959
            
            
            
            27.2
            %Accrued
      expenses
            
            
            1,948,211
            
            
            
            2,042,113
            
            
            
            (93,902
            )
            
            
            -4.6
            %Advances
      from customers
            
            
            47,720
            
            
            
            68,694
            
            
            
            (20,974
            )
            
            
            -30.5
            %Liability
      in connection with acquisition
            
            
            1,141,476
            
            
            
            1,141,476
            
            
            
            0
            
            
            
            0.0
            %Total
      current liabilities
            
            
            10,257,342
            
            
            
            9,415,929
            
            
            
            841,413
            
            
            
            8.9
            %Total
      liabilities
            
            
            10,257,342
            
            
            
            9,415,929
            
            
            
            841,413
            
            
            
            8.9
            %




At
September 30, 2006, we had $262,462 in cash. At September 30, 2006, our cash
position by geographic area is as follows:




United
      States
              
              $
              4China
              
              
              262,458Total
              
              $
              262,462




Our
working capital position increased $5,071 to $563,485 at September 30, 2006 from
$558,414 at June 30, 2006. This increase in working capital is primarily
attributable to an increase of approximately $846,484 in current assets at
September 30, 2006 as compared to June 30, 2006, which was offset by increases
in current liabilities of approximately $841,413 at September 30, 2006 as
compared to June 30, 2006. The increase in our current liabilities is primarily
attributable to accounts payable which were offset by a decrease in accrued
expenses and advances from customers.




At
September 30, 2006, our inventories of raw materials, work in process and
finished goods amounted $2,199,301, a decrease of $1,094,545, or approximately
33.2%, from June 30, 2006. The inventory decreased due to our increased sales
during the three months ended September 30, 2006. The increased sales depleted
our inventory levels. We expect our inventory levels to rise as we increase our
overall production.




At
September 30, 2006, our prepaid expenses and other amounted $2,707,711, an
increase of $2,626,547, or approximately 3236.1%, from June 30, 2006. The
prepaid expenses and other increased due to our increased prepaid import
materials during the three months ended September 30, 2006.




At
September 30, 2006 our accounts receivable, was $4,762,590, as compared to
$4,938,985 at June 30, 2006 and reflects our best estimate of probable losses.
As is customary in the PRC, we extend relatively long payment terms to our
customers. Our terms of sale generally require payment within six months, which
is considerably longer than customary terms offered in the United States,
however, we believe that our terms of sale are customary amongst our competitors
for our a company our size within our industry.




-21-




Net cash
used in operating activities for the three months ended September 30, 2006 was
$123,012, as compared to net cash used in operating activities of $465,756 for
the three months ended September 30, 2005. For the three months ended September
30, 2006, we used cash to fund an increase in prepaid and other current assets,
the reduction in accrued expenses and advances from customers. The decreases
were offset by an increase in accounts payable of $923,959, a net decrease in
accounts receivable of $23,983, and a decrease in inventories of $1,094,545.
These items, combined with an add back of non-cash items of $334,174 were offset
by our net loss.




For the
three months ended September 30, 2005, we used cash to fund increases in
inventories and other receivables, and decrease in accounts payable and accrued
expenses. The decreases were offset by a net increase in advances on purchases
of $254,729, a decrease in accounts receivables of $694,460, combined with a net
add back of non-cash items of $403,564 were offset by our net loss,














From time
to time, we need additional working capital for our operations. In 2006,
Yonglongxin borrowed money pursuant to several lines of credit that we have
established with two separate banks. We renewed pre-existing loans of $1,983,124
from the Bank of Agriculture with 6 to 12 months term from September 2006 to
September 2007, with an annual interest rate ranging from 5.94% to 6.732%. We
repaid loans of $62,450 from Ningbo Commercial Bank (Tianyuan Branch) during the
three months ended September 30, 2006. All loans are renewable when they mature.
We generate sufficient cash flow from financing and operations to meet our debt
services. We do not anticipate these loans will have material impact on our
liquidity. These loans are secured by our inventory, equipment and assets. We are current on all
payments relating to these loans and expect to renew the loans at terms and at
interest rates comparable to our current loans.




We
currently have no material commitments for capital expenditures.




While we
believe we have sufficient funds to conduct our business and operations as they
are currently undertaken, we want to upgrade our manufacturing capacity in order
to expand our production. In relation to the March 2005 Private Placement and
July 2005 Private Placement, we received net proceeds of $1,736,660 ($321,750
from the March 2005 Private Placement +$1,414,910 from the July 2005 Private
Placement). As of September 30, 2006 and 2005, we have applied $725,284 and
$326,878 of the proceeds received from the offerings to upgrade equipment and
technology, respectively.




Off
Balance Sheet Arrangements




-22-




Under SEC
regulations, we are required to disclose our off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our
financial condition, such as changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. An off-balance sheet arrangement means
a transaction, agreement or contractual arrangement to which any entity that is
not consolidated with us is a party, under which we have:


•


•       Any
retained or contingent interest in assets transferred to an unconsolidated
entity or similar arrangement that serves as credit, liquidity or market risk
support to that entity for such assets;




•       Any
obligation under a contract that would be accounted for as a derivative
instrument, except that it is both indexed to our stock and classified in
stockholder's equity in our statement of financial position; and




•       Any
obligation arising out of a material variable interest held by us in an
unconsolidated entity that provides financing, liquidity, market risk or credit
risk support to us, or engages in leasing, hedging or research and development
services with us.




As of the
date of this report, we do not have any off-balance sheet arrangements that we
are required to disclose pursuant to these regulations. 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




CRITICAL ACCOUNTING POLICIES AND
ESTIMATES




We have
identified critical accounting policies that, as a result of judgments,
uncertainties, uniqueness and complexities of the underlying accounting
standards and operations involved could result in material changes to our
financial position or results of operations under different conditions or using
different assumptions. The most critical accounting policies and estimates
are:




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 2006 and 2005 include the allowance for doubtful
accounts and the useful life of property, plant and equipment.




Inventories,
consisting of raw materials and finished goods related to our products are
stated at the lower of cost or market utilizing the weighted average
method.




Fair
value of instruments. Our financial instruments consist of accounts receivable,
accounts payable and long-term debt. The fair values of financial instruments
approximate their recorded values. Fair value of loans payable to stockholders
and balances of bank lines of credit, in the circumstances, are not reasonably
determinable.




We review
the carrying value of property and equipment and land-use rights for impairment
at least annually or whenever events or changes in circumstances indicate that
the carrying amount of an asset




-23-




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.




Details
regarding our use of these policies and the related estimates are described in
the accompanying financial statements as of September 30, 2006. During the three
month period ended September 30, 2006, there have been no material changes to
our critical accounting policies that impacted our consolidated financial
condition or results of operations.




Inflation




Although
management expects that our operations will be influenced by general economic
conditions we do not believe that inflation had a material effect on our results
of operations during the three months ended September 30, 2006.




ITEM 3. CONTROLS AND
PROCEDURES




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




Based
upon that evaluation, our company's CEO and CFO 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.


·
                        In July 2005, the Company entered into a consulting
      agreement with China Direct Investments, Inc. to provide business
      development and management service.  In connection with this
      agreement, the Company issued 400,000 shares of common stock with a fair
      value on the date of grant of $.26 per share totaling
      $104,000.  Initially, the Company had recorded deferred
      consulting expense and amortized the cost over the one year term of the
      agreement.  Due to the absence of vesting and forfeiture
      provisions, as provided in EITF 96-18, the Company determined that the
      measurement date of the transaction was triggered and, absent a
      sufficiently large disincentive for non-performance, which was not
      provided in the agreement, the financial statements have been restated to
      expense the entire fair value of $104,000 as of the effective date of the
      agreement.
 
 ·
                    For the fiscal year ended June 30, 2006 and quarter
      ended September 30, 2006, the Company erroneously filed financial
      statements presenting in their statement of cash flows the decrease of
      restricted cash as an investing activity.  The Company is now
      presenting this as a financing activity, in accordance with SFAS 95
      “Statement of Cash Flows”.  This error did not affect the
      balance sheet as of September 30, 2006, nor the statements of operations
      for the three month periods ended September 30, 2006 or September 30,
      2005.  With these corrections, the statements of cash flows for
      the three month periods ended September 30, 2006 and September 30, 2005
      reflect an increase in cash flows from financing activities of $13,503 and
      $236,232, respectively.
   ·
                    For the fiscal year ended June 30, 2006, the Company
      erroneously did not value the reduction in exercise price of existing
      warrants (from $0.30 to $0.15 for the 3,704,800 July
      2005 Warrants and the reduction in exercise price from $0.40 to $0.15
      for the 1,787,500 March 2005 Warrants) associated with an induced
      conversion offer.  The value of the reduction in exercise price
      was 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 year ended June 30,
      2006.  The Company had recorded the valuation of the reduction
      in exercise price as an increase in additional paid-in capital.
   ·
                    For the fiscal year ended June 30, 2006, the Company
      erroneously had deferred, over a three year period, $540,000 in consulting
      expense related to the issuance of 6,000,000 shares of its common stock to
      China Direct, Inc. 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, also to China Direct, Inc.  In
      addition, in February 2006, the Company issued warrants to purchase
      500,000 shares of common stock, exercisable for five years at $.15 per
      share, to Skybanc, Inc. for 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 123.  These corrections
      resulted in an increase in consulting expense for year ended June 30, 2006
      and a reduction in consulting expense for subsequent periods and deferred
      compensation on our balance sheet for a similar amount for the periods
      affected.


-24-




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




RISK FACTORS




An investment in our Common Stock is
a risky investment. In addition to the other information contained in this
report, prospective investors should carefully consider the following risk
factors before purchasing shares of our Common Stock.




RISKS RELATED TO OUR
BUSINESS




The management of our Company is
located in the Peoples Republic of China (“PRC”) and we are materially dependent
upon advisory services of a U.S. company. In the event this consultant fails to
perform properly, or elects to discontinue its relationships with us, the
results could have a negative impact on our ability to comply with the
requirements of being a US public reporting company and may lead our Common
Stock being de-listed from trading on the OTCBB.




None of
the current members of our management have any experience in U.S. public
companies and these individuals are not fluent in English, except our President.
We have engaged China Direct Investments, Inc. to provide us with various
advisory and consulting services, including U.S. business methods and compliance
with SEC disclosure requirements. We selected China Direct Investments, Inc. to
provide these services to us in part because its staff includes Chinese-speaking
individuals with experience in the operation and regulatory framework applicable
to U.S. public companies. Until such time as we are able to expand our board of
directors to include English-speaking individuals who have experience with the
operation and regulatory framework applicable to U.S. public companies, we are
materially dependent upon our relationship with China Direct Investments, Inc.
Our contract with that company expires in June 2006. If for any reason China
Direct Investments, Inc. should fail to provide the contracted services at the
anticipated levels or fails to extend its services and we have not added members
to our board of directors with the requisite experience, the abilities of our
board of directors to do business as a U.S. public company could be materially
and adversely affected. In such instances, we may be unable to prepare and file
reports as required by the Securities Exchange Act of 1934 on a timely basis
that could lead to our Common Stock being de-listed from trading on the
OTCBB.




Certain agreements to which we are a
party and which are material to our operations lack various legal protections
that are customarily contained in similar contracts prepared in the United
States. This could result in adverse consequences to our business operations in
the future.




Our
operations are based in the People’s Republic of China (“China” or “PRC”), our
operating subsidiaries are Chinese companies and all of our business and
operations are conducted in China. We




-25-




are a
party to certain material contracts, including supply contracts, purchase
contracts and the lease for our principal offices and manufacturing facility.
While these contracts contain the basic business terms of the agreements between
the parties, these contracts do not contain certain provisions which are
customarily contained in similar contracts prepared in the U.S., such as
representations and warranties of the parties, confidentiality and non-compete
clauses, provisions outlining events of defaults, and termination and
jurisdictional clauses. Because our material contracts omit these types of
clauses, notwithstanding the differences in Chinese and U.S. laws, we may not
have the same legal protections as we would if the contracts contained these
additional provisions. We anticipate that contracts we enter into in the future
will likewise omit these types of legal protections. While we have not been
subject to any adverse consequences as a result of the omission of these types
of clauses, and we consider the contracts to which we are a party to contain all
the material terms of our business arrangements with the other party, we cannot
provide assurances that future events will not occur which could have been
avoided if the contracts were prepared in conformity with U.S. standards, or
what the impact, if any, of these hypothetical future events could have on our
Company.




We are materially reliant on
revenues from our operations in the PRC. There are significant risks associated
with doing business in the PRC that may cause you to lose your entire investment
in our Company.




While our
goal is to both expand our operations to countries outside the PRC, in the
foreseeable future our growth and success will remain tied to our existing
operations in the PRC. Therefore, a downturn or stagnation in the economic
environment of the PRC could have a material adverse effect on our financial
condition that could result in a significant loss of revenues and liquidity in
future periods.




We cannot assure you that the
current Chinese policies of economic reform will continue. Because of this
uncertainty, there are significant economic risks associated with doing business
in China.




Although
the majority of productive assets in China are owned by the Chinese government,
in the past several years the government has implemented economic reform
measures that emphasize decentralization and encourage private economic
activity. In keeping with these economic reform policies, the PRC has been
openly promoting business development in order to bring more business into the
PRC. Because these economic reform measures may be inconsistent or ineffectual,
there are no assurances that:




•
            the
      Chinese government will continue its pursuit of economic reform
      policies;


•
            the
      economic policies, even if pursued, will be
  successful;


•
            economic
      policies will not be significantly altered from time to time;
      and


•
            business
      operations in China will not become subject to the risk of
      nationalization.




Even if
the Chinese government continues its policies of economic reform, we may be
unable to take advantage of these opportunities in a fashion that will provide
financial benefit to our Company. Our inability to sustain our operations in
China at current levels could result in a significant reduction in our revenues
that would result in escalating losses and liquidity concerns




China's
economy has experienced significant growth in the past decade, but such growth
has been uneven across geographic and economic sectors and has recently been
slowing. There can be no assurance that such growth will not continue to
decrease or that any slow down will not have a negative effect on our business.
The Chinese economy is also experiencing deflation which may continue in the
future. We cannot assure you that we will be able to capitalize on these
economic reforms, assuming the reforms continue. Given our material reliance on
our operations in the PRC, any failure on our part to continue to




-26-




take
advance of the growth in the Chinese economy will have a material adverse effect
on our results of operations and liquidity in future periods.




We are subject to risks associated
with the conversion of Chinese RMB into U.S. dollars.




We
generate revenue and incur expenses and liabilities in both Chinese Renminbi
(RMB) and U.S. dollars. Since 1994, the official exchange rate for the
conversion of Chinese RMB to U.S. dollars has generally been stable and the
Chinese RMB has appreciated slightly against the U.S. dollar. We have not
entered into agreements or purchased instruments to hedge our exchange rate
risks, although we may do so in the future. Our results of operations and
financial condition may be affected by changes in the value of Chinese RMB and
other currencies in which our earnings and obligations are denominated.
Recently, the Chinese government raised 2% of Chinese RBM against US dollar by
floating Chinese RMB with a basket of foreign currencies. The Company can not
guarantee that the current exchange rate will remain steady, therefore there is
a possibility that the Company could post the same amount of profit for two
comparable periods and because of a fluctuating exchange rate actually post
higher or lower profit depending on exchange rate of Chinese RMB converted to US
dollars on that date. The exchange rate could fluctuate depending on changes in
the political and economic environments without notice.




We may not have sufficient
protection of certain of our intellectual property.




We
utilize certain technologies in the production of certain packaging paper that
are used in our products that are proprietary in nature. To protect our
proprietary rights, we rely generally on confidentiality agreements with
employees and third parties, and agreements with consultants, vendors and
customers, although we have not signed such agreements in every case. Despite
such protections, a third party could, without authorization, utilize our
propriety technologies without our consent. The unauthorized use of this
proprietary information by third parties could adversely affect our business and
operations as well as any competitive advantage we may have in our market
segment. We can give no assurance that our agreements with employees,
consultants and others who participate in the production of our products will
not be breached, or that we will have adequate remedies for any breach, or that
our proprietary technologies will not otherwise become known or independently
developed by competitors.




We have not voluntarily implemented
various corporate governance measures, in the absence of which, stockholders may
have reduced protections against interested director transactions, conflicts of
interest and other matters.




We are
not subject to any law, rule or regulation requiring that we adopt any of the
corporate governance measures that are required by the rules of national
securities exchanges or Nasdaq such as independent directors and audit
committees. It is possible that if we were to adopt some or all of the corporate
governance measures, stockholders would benefit from somewhat greater assurances
that internal corporate decisions were being made by disinterested directors and
that policies had been implemented to define responsible conduct. Prospective
investors should bear in mind our current lack of corporate governance measures
in formulating their investment decisions.




We may be exposed to potential risks
relating to our internal controls over financial reporting and our ability to
have those controls attested to by our independent
auditors.




As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on the company’s internal controls over financial
reporting in their annual reports, including Form 10-KSB. In addition, the
independent registered public accounting firm auditing a company’s financial
statements must also attest to and report on management’s assessment of the
effectiveness of the company’s internal




-27-




controls
over financial reporting as well as the operating effectiveness of the company’s
internal controls. We were not subject to these requirements for the fiscal year
ended June 30, 2005. We are evaluating our internal control systems in order to
allow our management to report on, and our independent auditors attest to, our
internal controls, as a required part of our annual report on Form 10-KSB
beginning with our reports for the fiscal year ended June 30, 2007.




While we
expect to expend significant resources in developing the necessary documentation
and testing procedures required by SOX 404, there is a risk that we will not
comply with all of the requirements imposed thereby. At present, there is no
precedent available with which to measure compliance adequacy. Accordingly,
there can be no positive assurance that we will receive a positive attestation
from our independent auditors.




In the
event we identify significant deficiencies or material weaknesses in our
internal controls that we cannot remediate in a timely manner or we are unable
to receive a positive attestation from our independent auditors with respect to
our internal controls, investors and others may lose confidence in the
reliability of our financial statements and our ability to obtain equity or debt
financing could suffer.




We will need to raise additional
capital to expand our operations in future periods. If we cannot raise
sufficient capital, our ability to implement our business strategies and
continue to expand will be at risk.




We want
to build an additional manufacturing line and upgrade our manufacturing
facilities and technologies in order to expand our business. Based upon our
preliminary estimates this will require capital and other expenditures of
approximately USD $1 million to $2 million. We do not presently have sufficient
working capital to fund the additional acquisitions and upgrade our
manufacturing facilities and technologies, and we will need to raise additional
working capital to accomplish these objectives. We do not presently have any
external sources of capital and will in all likelihood raise the capital in a
debt or equity offering. If we raise the necessary capital through the issuance
of debt, this will result in increased interest expense. If we raise additional
funds through the issuance of equity or convertible debt securities, the
percentage ownership of our Company held by existing stockholders will be
reduced and those stockholders may experience significant dilution. In addition,
new securities may contain certain rights, preferences or privileges that are
senior to those of our Common Stock. There can be no assurance that acceptable
financing to fund this project can be obtained on suitable terms, if at all. Our
ability to continue to implement our growth strategy could suffer if we are
unable to raise the additional funds on acceptable terms that will have the
effect of adversely affecting our ongoing operations and limiting our ability to
increase our revenues in the future.




We do not have significant financial
reporting experience, which may lead to delays in filing required reports with
the Securities and Exchange Commission and suspension of quotation of our
securities on the OTCBB, which will make it more difficult for you to sell your
securities.




The OTCBB
limits quotations to securities of issuers that are current in their reports
filed with the Securities and Exchange Commission. These limitations may be
impediments to our quotation on the OTCBB. Because we do not have significant
financial reporting experience, we may experience delays in filing required
reports with the Securities and Exchange Commission. Because issuers whose
securities are qualified for quotation on the OTCBB are required to file these
reports with the Securities and Exchange Commission in a timely manner, the
failure to do so may result in a suspension of trading or delisting from the
OTCBB.




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There are no automated systems for
negotiating trades on the OTCBB and it is possible for the price of a stock to
go up or down significantly during a lapse of time between placing a market
order and its execution, which may affect your trades in our
securities.




Because
there are no automated systems for negotiating trades on the OTCBB, they are
conducted via telephone. In times of heavy market volume, the limitations of
this process may result in a significant increase in the time it takes to
execute investor orders. Therefore, when investors place market orders, an order
to buy or sell a specific number of shares at the current market price, it is
possible for the price of a stock to go up or down significantly during the
lapse of time between placing a market order and its execution.




Because our stock currently trades
below $5.00 per share, and is quoted on the OTCBB, our stock is considered a
"penny stock" which can adversely affect its
liquidity.




As the
trading price of our Common Stock is less than $5.00 per share, our Common Stock
is considered a "penny stock," and trading in our Common Stock is subject to the
requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this
rule, broker/dealers who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements. The broker/dealer must make an individualized written
suitability determination for the purchaser and receive the purchaser's written
consent prior to the transaction.




SEC
regulations also require additional disclosure in connection with any trades
involving a "penny stock," including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. These requirements severely limit the liquidity of securities
in the secondary market because few broker or dealers are likely to undertake
these compliance activities. In addition to the applicability of the penny stock
rules, other risks associated with trading in penny stocks could also be price
fluctuations and the lack of a liquid market.




“Penny Stock” rules may make buying
or selling our Securities difficult.




Trading
in our Securities will be subject to the “penny stock” rules for the foreseeable
future. The Securities and Exchange Commission has adopted regulations that
generally define a penny stock to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. These rules require
that any broker-dealer who recommends our securities to persons other than prior
customers and accredited investors must, prior to the sale, make a special
written suitability determination for the purchaser and receive the purchaser’s
written agreement to execute the transaction. Unless an exception is available,
the regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with trading in the penny stock market. In addition, broker-dealers
must disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from recommending transactions in our securities,
which could severely limit the liquidity of our securities and consequently
adversely affect the market price for our securities.




-29-




We do not anticipate payment of
dividends, and investors will be wholly dependent upon the market for the Common
Stock to realize economic benefit from their
investment.




As
holders of our Securities, you will only be entitled to receive those dividends
that are declared by our board of directors out of surplus. We do not expect to
have surplus available for declaration of dividends in the foreseeable future.
Indeed, there is no assurance that such surplus will ever materialize to permit
payment of dividends to you as holders of the Securities. The board of directors
will determine future dividend policy based upon our results of operations,
financial condition, capital requirements, reserve needs and other
circumstances.




RISKS RELATED TO OUR
INDUSTRY




Our business is strongly conjunct
with the cigarette industry and in the exposure of risks derived from the
fluctuation of the cigarette industry.




A
majority of our clientele is involved in various aspects of the cigarette
manufacturing industry in China, which is facing significant governmental
actions aimed at reducing the consumption of cigarettes. As one of the largest
cigarette consumption markets in the world, the Chinese government is following
the world trends to enforce more regulations on the cigarette industry.
Management does not think the Chinese cigarette industry will have a regression
in the near future, but we cannot ignore the risks deriving from the fluctuation
of the cigarette industry.




Intense competition from existing
and new entities may adversely affect our revenues and
profitability.




We face
intense competition. The packaging products and paperboard industries are highly
competitive, and no single company dominates either industry. Our competitors
include large, vertically integrated packaging products and paperboard companies
and numerous smaller companies.




Because
all of our businesses operate in highly competitive industry segments, we
regularly bid for sales opportunities to customers for new business or for
renewal of existing business. The loss of business or the award of new business
from our larger customers may have a significant impact on our results of
operations.




The
primary competitive factors in the packaging products and paperboard industries
are price, design, product innovation, quality and service, with varying
emphasis on these factors depending on the product line and customer
preferences. We believe that we compete effectively with respect to each of
these factors. However, to the extent that any of our competitors becomes more
successful with respect to any key competitive factor, our business could be
materially adversely affected.




Provisions of our Articles of
Incorporation and Bylaws may delay or prevent a take-over that may not be in the
best interests of our stockholders.




Provisions
of our Articles of Incorporation and Bylaws may be deemed to have anti-takeover
effects, which include when and by whom special meetings of our stockholders may
be called, and may delay, defer or prevent a takeover attempt. In addition,
certain provisions of the Nevada Revised Statutes also may be deemed to have
certain anti-takeover effects which include that control of shares acquired in
excess of certain specified thresholds will not possess any voting rights unless
these voting rights are approved by a majority of a corporation's disinterested
stockholders.




In
addition, our Articles of Incorporation authorize the issuance of up to
25,000,000 shares of Preferred Stock with such rights and preferences as may be
determined from time to time by our Board of




-30-





Directors.
No shares are currently outstanding. Our Board of Directors may, without
stockholder approval, issue Preferred Stock with dividends, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of our Common Stock.




Our executive officers, directors
and 5% or greater shareholders have the ability to significantly influence
matters requiring a shareholder vote and other shareholders may not have the
ability to influence corporate transactions.




Currently,
our existing officers, directors and 5% or greater shareholders in the aggregate
beneficially own approximately 45.8% of our outstanding stock. As a result, such
persons, acting together, will have the ability to significantly influence the
vote on all matters requiring approval of our shareholders, including the
election of directors and approval of significant corporate
transactions.




We cannot predict whether we will
successfully effectuate our current business plan. Each prospective investor is
encouraged to carefully analyze the risks and merits of an investment in our
Common Stock and should take into consideration when making such analysis, among
others, the Risk Factors discussed above.






Part II - OTHER
INFORMATION




Item 1. Legal
      Proceedings




None




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




We did
not issue any shares of our common stock during the three month period ended
September 30, 2006.




Item 3. Defaults Upon Senior
Securities




None




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




None




Item 5. Other
Information




None




Item 6. Exhibits




Exhibit




-31-






Number
            Description31.1
            Rule
      13a – 14(a)/15d-14(a) Certification of the Chief Executive Officer
      *31.2
            Rule
      13a – 14(a)/15d-14(a) Certification of the Chief Financial Officer
      *32.1
            Certification
      of Chief Executive Officer Certification under Section 906
    *32.2
            Certification
      of Principal Financial and Accounting Officer Certification under Section
      906 *




*
      Filed herein








-32-




SIGNATURES








DRAGON
INTERNATIONAL GROUP CORP.






By: /s/ David
Wu


David
Wu,


CEO,
Principal Executive Officer








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