UNITED STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
 (Mark
One)
 
 [X]      QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
quarterly period ended September 30, 2008
  [  
]      TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
  For the
transition period from ________ to __________
  Commission
File Number: 0-23485
  DRAGON
      INTERNATIONAL GROUP CORP.(Exact
      name of small business issuer as specified in
  charter)
  Nevada
              
              98-0177646(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)
  No.
      201 Guangyuan Road, District C Investment Pioneering Park
      Jiangbei,Ningbo,
      China 315033(Address
      of principal executive offices)(86)
      574-83070703(Issuer's
      telephone number)(Former
      name, former address and former fiscal year,if
      changed since last report)
 
 Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No
[   ]
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer
               ̈
              
              
              Accelerated
      filer
               ̈Non-accelerated
      filer
               ̈
              
              
              Smaller
      reporting company
              ý(Do
      not check if a smaller
                reporting
      company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes [   ] No [X]
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State the
number of shares outstanding of each of the issuer's classes of common equity as
of the latest practicable date. At November 13, 2008 there were 132,198,022
shares of common stock issued and outstanding.
 
 Transitional
Small Business Disclosure Format (Check one) Yes [   ] No
[X]
 
 -1-
 DRAGON INTERNATIONAL GROUP
CORP.
 QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2008
  
 INDEX
 PART I. FINANCIAL
INFORMATION
  Item
      1.
              Financial
      Statements
              Page
      No.1)
              Consolidated balance
      sheets as of September 30, 2008 (unaudited) and June 30,
      2008
              32)
              Consolidated
      unaudited statements of operations for the three months ended September
      30, 2008 and 2007
              43)
              Consolidated
      unaudited statements of cash flows for the three months ended September
      30, 2008 and 2007
              54)
              Notes
      to the unaudited consolidated condensed financial
    statements
              6Item
      2.
              Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
              19Item
      4T.
              Controls
      and Procedures
              26PART
      II. OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              28Item
      1A.
              Risk
      Factors
              28Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              28Item
      3.
              Defaults
      Upon Senior Securities
              28Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              28Item
      5.
              Other
      Information
              29Item
      6.
              Exhibits
              29SIGNATURES
 
 -2-
 Part
I – Financial Information
 Item
1 – Financial Statements
  DRAGON
      INTERNATIONAL GROUP CORP. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS
  September
      30, 2008
                
                
                June
      30, 2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                
                $
                432,168
                
                
                $
                213,110Accounts
      receivable (net of allowance for doubtful accountsof
      $1,321,136 and $1,333,501, respectively)
                
                
                6,807,348
                
                
                
                9,919,791Notes
      receivable
                
                
                35,945
                
                
                
                -Inventories
                
                
                4,890,418
                
                
                
                4,819,435Advances
      on purchases
                
                
                5,360,372
                
                
                
                5,034,567Other
      receivables
                
                
                144,456
                
                
                
                57,536Prepaid
      expenses and other current assets
                
                
                89,012
                
                
                
                39,291Total
      Current Assets
                
                
                17,759,719
                
                
                
                20,083,730Cash
      restricted
                
                
                240,697
                
                
                
                240,112Property
      and equipment - Net
                
                
                3,108,589
                
                
                
                3,125,797Intangible
      assets
                
                
                3,104,376
                
                
                
                2,813,666Deferred
      expenses
                
                
                10,886
                
                
                
                28,525Taxes
      receivable
                
                
                42,930
                
                
                
                -Total
      Assets
                
                $
                24,267,197
                
                
                $
                26,291,830LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Notes
      payable - current portion
                
                $
                5,511,266
                
                
                $
                5,498,220Accounts
      payable
                
                
                6,212,837
                
                
                
                8,505,110Accrued
      liabilities
                
                
                665,671
                
                
                
                283,616Advances
      from customers
                
                
                77,010
                
                
                
                62,504Taxes
      payable
                
                
                -
                
                
                
                40,015Due
      to related parties
                
                
                627,811
                
                
                
                602,511Total
      Current Liabilities
                
                
                13,094,595
                
                
                
                14,991,976STOCKHOLDERS'
      EQUITY:Preferred
      stock ($.001 Par Value; 25,000,000 Shares Authorized;No
      shares issued and outstanding)
                
                
                -
                
                
                
                -Common
      stock ($.001 Par Value; 200,000,000 Shares Authorized;117,033,022
      shares issued and outstanding at September 30, 2008 and June 30,
      2008)
                
                
                117,033
                
                
                
                117,033Additional
      paid-in capital
                
                
                11,640,962
                
                
                
                11,640,962Accumulated
      deficit
                
                
                (1,949,731
                )
                
                
                (1,800,842
                )Other
      comprehensive income - foreign currency
                
                
                1,364,338
                
                
                
                1,342,701Total
      Stockholders' Equity
                
                
                11,172,602
                
                
                
                11,299,854Total
      Liabilities and Stockholders' Equity
                
                $
                24,267,197
                
                
                $
                26,291,830
  See
      notes to unaudited consolidated financial statements
 -3-
 DRAGON
      INTERNATIONAL GROUP CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(Unaudited)
  For
      the Three Months EndedSeptember
      30,2008
                
                
                2007(Restated)NET
      REVENUES
                
                $
                9,814,986
                
                
                $
                7,929,498COST
      OF SALES
                
                
                9,067,517
                
                
                
                7,331,333GROSS
      PROFIT
                
                
                747,469
                
                
                
                598,165OPERATING
      EXPENSES:Selling
      expenses
                
                
                381,575
                
                
                
                192,308General
      and administrative expenses
                
                
                388,336
                
                
                
                234,339Total
      Operating Expenses
                
                
                769,911
                
                
                
                426,647(LOSS)
      INCOME  FROM OPERATIONS
                
                
                (22,442
                )
                
                
                171,518OTHER
      INCOME (EXPENSE):Other
      income
                
                
                57,937
                
                
                
                60,051Debt
      issuance costs
                
                
                -
                
                
                
                (2,657
                )Interest expense
                
                
                (178,071
                )
                
                
                (79,491
                )Total
      Other Expense
                
                
                (120,134
                )
                
                
                (22,097
                )(LOSS)
      INCOME BEFORE INCOME TAXES
                
                
                (142,576
                )
                
                
                149,421INCOME
      TAXES
                
                
                (6,312
                )
                
                
                (90,898
                )(LOSS)
      NET INCOME BEFORE MINORITY INTEREST
                
                
                (148,888
                )
                
                
                58,523MINORITY
      INTEREST IN INCOME OF SUBSIDIARY
                
                
                -
                
                
                
                (75,870
                )NET
      LOSS
                
                
                (148,888
                )
                
                
                (17,347
                )OTHER
      COMPREHENSIVE INCOME:Unrealized
      foreign currency translation
                
                
                21,637
                
                
                
                98,779COMPREHENSIVE
      (LOSS) INCOME
                
                $
                (127,251
                )
                
                $
                81,432NET
      INCOME PER COMMON SHAREBasic
                
                $
                (0.00
                )
                
                $
                (0.00
                )Diluted
                
                $
                (0.00
                )
                
                $
                (0.00
                )Weighted
      Common Shares Outstanding - Basic
                
                
                117,033,022
                
                
                
                96,363,982Weighted
      Common Shares Outstanding - Diluted
                
                
                127,194,799
                
                
                
                96,363,982
  See
      notes to unaudited consolidated financial
  statements
 -4-
 DRAGON
      INTERNATIONAL GROUP CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF CASH FLOWS(Unaudited)
  For
      the Three Months EndedSeptember
      30,2008
                
                
                2007(Restated)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (148,888
                )
                
                $
                (17,347
                )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
      and amortization
                
                
                107,563
                
                
                
                121,573Allowance
      for doubtful accounts
                
                
                (12,365
                )
                
                
                (20,408
                )Minority
      interest
                
                
                -
                
                
                
                75,870Changes
      in assets and liabilities:Accounts
      receivable
                
                
                3,124,808
                
                
                
                (344,178
                )Inventories
                
                
                (70,983
                )
                
                
                (830,611
                )Prepaid
      and other current assets
                
                
                (49,721
                )
                
                
                (781,197
                )Other
      receivable
                
                
                (86,920
                )
                
                
                286,288Advances
      to employees
                
                
                -
                
                
                
                25,618Advances
      on purchases
                
                
                (325,805
                )
                
                
                (2,090,774
                )Other
      assets
                
                
                17,638
                
                
                
                (12,630
                )Intangible
      assets
                
                
                (300,000
                )
                
                
                -Accounts
      payable
                
                
                (2,193,506
                )
                
                
                3,022,509Taxes
      payable
                
                
                (82,945
                )
                
                
                175,468Other
      payable
                
                
                (98,767
                )
                
                
                (204,247
                )Accrued
      liabilities
                
                
                382,055
                
                
                
                (117,524
                )Advances
      from customers
                
                
                14,506
                
                
                
                116,339NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
                
                
                276,670
                
                
                
                (595,251
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Increase
      in notes receivable
                
                
                (35,945
                )
                
                
                -Capital
      expenditures
                
                
                (73,863
                )
                
                
                (229,269
                )NET
      CASH FLOWS (USED IN) INVESTING ACTIVITIES
                
                
                (109,808
                )
                
                
                (229,269
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from notes payable
                
                
                13,047
                
                
                
                63,135Proceeds
      from related parties advances
                
                
                25,300
                
                
                
                -NET
      CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
                
                
                38,347
                
                
                
                63,135EFFECT
      OF EXCHANGE RATE ON CASH
                
                
                13,849
                
                
                
                66,089NET
      INCREASE (DECREASE) IN CASH
                
                
                219,058
                
                
                
                (695,296
                )CASH  -
      beginning of the period
                
                
                213,110
                
                
                
                1,032,519CASH
      - end of the period
                
                $
                432,168
                
                
                $
                337,223SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid  for:Interest
                
                $
                178,253
                
                
                $
                79,492Income
      Taxes
                
                $
                6,312
                
                
                $
                -
  See
      notes to unaudited consolidated financial
  statements.
 -5-
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
  Dragon
International Group Corp. ("we", "our," "us", "Dragon" or "Dragon Nevada") is a
holding company that, through our subsidiary companies, manufactures and
distributes assorted industrial paper and packaging products.  Our
operations are conducted through subsidiaries located in the Peoples Republic of
China ("PRC") and the British Virgin Islands (“BVI”).
  We are a
manufacturer and distributor of a variety of paper products and packaging
materials. Our principal executive offices and manufacturing facilities are
located approximately 200 miles south of Shanghai in Ningbo, Zhejiang Province,
China.  Our manufacturing operations are led by Shanghai Jin Kui
Packaging Material Co., Ltd. and Ningbo Dragon International Trade Co., Ltd. and
its subsidiary companies.  The main customers of our manufacturing
products are pharmaceutical companies in the PRC, Pakistan, and
India.  Our distribution operations are led by Wellton International
Fiber Corp. domiciled in the British Virgin Islands.  Wellton is an
agent and supplier of paper pulp, waste paper, and recycled paper
products.  Its main customers are manufacturers of paper and packaging
products ranging from office paper to industrial cardboard.
 
 We
operate various entities engaged in the paper industry. However, we evaluate the
business and our products under two core segments: (i) Pulp and Paper and (ii)
Packaging. Our Pulp and Paper segment consists of the operations of Wellton and
our Packaging segment consists of the operations of Shanghai Jin Kui and Ningbo
Dragon and its subsidiaries.  Our various entities enable us to be
diversified within the paper industry and support our goal to become a leader in
the manufacture and distribution of a) pharmaceutical packaging products and b)
pulp and paper products within China.
 
 Our
operations are conducted through the following subsidiaries of Dragon
Nevada:
 
 PULP
AND PAPER SEGMENT:
 
 I.
              Wellton
      International Fiber Corp.
("Wellton")
 Wellton
is a wholly owned subsidiary of Dragon Nevada.  Dragon Nevada
acquired a 51% interest on June 29, 2007 and acquired the
remaining 49% interest in Wellton on October 1, 2007. Wellton was formed on
February 2002 under the laws of the British Virgin Islands and operates as an
agent and supplier of paper pulp, waste paper, and recycled paper
products.  Revenues for Wellton are derived from a diverse customer
base located primarily in the PRC where no single customer represents more than
10% of our revenues.
 
 PACKAGING
SEGMENT:
 
 II.
              Shanghai
      Jin Kui Packaging Material Co., Ltd. (“Shanghai Jin
  Kui”)
 Shanghai
Jin Kui is a wholly owned subsidiary of Dragon Nevada. Dragon Nevada acquired
Shanghai Jin Kui on June 30, 2006. Shanghai Jin Kui is a manufacturer of
packaging products, for the pharmaceutical and food industry. In 2005, Shanghai
Jin Kui obtained the Good Manufacturer Practice ("GMP") status from the Chinese
State Food and Drug Administration ("SFDA") and received ISO9000 Quality
Assurance System certification.
 
 III.
              Dragon
      International Group Corp., a Florida corporation ("Dragon
      Florida")
 Dragon
Florida is a wholly owned subsidiary of Dragon Nevada. Dragon Nevada
acquired Dragon Florida on October 4, 2004. Dragon Florida is a holding company
and operates the following subsidiary:
 
 A.
              Ningbo
      Dragon International Trade Co., Ltd. ("Ningbo
  Dragon")
 Ningbo
Dragon is a wholly owned subsidiary of Dragon Florida. Ningbo Dragon was formed
on August 29, 1997. Dragon Florida acquired a 70% interest in Ningbo Dragon on
June 21, 2004 and acquired the remaining 30% interest on December 31, 2004.
Ningbo Dragon is a manufacturer and distributor of paper and integrated
packaging paper products.  Ningbo Dragon, through a subsidiary, holds
an ISO9000 certificate and national license to import and export paper
products.  Revenues for Ningbo Dragon are derived primarily from
operations within China with a diverse customer base where no single customer
represents more than 10% of revenues. In addition to its own operations, Ningbo
Dragon directly operates the following three subsidiaries:
 
 -6-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 ·     Ningbo
City Jiangdong Yonglongxin Packaging Technology Co., Ltd.
("Yonglongxin")
 Yonglongxin
is a wholly owned subsidiary of Ningbo Dragon. Yonglongxin was formed on
November 8, 1999.  Yonglongxin is a manufacturer of specialty
paperboard products and holds an ISO9000 certificate.  Yonglongxin
operates a civil welfare manufacturing facility, which enjoys government
subsidies for employing handicapped citizens in Zhang'ai Village, Fuming County,
near Ningbo, China.  Yonglongxin also operates the
Xianyang Naite Research & Development Center
("R&D Center").  The R&D Center was created to
develop, design and improve production methods.
 
 ·     Ningbo
Dragon Packaging Technology Co., Ltd. ("Dragon Packaging")
 Dragon
Packaging is a wholly owned subsidiary of Ningbo Dragon.  Ningbo
Dragon acquired Dragon Packaging on June 1, 2005. Dragon Packaging is a
manufacturer of specialized packaging materials products for the pharmaceutical
and food industry.
 
 ·     Hangzhou
Yongxin Paper Co., Ltd. ("Yongxin”)
 NingboDragonholds a 60% interest in
Yongxin.NingboDragon acquired a 60% interest on
July 1, 2005. Yongxin manufactures, sells, and distributes cigarette packaging
materials and is located in Hengjie Village of the Liuxia town in Hangzhou,
Zhejiang Province,China.
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”).
  These
statements have been prepared in accordance with the instructions to Form
10-Q.  Accordingly, certain information and footnote disclosures
normally included in financial statements included in our Annual Report on Form
10-K has been condensed or omitted.
 
 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 fiscal year ended June 30, 2008 and
notes thereto contained on Form 10-K for the fiscal year ended June 30, 2008 of
the Company as filed with the SEC.  The results of operations for the
three month period ended September 30, 2008 are not necessarily indicative of
the results for our full fiscal year ending June 30, 2009.
  Certain
reclassifications have been made to the prior year to conform to the current
year presentation.
  Restatement
of financial statements
  The
financial statements for the fiscal year ended June 30, 2007, including the
subsequent three month period ended September 30, 2007 have been restated to
correct the accounting treatment previously accorded certain
transactions.
  -7-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 ·
              For
      the fiscal year ended June 30, 2007 and  2006, we erroneously
      did not value the reduction in exercise price of existing warrants
      associated with an induced conversion offer.  The value of the
      reduction in exercise price has been calculated at $447,238, and was
      reflected in the statement of operations as an increase in interest
      expense, and a resultant increase in net loss and net loss per share for
      the fiscal year ended June 30, 2006.  The Company had recorded
      the valuation of the reduction in exercise price as an increase in
      additional paid-in capital.·
              For
      the fiscal years ended June 30, 2007 and 2006, we erroneously deferred,
      over a three year period commencing in January 2006, $540,000 in
      consulting expense related to the issuance of 6,000,000 shares of our
      common stock and $395,675 related to the issuance of 4,700,000 common
      stock purchase warrants exercisable at $0.15 per share over a five year
      period.  In addition, in February 2006, we issued warrants to
      purchase 500,000 shares of common stock, exercisable for five years at
      $.15 per share, as compensation pursuant to a one year financial advisory
      consulting agreement.  The Company had incorrectly deferred the
      fair value of these warrants of $71,243 over the contract
      term.  The Company has restated the related financial statements
      to recognize the full expense of these agreements immediately upon
      entering into the consulting agreements in January 2006 and February 2006,
      under the provisions of EITF 96-18 and SFAS 123R.  These
      corrections resulted in an increase in consulting expense for the fiscal
      year ended June 30, 2006 and a reduction in consulting expense for
      subsequent periods, including a reduction in consulting expenses of
      $86,878 for the three month period ended September 30, 2007, as
      detailed in the tables below.·
              In
      March 2007, pursuant to a consulting agreement, we issued 4,000,000 shares
      of our common stock.  Initially, we had recorded and reported
      this issuance incorrectly as a cost of raising capital related to the
      private placement of $1,500,000 in units sold during the
      quarter.  We restated the financial statements to recognize the
      full expense of this agreement immediately upon entering into the
      consulting agreement in March 2007 under the provisions of EITF 96-18 and
      SFAS 123R.  This correction resulted in an increase in our
      accumulated deficit for the three month period ended September 30, 2007 of
      $360,000.
 
 Components
of the restatements are detailed in the following tables.
 Balance
      sheet data as of September 30, 2007:As
      Filed
                
                
                
                Adjustment
      to Restate
                
                
                RestatedAdditional
      Paid-in Capital
                
                $
                9,335,763
                
                (b)
                
                $
                447,238(c)
                
                
                360,000$
                9,335,763
                
                
                
                $
                807,238
                
                
                $
                10,143,001As
      Filed
                
                
                
                Adjustment
      to Restate
                
                
                RestatedAccumulated
      Deficit
                
                $
                (1,293,525
                )
                (a)
                
                $
                (420,551
                )(b)
                
                
                (447,238
                )(c)
                
                
                (360,000
                )$
                (1,293,525
                )
                
                
                $
                (1,227,789
                )
                
                $
                (2,521,314
                )Deferred
      Compensation
                
                $
                420,551
                
                
                
                $
                (420,551
                )
                
                $
                0
 (a)
              To
      expense the entire fair value of common stock and warrants issued in
      January and February 2006, previously accounted for as deferred
      compensation and amortized as stock based consulting expenses and reverse
      in subsequent periods, including the three month period ended
      September 30, 2007, the related amortization
  expense.
 
 (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.
 
 (c)
              To
      recognize the entire fair value of 4,000,000 shares of common stock issued
      in March 2007. This transaction had previously been accounted for as a
      cost of raising capital rather than consulting
  expense.
 
 -8-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 Consolidated
statements of operations for the three month period ended September 30,
2007:
 
 As
      Filed
              
              
              Adjustment
      to
                Restate
              
              
              RestatedGeneral
      and administrative expenses
                (including
      stock-based consulting expenses)
              
              $
              321,217
              
              (a)
              $
              (86,878
              )
              
              $
              234,339-$
              321,217
              
              
              $
              (86,878)
              
              
              $
              234,339Net
      loss per share:Basic
              
              $
              (0.00
              )
              
              $
              (0.00
              )
              
              $
              (0.00
              )Diluted
              
              
              (0.00
              )
              
              
              (0.00
              )
              
              
              (0.00
              )
 
 (a)
              To
      reverse the expense of common stock and warrants issued in January and
      February 2006, previously accounted for as deferred compensation and
      amortized as stock based
consulting.
  BASIS OF
PRESENTATION
 
 The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
 
 RECLASSIFICATION
  Certain
reclassifications of amounts previously reported have been made to the
accompanying consolidated financial statements in order to maintain consistency
and comparability between the periods presented.
  Some
payables previously classified as Accounts Payable are now classified as Due to
Related Party.
  ESTIMATES
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting
period.  Actual results could differ materially from those
estimates.  Significant estimates in fiscal years 2009 and 2008
include the allowance for doubtful accounts of accounts receivable, valuation of
inventories, the useful life of property, plant and equipment and land use
rights.
 
 CASH AND
CASH EQUIVALENTS
 
 For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less and
money market accounts to be cash equivalents. At September 30, 2008, the Company
maintained a cash balance of $672,865. Of this amount $664,326 is held in China,
and $8,539 is held in the U.S.  Of the cash balance of $664,326 held in
China, $240,697 is restricted and has been presented as restricted cash on the
accompanying balance sheet. The restricted cash is being held in a bank
account as collateral for certain loans, totaling $481,394 held with Chinese
banks..
 
 ACCOUNTS
RECEIVABLE
 
 Accounts
receivable are reported at net realizable value. The Company has established an
allowance for doubtful accounts based upon factors pertaining to the credit risk
of specific customers, historical trends, and other information. Delinquent
accounts are written-off against the allowance when it is determined that the
amounts are uncollectible.  The allowance for doubtful accounts
totaled $1,321,136 at September 30, 2008 and $1,333,501 at June 30,
2008.
 
 -9-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 INVENTORIES
 
 Inventories,
consisting of raw materials, work in process and finished goods related to
the Company's products are stated at the lower of cost or market utilizing the
weighted average method.
 
 ADVANCES
ON PURCHASES
 
 Advances
on purchases amounted to $5,360,372 and $5,034,567 at September 30, 2008 and
June 30, 2008, respectively. This amount consists of prepayments by the Company
for merchandise orders that had not yet been shipped to the
Company.
  INTANGIBLE
ASSETS / INTELLECTUAL PROPERTY
  The
Company recognizes the value and amortizes intangible assets and intellectual
property acquired in connection with their various acquisitions. The Company
amortizes these assets based on the expected useful lives of these assets, based
on Company management projecting forward future revenue and expense streams
related to these acquired assets. For the three months ended September 30, 2008
and 2007, amortization expenses for intangible assets amounted to
$16,088 and $29,171, respectively.
 
 LONG -
LIVED ASSETS
  In
accordance with the provisions of SFAS No. 144,Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company evaluates its long-lived
assets for possible impairment when changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Long-lived assets under
certain circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of carrying amount or
fair value less related costs to sell. To the extent carrying values exceed
fair values; an impairment loss is recognized in operating results.
 
 STOCK-BASED
COMPENSATION
  In
December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No.
123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the
statement of operations the grant- date fair value of stock options and other
equity based compensation issued to employees. The Company adopted FAS No.123R
in the first quarter of fiscal year 2006.
  NET
INCOME (LOSS) PER SHARE
 
 Basic
income (loss) per share is computed by dividing net income or loss by the
weighted average number of shares of common stock outstanding during the
period.  Diluted income per share is computed by dividing net income
by the weighted average number of shares of common stock, common stock
equivalents and potentially dilutive securities outstanding during each
period.
 
 The
following table represents a reconciliation of basic and diluted earnings per
share:
  For
      the Three Months
                Ended
      September 30,2008
              
              
              2007RestatedNet
      Loss
              
              $
              (148,888)
              
              
              $
              (17,347)Weighted
      average shares outstanding – basic
              
              
              117,033,022
              
              
              
              96,363,982Loss
      per share – basic
              
              $
              0.00
              
              
              $
              0.00Weighted
      average shares outstanding – basic
              
              
              117,033,022
              
              
              
              96,363,982Effect
      of dilutive securitiesUnexercised
      warrants
              
              
              161,777
              
              
              
              -Contingent
      shares for acquisition
              
              
              10,000,000
              
              
              
              -Weighted
      average shares outstanding – diluted
              
              
              127,194,799
              
              
              
              96,363,982Loss
      per share - diluted
              
              $
              0.00
              
              
              $
              0.00
  -10-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 REVENUE
RECOGNITION
 
 The
Company follows the guidance of the Securities and Exchange Commission's Staff
Accounting Bulletin 104 for revenue recognition. In general, the Company records
revenue when persuasive evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the sales price to the customer is
fixed or determinable, and collectibility is reasonably assured.
 
 SHIPPING
AND HANDLING COSTS
 
 The
Company accounts for shipping and handling costs as a component of selling
expenses.
 
 FOREIGN
CURRENCY TRANSLATION
 
 Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts. Transactions and balances in other currencies are converted
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation," and are included in determining
net income or loss.
 
 For
foreign operations with the local currency as the functional currency, assets
and liabilities are translated from the local currencies into U.S. dollars at
the exchange rate prevailing at the balance sheet date. Revenues and expenses
are translated at weighted average exchange rates for the period to approximate
translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
loss. At September 30, 2008 and 2007, the exchange rates for the Chinese dollar
or Renminbi ("RMB") for 1 United States dollar were 6.855 and 7.518,
respectively.
  CONCENTRATION
OF CREDIT RISK
 
 Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. The Company
places its cash with high credit quality financial institutions in the United
States and China. At September 30, 2008, the Company, held a total of $672,865
in bank deposits. Of this amount $664,326 is held in China, and $8,539 is
held in the U.S. Of the amount held in China, $240,697 is restricted and is
presented as restricted cash on the accompanying balance sheet. This amount is
being held as collateral for certain loans, totaling $481,394, held with Chinese
banks. The remaining unrestricted cash balance of $423,629 held in bank deposits
in China is not insured. The Company has not experienced any losses in such
accounts through September 30, 2008. The Company also performs ongoing credit
evaluations of its customers to help further reduce credit risk.
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS
 
 The
carrying amounts reported in the consolidated balance sheet for cash, accounts
receivable, deferred expenses, advance on purchases, other receivables, accounts
payable, accrued liabilities, due to related parties, advance from customers,
and loans approximate their fair market value based on the short-term maturity
of these instruments.
 
 
 -11-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 NOTE
2 - INVENTORIES
 
 At
September 30, 2008 and June 30, 2008, inventories consisted of the
following:
  September
      30, 2008
                
                
                June
      30, 2008Raw
      Materials
                
                $
                800,623
                
                
                $
                669,322Work
      in Progress
                
                
                1,222,659
                
                
                
                1,608,582Finished
      Goods
                
                
                2,867,136
                
                
                
                2,541,531$
                4,890,418
                
                
                $
                4,819,435
  
 NOTE
3 – PROPERTY AND EQUIPMENT
 
 At September 30, 2008 and June 30,
2008, property and equipment consisted of the following:
  Asset
      class
                
                Estimated
      Life
                
                September
      30, 2008
                
                
                June
      30, 2008Auto
      and Truck
                
                10
      years
                
                
                -
                
                
                
                -Manufacturing
      Equipment
                
                5
      years
                
                $
                2,500,212
                
                
                $
                2,590,684Building
      and Improvements
                
                20
      years
                
                
                1,429,076
                
                
                
                1,287,304Office
      Equipment
                
                5
      years
                
                
                90,764
                
                
                
                74,876Construction
      In Process
                
                
                
                
                350,017
                
                
                
                343,3434,370,069
                
                
                
                4,296,207Less:
      Accumulated Depreciation
                
                
                
                
                (1,261,480
                )
                
                
                (1,170,410
                )Fixed
      Assets - Net
                
                
                
                $
                3,108,589
                
                
                $
                3,125,797
  NOTE
4 - INTANGIBLE ASSETS
 
 In
connection with the acquisition of Dragon Packaging on June 1, 2005, the Company
acquired land use rights valued as of September 30, 2008 at $3,012,701 (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 commenced amortizing this land use right over the contract period
beginning July 1, 2005. For the three month ended September 30, 2008 and 2007,
amortization expenses amounted to $16,088 and $16,256, respectively. The value
of the land use rights remained constant in the local currency of RMB, the
change in the valuation as it relates to U.S. dollars is associated with the
currency fluctuation.
 In
connection with the acquisition of Shanghai JinKui on June 30, 2006, we settled
a previously disputed contingent consideration payment in October, 2008. In
accordance with SFAS 141, “Business Combinations” we
accounted for the additional shares as part of the purchase price and allocated
the amount to goodwill when the contingency was resolved and additional
consideration was distributable. Please refer to Note 11 – Subsequent Events for
further discussion.
 
 September
      30,
                  2008
                
                
                June
      30,
                  2008Land
      Use Rights (Estimated Useful Life: 47 years)
                
                $
                3,012,701
                
                
                $
                3,005,379Goodwill
                
                
                300,000
                
                
                
                -Less:
      Accumulated Amortization
                
                
                (208,325
                )
                
                
                (191,713
                )$
                3,104,376
                
                
                $
                2,813,666
  NOTE
5 - RELATED PARTY TRANSACTIONS
 
 DUE TO
RELATED PARTY
 
 Due to
related party balances consist of the following amounts due to Kung Ming
(Eric) Kuo, general manager of Wellton at September 30, 2008 and June 30,
2008:
 
 -12-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
   Description
                
                September
      30, 2008
                
                
                June
      30, 2008Unpaid
      Salary
                
                $
                157,500
                
                
                $
                106,200Dividend
      Liability
                
                
                242,000
                
                
                
                242,000Shareholder
      Loan
                
                
                228,311
                
                
                
                254,311Total
                
                $
                627,811
                
                
                $
                602,511
  NOTE
6 - NOTES PAYABLE
 
 A summary
of notes payable as of September 30, 2008 and June 30, 2008 is as
follows:
  NOTES
      PAYABLE SECURED OR PARTIALLY SECURED BY THIRD PARTY:
                
                September
      30, 2008
                
                
                June
      30, 2008Note
      payable to Capital One Resource Co. Ltd., due on December 26, 2008 at a
      rate of 12%. Secured by the property of the Company and third party:
      Yonghua Cai.
                
                $
                437,630
                
                
                $
                436,568Note
      payable to Capital One Resource Co. Ltd., due on December 31, 2008 at an
      annual rate of 12%. Secured by property of the Company and third party:
      Yonghua Cai.
                
                
                583,507
                
                
                
                $582,089Note
      payable to Shanghai Agriculture Commercial Bank, due on June 2, 2009.
      Interest only payable monthly at an annual rate of 8.5905%. Secured by the
      property of third party: Lijuan Lu.
                
                
                218,815
                
                
                
                218,283Note
      payable to Bank of Agriculture, due on November 12, 2009. Interest only
      payable monthly at an annual rate of 7.884%. Secured by property of third
      party: Ningbo Jiangdong Yongke Company.
                
                
                583,507
                
                
                
                582,089NOTES
      PAYABLE SECURED BY COMPANY OR OFFICER(S):Bank
      Acceptance note payable to Bank of Communications, due on November 23,
      2008. Non-interest bearing. Secured by 50% deposit as restricted
      cash.
                
                
                189,640
                
                
                
                189,179Note
      payable to James Wang, CEO of China Direct Inc., interest only payable
      annually at the rate of 8%, $100,000 due on January 10, 2009 and $43,000
      due on April 11, 2009.  Unsecured.
                
                
                143,000
                
                
                
                143,000Note
      payable to Bank of Agriculture, due on February 15, 2009. Interest only
      payable monthly at an annual rate of 8.217%. Secured by the property of
      the Company.
                
                
                948,199
                
                
                
                945,895Note
      payable to Bank of Agriculture, due on June 12, 2009. Interest only
      payable monthly at an annual rate of 8.217%. Secured by property of the
      Company.
                
                
                1,823,460
                
                
                
                1,819,028Note
      payable to Bank of Agriculture, due on June 15, 2009. Interest only
      payable monthly at an annual rate of 8.217%. Secured by property of the
      CEO, David Wu.
                
                
                291,754
                
                
                
                291,044Bank
      Acceptance note payable to Bank of Communications, due on December 4,
      2009. Non-interest bearing. Secured by 50% deposit as restricted
      cash.
                
                
                291,754
                
                
                
                291,045Total
                
                
                5,511,266
                
                
                
                5,498,220Less
      current portion
                
                
                (5,511,266
                )
                
                
                (5,498,220
                )Long-term
      portion
                
                $
                -
                
                
                $
                -
  -13-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 NOTE
7 - STOCKHOLDERS' EQUITY
 
 CONSULTANT
 
 On July
1, 2008, the Company entered into a consulting agreement with the Company’s
financial consultant: Capital One Resource Co., Ltd., a wholly owned subsidiary
of China Direct, Inc. Under the terms of the agreement, the Company will issue a
total of 5,000,000 shares of its common stock during the current fiscal
year.  The consulting agreement provides that we will issue and
expense, at fair value, 1,250,000 shares per quarter for services rendered
and earned during each quarter.  The fair value of the shares will be
measured upon the date of each issuance.
 ADDITIONAL
CONSIDERATION FOR ACQUISITION
  On
October 13, 2008 the Company issued an additional 10,000,000 shares as
contingent consideration in connection with the acquisition of Shanghai JinKui.
Please refer to Note 11 – Subsequent Events for further discussion.
 COMMON
STOCK PURCHASE WARRANTS
 
 A summary
of the status of the Company's outstanding stock warrants as of September 30,
2008 and changes during the three month period then ended is as
follows:
 
 Shares
              
              
              Weighted
                Average
                Exercise
      PriceOutstanding
      at July 1, 2008
              
              
              42,697,282
              
              
              
              $0.139Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -Outstanding
      at September 30, 2008
              
              
              42,697,282
              
              
              
              $0.139Warrants
      exercisable at end of period
              
              
              42,697,282
              
              
              
              $0.139
 
 The
following information applies to all warrants outstanding at September 30,
2008:
  Warrants
      Outstanding and ExercisableWeightedAverage
              
              
              Weighted
              
              
              WeightedRange
      of
              
              Remaining
              
              
              Average
              
              
              AverageExercise
              
              Contractual
              
              
              Exercise
              
              
              ExercisePrices
              
              Shares
              
              
              Life
      (Years)
              
              
              Price$0.300
              
              
              150,000
              
              
              
              1.78
              
              
              
              $0.300$0.150
              
              
              24,017,940
              
              
              
              2.60
              
              
              
              $0.150$0.125
              
              
              18,333,342
              
              
              
              3.34
              
              
              
              $0.125$0.010
              
              
              196,000
              
              
              
              1.78
              
              
              
              $0.01042,697,282
              
              
              
              
              
              
              
              $0.139
  -14-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 NOTE
8 - OPERATING RISK
 
 (a)
Country risk
 
 The
Company's revenues are mainly derived from the sale of pulp, paper and packaging
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 PRC based companies, the Company could have to
compete with larger U.S. or foreign companies who have greater funds available
for expansion, marketing, research and development and the ability to attract
more qualified personnel, if access is allowed into the PRC market. If U.S. or
foreign 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 rate risk
  The
Company cannot 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 operating profit depending on exchange rate of
Chinese Renminbi converted to U.S. dollars for the period covered by the report.
The exchange rate could fluctuate depending on changes in the political and
economic environments without notice.
 
 (d)
Political risk
 
 Currently,
the PRC is openly promoting business development in order to bring more business
into the PRC. Additionally, the 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 adversely affected.
 
 (e) Key
personnel risk
 
 The
Company's future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives.
Future success is also dependent on the ability to identify, hire, train and
retain other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
 
 (f)
Performance of subsidiaries risk
 
 All of
the Company's revenues are derived and are expected to continue to be derived
through the operations of the Company's subsidiaries, most notably Wellton
International Fiber Corp., which accounted for approximately 86% of our
consolidated revenues for the three month period ended September 30, 2008.
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.
  NOTE
9 – RECENT ACCOUNTING PRONOUNCEMENTS
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FAS 115 ”.
SFAS 159 allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item’s fair value in subsequent reporting
periods must be recognized in current earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. We have determined that SFAS 159 has
not had a significant impact as of September 30, 2008, and we will continue
to evaluate the impact, if any, of SFAS 159 on our financial
statements.
 
 -15-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 In
December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations”. SFAS
141R is a revision to SFAS 141 and includes substantial changes to the
acquisition method used to account for business combinations (formerly the
“purchase accounting” method), including broadening the definition of a
business, as well as revisions to accounting methods for contingent
consideration and other contingencies related to the acquired business,
accounting for transaction costs, and accounting for adjustments to provisional
amounts recorded in connection with acquisitions. SFAS 141R retains the
fundamental requirement of SFAS 141 that the acquisition method
of accounting be used for all business combinations and for an acquirer to
be identified for each business combination. SFAS 141R is effective for periods
beginning on or after December 15, 2008, and will apply to all business
combinations occurring after the effective date. We are currently evaluating the
requirements of SFAS 141R and the impact of adoption on our consolidated
financial statements.
 
 In
December 2007, the FASB issued SFAS 160, “Non-controlling Interests in
Consolidated Financial Statements - an amendment of Accounting Research
Bulletin No. 51, Consolidated Financial Statements” (“ARB 51”). This Statement
amends ARB 51 to establish new standards that will govern the (1) accounting for
and reporting of non-controlling interests in partially owned consolidated
subsidiaries and (2) the loss of control of subsidiaries. A non-controlling
interest will be reported as part of equity in the consolidated financial
statements. Losses will be allocated to the non-controlling interest, and, if
control is maintained, changes in ownership interests will be treated as equity
transactions. Upon a loss of control, any gain or loss on the interest sold will
be recognized in earnings. SFAS 160 is effective for periods beginning after
December 15, 2008. We are currently evaluating the requirements of SFAS 160 and
the impact of adoption on our consolidated financial statements.
 
 In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We are currently evaluating the requirements of SFAS 161 and the
impact of adoption on our consolidated financial statements.
 
 In May
2008, the FASB issued Staff Position (“FSP”) APB 14-1,Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement. FSP APB 14-1 clarifies that convertible debt instruments that
may be settled in cash upon either mandatory or optional conversion (including
partial cash settlement) are not addressed by paragraph 12 of APB Opinion No.
14,Accounting for Convertible
Debt and Debtissued
with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that
issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. We will
adopt FSP APB 14-1 beginning in the first quarter of fiscal 2009, and this standard must be
applied on a retrospective basis. We are evaluating the impact the adoption of
FSP APB 14-1 will have on our consolidated financial position and results of
operations.
 
 In May
2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted
Accounting Principles. This standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with generally accepted accounting principles in the
United States for non-governmental entities. SFAS No. 162 is effective 60 days
following approval by the U.S. SEC of the Public Company Accounting Oversight
Board’s amendments to AU Section 411,The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. We do not
expect SFAS No. 162 to have a material impact on the preparation of our
consolidated financial statements.
 
 On
September 16, 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
The FSP determines that unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective for fiscal years beginning after December 15, 2008.
We are currently evaluating the requirements of (FSP) No. EITF 03-6-1, as well
as the impact of the adoption on our consolidated financial
statements.
 
 On
October 10, 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.This FASB
Staff Position (FSP) clarifies the application of FASB Statement No. 157, Fair
Value Measurements, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. Statement 157 was issued
in September 2006, and is effective for financial assets and financial
liabilities for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years.  We have adopted FSP 157-3 and determined that it had no impact
as of September 30, 2008, and we will continue to evaluate the impact, if any,
of SFAS 157-3 on our financial statements.
 
 -16-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
  NOTE
10 – SEGMENT INFORMATION
 
 The
following information is presented in accordance with SFAS No. 131,
“Disclosure about segments of an Enterprise and Related Information”. For the
three months ended September 30, 2008, the Company operated in two
reportable business segments as follows;
  PULP
AND PAPER SEGMENT:
 
 ·
              Wellton,
      a wholly owned subsidiary of Dragon
Nevada.
 
 PACKAGING
SEGMENT:
 
 ·
              Shanghai
      Jin Kui, a wholly owned subsidiary of Dragon
  Nevada;
 
 ·
              Dragon
      Florida, a wholly owned subsidiary of Dragon
  Nevada;
 
 ·
              Ningbo
      Dragon, a wholly owned subsidiary of Dragon
  Florida;
 
 ·
              Yonglongxin,
      a wholly owned subsidiary of Ningbo
Dragon;
 
 ·
              R&D Center,
      a wholly owned subsidiary of
Yonglongxin;
 
 ·
              Yongxin,
      a 60% interest subsidiary of Ningbo Dragon;
and
 
 ·
              Dragon
      Packaging, a wholly owned subsidiary of Ningbo
  Dragon.
 
 The
Company's reportable segments are strategic business units that offer different
products and services. Each segment and each company or group of
companies are managed and reported separately based on the fundamental
differences in their operations. Condensed information with respect to these
reportable segments for the three months ended September 30, 2008 and 2007 are
as follows:
  For the
three months ended September 30, 2008:
 
  Consolidated
                
                
                Pulp
      and Paper
                
                
                Packaging
                
                
                Corporate
      Items and EliminationsNet
      Revenues
                
                $
                9,814,986
                
                
                $
                8,440,438
                
                
                $
                1,374,548
                
                
                $
                -Cost
      of Sales
                
                
                9,067,517
                
                
                
                7,936,537
                
                
                
                1,130,980
                
                
                
                -Gross
      Profit
                
                
                747,469
                
                
                
                503,901
                
                
                
                243,568
                
                
                
                -Total
      Operating Expenses
                
                
                769,911
                
                
                
                432,418
                
                
                
                243,743
                
                
                
                93,750Total
      Income (loss) from Operations
                
                
                (22,442
                )
                
                
                71,483
                
                
                
                (175
                )
                
                
                (93,750
                )Net
      (loss) income
                
                
                (148,888
                )
                
                
                13,388
                
                
                
                (68,381
                )
                
                
                (93,895
                )Segment
      Assets
                
                
                24,267,197
                
                
                
                6,755,504
                
                
                
                17,513,154
                
                
                
                (1,461
                )
 -17-
 
 DRAGON
INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 For the
three months ended September 30, 2007:
  Consolidated
                  
                  
                  Pulp
      and Paper
                  
                  
                  Packaging
                  
                  
                  Corporate
      Items and EliminationsNet
      Revenues
                  
                  $
                  7,929,498
                  
                  
                  $
                  7,042,996
                  
                  
                  $
                  886,502
                  
                  
                  $
                  -Cost
      of Sales
                  
                  
                  7,331,333
                  
                  
                  
                  6,626,054
                  
                  
                  
                  705,278
                  
                  
                  
                  -Gross
      Profit
                  
                  
                  598,165
                  
                  
                  
                  416,941
                  
                  
                  
                  181,224
                  
                  
                  
                  -Total
      Operating Expenses
                  
                  
                  426,647
                  
                  
                  
                  220,349
                  
                  
                  
                  206,178
                  
                  
                  
                  120Total
      Income (loss) from Operations
                  
                  
                  171,518
                  
                  
                  
                  196,592
                  
                  
                  
                  (24,954
                  )
                  
                  
                  (120
                  )Net
      (loss) income
                  
                  
                  (17,347
                  )
                  
                  
                  78,967
                  
                  
                  
                  (96,194
                  )
                  
                  
                  (120
                  )Segment
      Assets
                  
                  
                  24,462,181
                  
                  
                  
                  5,998,862
                  
                  
                  
                  18,515,672
                  
                  
                  
                  (52,352
                  )
  NOTE
11 – SUBSEQUENT EVENTS
 On
October 13, 2008 we issued 10,000,000 shares of common stock assigned to H.K.
Mingtai Investment Co., Ltd. upon the request of Haobo Zhu and Shaobo
Ouyang, former shareholders of Shanghai JinKui. The shares were issued as
partial payment of our acquisition of Shanghai Jin Kui. Pursuant to section 1.2
of a stock purchase agreement entered into by and among Dragon Nevada and
Shanghai Jin Kui dated June 10, 2006, filed as an exhibit to our 10-KSB/A for
the fiscal year ended June 30, 2006, we agreed to a contingent payment of
additional shares related to the purchase, based on Shanghai JinKui achieving
specified net income targets subsequent to the purchase. The fulfillment of the
contingent conditions has been in dispute since December 31, 2006; specifically,
the parties have disagreed regarding the definition of net income. On October
13, 2008 the parties reached an agreement to issue 10,000,000 shares of common
stock with a fair value of $300,000 . In accordance with SFAS 141, “Business Combinations” we
accounted for the additional shares as part of the purchase price of Shanghai
JinKui when the contingency was resolved and additional consideration was distributable. We valued the additional
consideration at fair value based on the market price of $0.03 per share on the
date of issuance.
  On
October 15, 2008 we issued 5,000,000 shares of common stock to Capital One
Resource Co., Ltd.; 3,000,000 shares were for payment of consulting services
rendered during our fiscal year ended June 30, 2008 and 2,000,000 shares were
for payment of consulting services rendered and to be rendered during our fiscal
year ended June 30, 2009.
 -18-
 
 Item
2.  Management’s Discussion and Analysis of Financial Condition and Results
of Operations
  The
following discussion should be read in conjunction with the information
contained in our unaudited consolidated financial statements and the notes
thereto appearing elsewhere herein and in conjunction with the Management’s
Discussion and Analysis set forth in our Annual Report on Form 10-K for the year
ended June 30, 2008.
 
 We are on
a fiscal year; as such the three month period ending September 30, is our first
quarter. The fiscal year ended June 30, 2008 is referred to as “2008”, the
fiscal year ended June 30, 2007 is referred to as “2007”, and the coming fiscal
year ending June 30, 2009 is referred to as “2009”.
 
 OVERVIEW
  Dragon
International Group Corp. ("we", "our", "us", "Dragon" or "Dragon Nevada") is a
holding company that, through our subsidiary companies, manufactures and
distributes assorted industrial paper and packaging products.  Our
operations are conducted through subsidiaries located in the Peoples Republic of
China ("PRC") and the British Virgin Islands (“BVI”).
  We are a
manufacturer and distributor of a variety of paper products and packaging
materials. Our principal executive offices and manufacturing facilities are
located approximately 200 miles south of Shanghai in Ningbo, Zhejiang Province,
China.  Our manufacturing operations are led by Shanghai Jin Kui
Packaging Material Co., Ltd. (“Shanghai Jin Kui”) and Ningbo Dragon
International Trade Co., Ltd. (“Ningbo Dragon”) and its subsidiary
companies.  The main customers of our manufacturing products are
pharmaceutical companies in the People’s Republic of China, Pakistan, and
India.  Our distribution operations are led by Wellton International
Fiber Corp. (“Wellton”) domiciled in the British Virgin
Islands.  Wellton is an agent and supplier of paper pulp, waste paper,
and recycled paper products.  Its main customers are manufacturers of
paper and packaging products ranging from office paper to industrial
cardboard.
 
 We
operate various entities engaged in the paper industry. However, we evaluate the
business and our products under two core segments: (i) Pulp and Paper and (ii)
Packaging. Our Pulp and Paper segment consists of the operations of Wellton and
our Packaging segment consists of the operations of Shanghai Jin Kui and Ningbo
Dragon and its subsidiaries.  Our various entities enable us to be
diversified within the paper industry and support our goal to become a leader in
the manufacture and distribution of a) pharmaceutical packaging products and b)
pulp and paper products within China.
 
 Our
operations are conducted through the following subsidiaries of Dragon
Nevada:
 
 PULP
AND PAPER SEGMENT:
 
 I.
              Wellton
      International Fiber Corp.
("Wellton")
 Wellton
is a wholly owned subsidiary of Dragon Nevada.  Dragon Nevada
acquired a 51% interest on June 29, 2007 and acquired the
remaining 49% interest in Wellton on October 1, 2007. Wellton was formed on
February 2002 under the laws of the British Virgin Islands and operates as an
agent and supplier for two categories of goods: paper pulp and waste paper
products.  Revenues for Wellton are derived from a diverse customer
base located primarily in the PRC where no customer represents more than 10% of
revenues.
 
 PACKAGING
SEGMENT:
 
 II.
              Shanghai
      Jin Kui Packaging Material Co., Ltd. (“Shanghai Jin
  Kui”)
 Shanghai
Jin Kui is a wholly owned subsidiary of Dragon Nevada. Dragon Nevada acquired
Shanghai Jin Kui on June 30, 2006. Shanghai Jin Kui is a manufacturer of
specialized packaging products, e.g. blister packs, for the pharmaceutical and
food industry. In 2005, Shanghai Jin Kui obtained Good Manufacturer Practice
("GMP") status from the Chinese State Food and Drug Administration ("SFDA") and
ISO9000 Quality Assurance System.
 
 III.
              Dragon
      International Group Corp., a Florida corporation ("Dragon
      Florida")
 Dragon
Florida is a wholly owned subsidiary of Dragon Nevada. Dragon Nevada
acquired Dragon Florida on October 4, 2004.  Dragon Florida is a
holding company and operates the following subsidiary:
 
 -19-
 1.
              Ningbo
      Dragon International Trade Co., Ltd. ("Ningbo
  Dragon")
 Ningbo
Dragon is a wholly owned subsidiary of Dragon Florida. Ningbo Dragon was formed
on August 29, 1997. Dragon Florida acquired a 70% interest in Ningbo Dragon on
June 21, 2004 and acquired the remaining 30% interest on December 31, 2004.
Ningbo Dragon is a manufacturer and distributor of paper and integrated
packaging paper products.  Ningbo Dragon, through a subsidiary, holds
an ISO9000 certificate and national license to import and export
products.  Revenues for Ningbo Dragon are derived primarily from
operations within China with a diverse customer base where no customer
represents more than 10% of revenues. In addition to its own operations, Ningbo
Dragon directly operates the following three subsidiaries:
 
 i.
              Ningbo
      City Jiangdong Yonglongxin Packaging Technology Co., Ltd.
      ("Yonglongxin")
 Yonglongxin
is a wholly owned subsidiary of Ningbo Dragon. Yonglongxin was formed on
November 8, 1999.  Yonglongxin is a manufacturer of specialty
paperboard products and holds an ISO9000 certificate.  Yonglongxin
operates a civil welfare manufacturing facility, which enjoys government
subsidies for employing handicapped citizens in Zhang'ai Village, Fuming County,
near Ningbo, China.  Yonglongxin also operates the
Xianyang Naite Research & Development Center
("R&D Center").  The R&D Center was created to
develop, design and improve production methods.
 
 ii.
              Ningbo
      Dragon Packaging Technology Co., Ltd. ("Dragon
  Packaging")
 Dragon
Packaging is a wholly owned subsidiary of Ningbo Dragon.  Ningbo
Dragon acquired Dragon Packaging on June 1, 2005. Dragon Packaging is a
manufacturer of specialized packaging materials products for the pharmaceutical
and food industry.
 
 iii.
              Hangzhou
      Yongxin Paper Co., Ltd. ("Yongxin”)
 NingboDragonholds a 60% interest in
Yongxin.NingboDragon acquired a 60% interest on
July 1, 2005. Yongxin
manufactures, sells, and distributes cigarette packaging materials and is
located in Hengjie Village of the Liuxia town in Hangzhou, Zhejiang Province,China.
  FOREIGN
EXCHANGE CONSIDERATIONS
 
 Since the
local currency for 100% of our net revenues for the three months ended September
30, 2008 and 2007 is the Chinese Renminbi (“RMB”), how we report net revenues
from our RMB-based operations is of particular importance to understanding our
financial statements. Transactions and balances originally denominated in U.S.
dollars are presented at their original amounts. Transactions and balances in
other currencies are converted into U.S. dollars in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency
Translation", and are included in determining net income or loss. For
foreign operations with the local currency as the functional currency, assets
and liabilities are translated from the local currencies into U.S. dollars at
the prevailing exchange rate on the respective balance sheet date.
 
 Revenues
and expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive
loss.
 
 The
functional currency of our Chinese subsidiaries is the local currency, the
Renminbi or the Chinese dollar, ("RMB"). The financial statements of our
subsidiaries are translated to U.S. dollars using period and rates of exchange
for assets and liabilities, and average rates of exchange for the period for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations
and were not material during the periods presented.  Since 1994, the
value of the Renminbi relative to the U.S. dollar has remained relatively
stable; appreciating slightly against the U.S. dollar. On July 21, 2005, the PRC
announced that the Renminbi would be pegged to a basket of currencies rather
than tied to a fixed exchange rate to the U.S. dollar.
 
 If any
devaluation of the Renminbi were to occur in the future, returns on our
operations in China, which are expected to be in the form of Renminbi, will be
negatively impacted upon conversion to U.S. dollars. Although we attempt to have
most future payments, mainly repayments of loans and capital contributions
denominated in U.S. dollars, if any decrease in the value of the Renminbi were
to occur in the future, our product sales in China and in other countries may be
negatively affected.
 
 CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates in 2008 and 2007 include inventory valuation, the
allowance for doubtful accounts, the valuation of equity instruments, the
useful life of property, plant and equipment and value of land use
rights.
 
 -20-
 Inventories,
consisting of raw materials and finished goods related to our products are
stated at the lower of cost or market utilizing the weighted average
method.
 
 Our
financial instruments at September 30, 2008 contain accounts receivable,
accounts payable and short-term debt. The fair values of financial instruments
approximate their recorded values.
 
 We review
the carrying value of property and equipment and land-use rights for impairment
at least annually or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
long-lived assets is measured by comparison of its carrying amount to the
undiscounted cash flows that the asset or asset group is expected to generate.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the property, if any,
exceeds its fair market value.
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FAS 115 ”.
SFAS 159 allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item’s fair value in subsequent
reporting periods must be recognized in current earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. We have adopted SFAS 159 and
determined that it had no impact as of September 30, 2008, and we will continue
to evaluate the impact, if any, of SFAS 159 on our financial
statements.
 
 In
December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations”. SFAS
141R is a revision to SFAS 141 and includes substantial changes to the
acquisition method used to account for business combinations (formerly the
“purchase accounting” method), including broadening the definition of a
business, as well as revisions to accounting methods for contingent
consideration and other contingencies related to the acquired business,
accounting for transaction costs, and accounting for adjustments to provisional
amounts recorded in connection with acquisitions. SFAS 141R retains the
fundamental requirement of SFAS 141 that the acquisition method of accounting be
used for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141R is effective for periods beginning on or after
December 15, 2008, and will apply to all business combinations occurring after
the effective date. We are currently evaluating the requirements of SFAS 141R
and the impact of adoption on our consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS 160, “Non-controlling Interests in
Consolidated Financial Statements - an amendment of Accounting
Research Bulletin No. 51, Consolidated Financial Statements ” (“ARB 51”).
This Statement amends ARB 51 to establish new standards that will govern the (1)
accounting for and reporting of non-controlling interests in partially owned
consolidated subsidiaries and (2) the loss of control of subsidiaries. A
non-controlling interest will be reported as part of equity in the consolidated
financial statements. Losses will be allocated to the non-controlling interest,
and, if control is maintained, changes in ownership interests will be treated as
equity transactions. Upon a loss of control, any gain or loss on the interest
sold will be recognized in earnings. SFAS 160 is effective for periods beginning
after December 15, 2008. We are currently evaluating the requirements of SFAS
160 and the impact of adoption on our consolidated financial
statements.
 
 In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We are currently evaluating the requirements of SFAS 161 and the
impact of adoption on our consolidated financial statements.
 
 In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement . FSP APB 14-1 clarifies
that convertible debt instruments that may be settled in cash upon either
mandatory or optional conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14,Accounting for Convertible
Debt and Debt issued
with Stock Purchase Warrants . Additionally, FSP APB 14-1 specifies that
issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. We will
adopt FSP APB 14-1 beginning in the first quarter of fiscal 2009, and this standard must be
applied on a retrospective basis. We are evaluating the impact the adoption of
FSP APB 14-1 will have on our consolidated financial position and results of
operations.
 
 -21-
 In May
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
162,The Hierarchy of
Generally Accepted Accounting Principles. This standard is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS No. 162 is effective 60
days following approval by the U.S. Securities and Exchange Commission
(“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU
Section 411,The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. We do not expect SFAS No. 162 to have a material impact on
the preparation of our consolidated financial statements.
 
 On
September 16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“Determining Whether
Instruments Granted in Share-Based Payment Transactions Are
Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
The FSP determines that unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective for fiscal years beginning after December 15, 2008.
We are currently evaluating the requirements of (FSP) No. EITF 03-6-1, as well
as the impact of the adoption on our consolidated financial
statements.
 
 On
October 10, 2008, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.This FASB
Staff Position (FSP) clarifies the application of FASB Statement No. 157, Fair
Value Measurements, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. Statement 157 was
issued in September 2006, and is effective for financial assets and financial
liabilities for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years.  We have adopted SFAS 157-3 and determined that it had no
impact as of September 30, 2008, and we will continue to evaluate the impact, if
any, of SFAS 157-3 on our financial statements.
 
 During
the three month period ended September 30, 2008, there have been no material
changes to our critical accounting policies that impacted our consolidated
financial condition or results of operations.
 
 REVENUE
RECOGNITION
 
 We follow
the guidance of the Securities and Exchange Commission's Staff Accounting
Bulletin 104 for revenue recognition. In general, we record revenue when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured.
  RECENT
EVENTS
  In
November 2008, the Chinese government announced a two year domestic economic
stimulus program valued at $586 billion. The stimulus packages which included
previously announced tax rebates is aimed at bolstering domestic economic
activity. The program includes spending in housing, infrastructure, agriculture,
health care and social welfare. Furthermore the program includes tax rebates and
a tax deduction for capital. We expect to see a benefit to the Chinese economy
from this stimulus program. However in the short-term, it remains to be seen the
impact this will have on our revenues through the remainder of fiscal 2009 and
beyond.
 
 RESULTS
OF OPERATIONS
 
 For the
three months ended September 30, 2008 as compared to the three months ended
September 30, 2007.
 
 The following table provides certain
comparative information based on our consolidated results of operations for the
three months ended September 30, 2008 and September 30, 2007:
 
 -22-
 Three
      months ended September 30, 2008
                
                
                Three
      months ended September 30, 2007
                
                
                $
      Change
                
                
                %
      ChangeNet
      Revenues
                
                $
                9,814,986
                
                
                $
                7,929,498
                
                
                $
                1,885,488
                
                
                
                23.8%Cost
      of Sales
                
                
                9,067,517
                
                
                
                7,331,333
                
                
                
                1,736,184
                
                
                
                23.7%Gross
      Profit
                
                
                747,469
                
                
                
                598,165
                
                
                
                149,304
                
                
                
                25.0%Selling
      Expenses
                
                
                381,575
                
                
                
                192,308
                
                
                
                189,267
                
                
                
                98.4%General
      and Administration Expenses
                
                
                388,336
                
                
                
                234,339
                
                
                
                153,997
                
                
                
                65.7%Total
      Operating Expenses
                
                
                769,911
                
                
                
                426,647
                
                
                
                343,264
                
                
                
                80.5%Loss
      from Operations
                
                
                (22,442
                )
                
                
                171,518
                
                
                
                (193,960
                )
                
                
                113.1%Total
      Other Expense
                
                
                (120,134
                )
                
                
                (22,097
                )
                
                
                (98,037
                )
                
                
                -443.7%Net
      Income (Loss)
                
                $
                (148,888
                )
                
                $
                (17,347
                )
                
                $
                (131,541
                )
                
                
                -758.3%
  
 OTHER KEY
INDICATORS
  Three
      months ended
                  September
      30, 2008
                Three
      months ended
                  September
      30, 2007Other
      Key Indicators:Cost
      of Sales as a percentage of Revenues
                92%
                92%Gross
      Profit Margin
                8%
                8%Selling
      Expenses as a percentage of Revenues
                4%
                2%General
      and Administration Expenses as a percentage of Revenues
                4%
                3%Total
      Operating Expenses as a percentage of Revenues
                8%
                5%
  
 Segment
Information
  During
fiscal years 2008 and 2009, our operations were conducted in two operating
segments as defined in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information.  Our operating decisions,
on-site management, internal reporting and performance assessments are conducted
within each of the following two identified segments:
 
 ·
              Pulp
      and Paper
 ·
              Packaging
 
 The
following table summarizes the operating results for the three months ended
September 30, 2008 and September 30, 2007 by segment:
 
 -23-
   Consolidated
                
                
                Pulp
      and Paper
                
                
                Packaging
                
                
                Corporate
      Items and ElimationsFor
      the three months ended September 30,
                
                
                For
      the three months ended September 30,
                
                
                For
      the three months ended September 30,
                
                
                For
      the three months ended September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007Net
      Revenues
                
                
                9,814,986
                
                
                
                7,929,498
                
                
                
                8,440,438
                
                
                
                7,042,996
                
                
                
                1,374,548
                
                
                
                886,502
                
                
                
                -
                
                
                
                -Cost
      of Sales
                
                
                9,067,517
                
                
                
                7,331,333
                
                
                
                7,936,537
                
                
                
                6,626,054
                
                
                
                1,130,980
                
                
                
                705,278
                
                
                
                -
                
                
                
                -Gross
      Profit
                
                
                747,469
                
                
                
                598,165
                
                
                
                503,901
                
                
                
                416,941
                
                
                
                243,568
                
                
                
                181,224
                
                
                
                -
                
                
                
                -Total
      Operating Expenses
                
                
                769,911
                
                
                
                426,647
                
                
                
                432,418
                
                
                
                220,349
                
                
                
                243,743
                
                
                
                206,178
                
                
                
                93,750
                
                
                
                120Total
      Operating Income
                
                
                (22,442
                )
                
                
                171,518
                
                
                
                71,483
                
                
                
                196,592
                
                
                
                (175
                )
                
                
                (24,954
                )
                
                
                (93,750
                )
                
                
                (120
                )Net
      (loss) income
                
                
                (148,888
                )
                
                
                (17,347
                )
                
                
                13,388
                
                
                
                78,967
                
                
                
                (68,381
                )
                
                
                (96,194
                )
                
                
                (93,895
                )
                
                
                (120
                )Segment
      Assets
                
                
                24,267,197
                
                
                
                24,462,181
                
                
                
                6,755,504
                
                
                
                5,998,862
                
                
                
                17,513,154
                
                
                
                18,515,672
                
                
                
                (1,461
                )
                
                
                (52,352
                )
  NET
REVENUES
 
 Our
consolidated revenues for the three months ended September 30, 2008 were up
$1,885,488, or approximately 24%, increasing from $7,929,498 for the three month
period ending September 30, 2007 to $9,814,986 for the three month period ending
September 30, 2008.  This increase was due to organic growth in both
our packaging and pulp & paper segments.
 
 Pulp and Paper
Segment
 Wellton
leads our pulp and paper segment; this segment contributed $8,440,438 in revenue
this quarter, or approximately 86% of total revenue.  Segment revenues
increased $1,397,442 or 20%, from $7,042,996 for the three month period ended
September 30, 2007 to $8,440,438 for the same period in the current fiscal
year.  We expect to continue to see positive revenue growth from this
segment..
 
 Packaging
Segment
 Shanghai
Jin Kui and Ningbo Dragon and its subsidiaries make up our packaging segment;
this segment contributed $1,374,548, or approximately 14% of total
revenue.  Segment revenues increased $488,046 or 55%, from $886,502
for the three month period ended September 30, 2007 to $1,374,548 for the same
period in the current fiscal year.
 
 We are
beginning to see the growth results of our strategic shift in our packaging
segment from a focus on cigarette and food packaging toward pharmaceutical
packaging.  While this shift is continuing to develop and mature, the
55% revenue growth compared to the same quarter in the prior year is evidence
that this strategy is working.  We expect to see continued improvement
in our packaging segment as we continue to dedicate resources to this
market.
 
 COST OF
SALES AND GROSS PROFIT
 
 Our consolidated cost of sales
increased $1,736,184, or 24%, from $7,331,333 during the three months ended
September 30, 2007 to $9,067,517 during the three months ended September 30,
2008.  Cost of sales as a percentage of net revenues remained
relatively stable between periods, totaling 92.4% for the three months ended
September 30, 2008 and 92.5% for the three months ended September 30,
2007.  As such, this increase in cost of sales follows in-line with
our increase in sales period over period.
 
 Consolidated
gross profit increased $149,304, or 25%, from $598,165 for the three months
ended September 30, 2007 to $747,469 for the three months ended September 30,
2008.  Gross profit as a percentage of sales remained stable between
periods; 7.6% for the three months ended September 30, 2008 and 7.5% for the
three months ended September 30, 2007.
 
 Pulp and Paper
Segment
 Gross Profit increased $86,960 or 21%,
from $416,941 for the three months ended September 30, 2007 to $503,901 for the
three months ended September 30, 2008.  Gross profit as a percentage
of sales remained stable at 6.0% in the current quarter and 5.9% in the same
quarter in the prior year.
 
 Packaging
Segment
 Gross profit increased $62,344, or 34%,
from $181,244 for the three months ended September 30, 2007 to $243,568 for the
three months ended September 30, 2008. Gross profit as a percentage of sales
decreased from 20.4% during the first quarter of the prior year to 17.7% during
the current quarter; this decrease is largely due to higher energy
costs.  This segment continues to focus on higher margin
pharmaceutical products, even with this fluctuation this segment’s gross margin
is significantly higher than our Pulp and Paper segment.
 
 -24-
 TOTAL
OPERATING EXPENSES
 
 Total operating expenses increased
$343,264, or 80%, from $426,647 for the three months ended September 30, 2007 to
$769,911 for the three months ended September 30, 2008.  Operating
expense as a percentage of revenue increased from 5.4% during the
first quarter in the prior year to 7.8% during the current
quarter.
 
 Selling expenses increased $189,267, or
98%, from $192,308 for the three months ended September 30, 2007 to $381,575 for
the three months ended September 30, 2008. Selling expenses as a percentage of
revenue increased from 2.4% during the first quarter in the prior year to 3.9%
in the current quarter. This increase is primarily due to an increase in
commissions paid for Wellton agents.
 
 General and administrative expenses
increased $153,997 or 66% from $234,339 during the three months ended
September 30, 2007 to $388,336 as compared to the three months ended
September 30, 2008. General and administrative expenses as a percentage of
revenue increased from 3.0% during the first quarter in the prior year to 4.0%
in the current quarter.  This increase is due primarily to stock based
consulting expenses.
  TOTAL
OTHER EXPENSE
 
 Total other expense increased $98,037
from $22,097 for the three months ended September 30, 2007 to $120,134 for the
three months ended September 30, 2008.  This increase is primarily due
to an increase in interest expense of $98,580; interest expense increased the
current quarter as compared to the first quarter in the prior year as we have
financed a larger portion of our operations with short-term
notes.  Our notes payable balance has increased and the weighted
average interest rate of these notes have also increased over the same period in
the prior year.
  NET LOSS
  Net
loss increased sharply from a net loss of $17,347 for the three
months ended September 30, 2007 to a net loss of $148,888 for the three
month period ended September 30, 2008 due to the combination of factors
highlighted above.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
At September 30, 2008 our working capital was approximately $4.7 million as
compared to approximately $5.1 million at June 30, 2008.
 
 As of
September 30, 2008, we had $432,168 in unrestricted cash and an accumulated
deficit since inception of $1,949,731.  Our restricted cash balance at
September 30, 2008, totaled $240,697, and is pledged to the repayment of bank
acceptance notes, totaling $481,394 held by the Bank of Communications in the
PRC.
 
 Cash
provided from operating activities totaled $276,670 for the three months
ended September 30, 2008 compared to cash used in operating activities for the
same period of the preceding year of $595,251.  This overall increase
in cash provided by operating activities of $871,921 was primarily attributable
to efficient cash management relating to collection of accounts receivable and
payments on accounts payable.  The largest sources of cash include
funding from the following: $3,124,808 from collection of accounts receivable
and $82,055 from the increase of accrued liabilities. These sources of cash were
offset primarily by the following uses of cash: $2,193,506 to pay
down accounts payable, and $325,805 increase in advance on
purchases.
 
 We used
$109,808 of cash for investing activities during the period, we used $73,863 for
capital expenditures and $35,945 as an increase in notes
receivable.  We also obtained $38,347 in cash provided by financing
activities.
 
 We have
historically supplemented our operational cash flow, as needed, through PRC
based bank borrowings.  These borrowings have been primarily with the
Agricultural Bank of China and the Bank of Communications.  The level
of these borrowings remained relatively stable totaling $5,511,266 as of
September 30, 2008, increasing slightly from $5,498,220 at June 30,
2008.  We believe our relationship with these banks remains good and
we will be able to replace or renew these loans as they become
due.  We are current with our payment obligations relating to these
loans.  Our inability to renew these obligations as they become due or
find alternate sources of funding will adversely affect our
operations.
 
 -25-
 
 OFF
BALANCE SHEET ARRANGEMENTS
 
 As of the
date of this report, we do not have any off-balance sheet arrangements that are
likely to have a current or future effect on our financial condition material to
our shareholders. In the ordinary course of business, we enter into operating
lease commitments, purchase commitments and other contractual obligations. These
transactions are recognized in our financial statements in accordance with
generally accepted accounting principles in the United States.
  Cautionary Note Regarding
Forward-Looking Information and Factors That May Affect Future
Results
  This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The Securities and Exchange Commission
encourages companies to disclose forward-looking information so that investors
can better understand a company's future prospects and make informed investment
decisions. This Quarterly Report on Form 10-Q and other written and oral
statements that we make from time to time contain such forward-looking
statements that set out anticipated results based on management's plans and
assumptions regarding future events or performance. We have tried, wherever
possible, to identify such statements by using words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," "will" and similar
expressions in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to future actions,
future performance or results of current and anticipated sales efforts,
expenses, the outcome of contingencies, such as legal proceedings, and financial
results. A list of factors that could cause our actual results of operations and
financial condition to differ materially is set forth below, and these factors
are discussed in greater detail under Item 1. Description of Business--Risk
Factors in our Annual Report on Form 10-K  for the fiscal year ended
June 30, 2008:
  The loss
of the services of any of our executive officers or the loss of services of any
of our key persons responsible for the management, sales, marketing and
operations efforts of our subsidiaries; our ability to successfully transition
the internal operations of companies which we acquired in the PRC from their
prior status as privately held Chinese companies to their current status as
subsidiaries of a publicly-held U.S. company; our acquisition efforts in the
future may result in significant dilution to existing holders of our securities;
difficulties in raising capital in the future as a result of the terms of our
January 2007 financing; our ability to effectively integrate our
acquisitions and manage our growth; the lack of various legal protections
customary in certain agreements to which we are party and which are material to
our operations which are customarily contained in similar contracts prepared in
the United States; our dependence upon advisory services provided by a U.S.
company due to our management’s location in the Peoples Republic of China
(“PRC”); intense competition in the packaging products and paperboard
industries; the impact of economic downturn in the PRC on our revenues from our
operations in the PRC; the impact of changes in the political and economic
policies and reforms of the Chinese government; fluctuations in the exchange
rate between the U.S. dollars and Chinese Renminbi; the limitation on our
ability to receive and use our revenue effectively as a result of restrictions
on currency exchange in China; the impact of changes to the tax structure in the
PRC; our inability to enforce our legal rights in China due to policies
regarding the regulation of foreign investments; and the existence of extended
payment terms which are customary in China; uncertainties related to PRC
regulations relating to acquisitions of PRC companies by foreign entities that
could restrict or limit our ability to operate, and could negatively affect our
acquisition strategy; our board
of directors’ effectiveness in fulfilling the functions of the audit committee
may have been hindered by our lack of independent directors;we are dependent upon a few suppliers of raw materials and products we
distribute, if our suppliers do not provide us with adequate supplies of certain
materials used in our products, we may not be able to deliver sufficient
quantities of our products to satisfy demand; we may not have sufficient
protection of certain of our intellectual property; demand for our products is
substantially dependent upon the demand for the industry to which we supply
products; our operations are subject to government regulation; our products must
continue to meet the needs of the industries we service; our business is
substantially dependent upon the paper industry in general and the operations of
Wellton; changes in the cost or availability of raw material and energy; changes
in transportation availability or costs; material disruptions of manufacturing;
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, we have already had to restate our financial statements
from September 30, 2005 through September 30, 2007 as a result of weakness and
deficiencies in such controls; 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; 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.
  We
caution that the factors described herein and other factors could cause our
actual results of operations and financial condition to differ materially from
those expressed in any forward-looking statements we make and that investors
should not place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of anticipated or unanticipated events or
circumstances.  New factors emerge from time to time, and it is not
possible for us to predict all of such factors. Further, we cannot assess the
impact of each such factor on our results of operations or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking
statements.
  ITEM 4T.  CONTROLS AND PROCEDURES
 
 As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended as
of September 30, 2008, the end of the period covered by this quarterly report,
our management concluded its evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures.
 
 -26-
 Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures will prevent all
error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system's
objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. The design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions.
  Disclosure
controls and procedures and other procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time period specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934 is
accumulated and communicated to management including our Chief Executive Officer
and Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.
 
 Based
upon that evaluation, our company's Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were not
effective because of the significant deficiency and the material weakness
described below. Measures are being taken to include documentation of
management oversight and review as part of the appropriate functional
procedures.
  All of
our employees and the bulk of accounting staff are located in the PRC and we do
not presently have a Chief Financial Officer, comptroller or similarly titled
senior financial officer who is bilingual and experienced in the application of
U.S. Generally Accepted Accounting Principles. During fiscal 2006 we began a
search for an appropriate candidate who can fill such a position; however, as of
November 2008, the Company has not engaged one and we are unable to predict when
such a person will be hired. During fiscal 2006 we also began providing
additional training to our accounting staff in the application of U.S. GAAP. As
a result, our management believes that a deficiency in our internal
controls continues to exist. Until we expand our staff to include a bilingual
senior financial officer who has the requisite experience necessary, and
supplement the accounting knowledge of our staff, it is likely that we will
continue to have material weaknesses in our disclosure controls and
procedures.
 
 Restatement
of financial statements
  The
financial statements for the fiscal year ended June 30, 2007, including the
subsequent three month period ended September 30, 2007 have been restated to
correct the accounting treatment previously accorded certain
transactions.
 
 ·
              For
      the fiscal year ended June 30, 2007 and  2006, we erroneously
      did not value the reduction in exercise price of existing warrants
      associated with an induced conversion offer.  The value of the
      reduction in exercise price has been calculated at $447,238, and was
      reflected in the statement of operations as an increase in interest
      expense, and a resultant increase in net loss and net loss per share for
      the fiscal year ended June 30, 2006.  The Company had recorded
      the valuation of the reduction in exercise price as an increase in
      additional paid-in capital.
  -27-
 ·
              For
      the fiscal years ended June 30, 2007 and 2006, we erroneously deferred,
      over a three year period commencing in January 2006, $540,000 in
      consulting expense related to the issuance of 6,000,000 shares of our
      common stock and $395,675 related to the issuance of 4,700,000 common
      stock purchase warrants exercisable at $0.15 per share over a five year
      period.  In addition, in February 2006, we issued warrants to
      purchase 500,000 shares of common stock, exercisable for five years at
      $.15 per share, as compensation pursuant to a one year financial advisory
      consulting agreement.  The Company had incorrectly deferred the
      fair value of these warrants of $71,243 over the contract
      term.  The Company has restated the related financial statements
      to recognize the full expense of these agreements immediately upon
      entering into the consulting agreements in January 2006 and February 2006,
      under the provisions of EITF 96-18 and SFAS 123R.  These
      corrections resulted in an increase in consulting expense for the fiscal
      year ended June 30, 2006 and a reduction in consulting expense for
      subsequent periods, including a reduction in consulting expenses of
      $86,878 for the three month period ended September 30, 2007, as detailed
      in the tables below.·
              In
      March 2007, pursuant to a consulting agreement, we issued 4,000,000 shares
      of our common stock.  Initially, we had recorded and reported
      this issuance incorrectly as a cost of raising capital related to the
      private placement of $1,500,000 in units sold during the
      quarter.  We restated the financial statements to recognize the
      full expense of this agreement immediately upon entering into the
      consulting agreement in March 2007 under the provisions of EITF 96-18 and
      SFAS 123.  This correction resulted in an increase in
      accumulated deficit for the three month period ended September 30, 2007 of
      $360,000.
  Other
than the items discussed above there have been no changes in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
 
 PART II - OTHER INFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS
  None
  ITEM
      1A.
              RISK
      FACTORS
  Risk factors describing the major risks to our business can be
found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the
year ended June 30, 2008. There has been no material change in our risk factors
from those previously discussed in the Annual Report on Form
10-K.
   ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
  PROCEEDS
  On
October 13, 2008 we issued 10,000,000 shares of our common stock to HK Mingtai
Investment Co, Ltd. ("HK Mingtai").  These shares were issued in reliance
upon Section 4(2) of the Securities Act of 1933 ("the Act").  The
offering and sale of the common stock in this transaction qualified for
exemption under Section 4(2) of the Act since the issuance by us did not involve
a public offering. This offering was done with no general solicitation or
advertising by us.  HK Mingtai was an accredited investor and its
representative had an opportunity to ask questions of our
management.  The offering was not a public offering as defined in
Section 4(2) because the offer was made to an insubstantial number of persons
and because of the manner of the offering.   In addition, HK
Mingtai had the necessary investment intent as required by Section 4(2) since it
agreed to, and received, share certificates bearing a legend stating that such
shares are restricted.  This restriction ensures that these shares
will not be immediately redistributed into the market and therefore not part of
a public offering.  Based on the analysis of the above factors, we
have met the requirements to qualify for exemption under Section 4(2) of the Act
for this transaction.
  
 ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIES
  None
  
 ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 None
  
 -28-
 ITEM
      5.
              OTHER
      INFORMATION
 None
   ITEM
      6.
              EXHIBITS
      AND REPORTS ON FORM 8-K
  31.1
              Certification
      of the Chief Executive Officer, Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
  31.2
              Certification
      of the Chief Financial Officer, Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
  32.1
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley
  Act
  32.2
              Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley
  Act
 
 
 
 
 
 -29-
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 
 Date:
November 13, 2008.
 
 DRAGON
INTERNATIONAL GROUP CORP.
 
 
 By:
/s/ David Wu
 
 David
Wu,
 Chief
Executive Officer,
 (Principal
Executive Officer)
    -30-