| DRAGON INTERNATIONAL GROUP      CORP.                               |
|---------------------------------------------------------------------|
| (Exact      name of small business issuer as specified in  charter) |

| Nevada                                                             |   | 98-0177646                              |
|--------------------------------------------------------------------|--------|-----------------------------------------|
| (State      or other jurisdiction ofincorporation or organization) |   | (I.R.S.      EmployerIdentificationNo.) |

| No.      201 Guangyuan Road, District C Investment Pioneering Park      Jiangbei, |
|-----------------------------------------------------------------------------------|
| Ningbo,      China 315033                                                         |
| (Address      of principal executive offices)                                     |
|                                                                              |
|                                                                              |
| (86)      21-56689332                                                             |
| (Issuer's      telephone number)                                                  |
|                                                                              |
|                                                                              |
| Bldg      14 Suite A09, International Trading Center,                             |
| 29      Dongdu Road Ningbo, China 315000                                          |
| (Former      name, former address and former fiscal year,                         |
| if      changed since last report)                                                |

----

|  | · | For the fiscal year ended June 30, 2006, the Company      erroneously filed financial statements presenting in their statement of      cash flows the decrease of restricted cash as an investing      activity.  The Company is now presenting this as a financing      activity, in accordance with SFAS 95 “Statement of Cash      Flows”.  This error did not affect the balance sheet as of      September 30, 2006, nor the statements of operations for the three month      period ended September 30, 2006.  With this correction, the      statements of cash flows for the three month period ended September 30,      2006 reflect an increase in cash flows from financing activities of      $13,503. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | For the fiscal years ended June 30, 2007 and 2006,      the Company erroneously did not value the reduction in exercise price of      existing warrants (from $0.30 to $0.15 for the 3,704,800 July 2005      Warrants and the reduction in exercise price from $0.40 to $0.15 for the      1,787,500 March 2005 Warrants) associated with an induced conversion      offer. The value of the reduction in exercise price was calculated at      $447,238, and was reflected in the statement of operations as an increase      in interest expense, and a resultant increase in net loss and net loss per      share for the year ended June 30, 2006. The Company had recorded the      valuation of the reduction in exercise price as an increase in additional      paid-in capital. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | For the fiscal years ended June 30, 2007 and 2006,      the Company erroneously had 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 its common stock to China Direct, Inc. and $395,675      related to the issuance of 4,700,000 common stock purchase warrants      exercisable at $0.15 per share over a five year period, also to China      Direct, Inc. In      addition, in February 2006, the Company issued warrants to purchase      500,000 shares of common stock, exercisable for five years at $.15 per      share, to Skybanc, Inc. for a one year financial advisory consulting      agreement.  The Company had incorrectly deferred the fair value      of these warrants of $71,243 over the contract term. The Company      has restated the related financial statements to recognize the full      expense of these agreements immediately upon entering into the consulting      agreements in January 2006 and February 2006, under the provisions of EITF      96-18 and SFAS 123. These corrections resulted in an increase in      consulting expense for year ended June 30, 2006 and a reduction in      consulting expense for subsequent periods and deferred compensation on our      balance sheets for a similar amount. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | In March 2007, pursuant to a consulting agreement,      the Company issued 4,000,000 shares of its common stock to Capital One      Resource, Co., Ltd., a wholly owned subsidiary of China Direct, Inc.      Initially, the Company 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. The Company has 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 consulting expenses for fiscal year ended June 30, 2007      of $360,000. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Item 1.                                           | Financial      Statements                                                                              |                                                                                                                         |
|---------------------------------------------------|-------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|
|                                              |                                                                                                        |                                                                                                                         |   |
|                                              | 1)                                                                                                          | Consolidated      condensed balance sheet (unaudited) as of September      30, 2007                                     | 2 |
|                                              |                                                                                                        |                                                                                                                         |   |
|                                              | 2)                                                                                                          | Consolidated      condensed statements of operations (unaudited) for      the three months ended September 30, 2007 and 2006 | 3 |
|                                              |                                                                                                        |                                                                                                                         |   |
|                                              | 3)                                                                                                          | Consolidated      condensed statements of cash flows (unaudited) for the      three months ended September 30, 2007 and 2006 | 4 |
|                                              |                                                                                                        |                                                                                                                         |   |
|                                              | 4)                                                                                                          | Notes      to consolidated condensed financial statements (unaudited)                                                        | 5 |
|                                              |                                                                                                        |                                                                                                                         |   |
| Item 2.                                           | Management’s Discussion and      Analysis of Financial Condition and      Results of Operations  | 14                                                                                                                           |
|                                              |                                                                                                        |                                                                                                                         |   |
| Item 3.                                           | Controls and      Procedures                                                                           | 19                                                                                                                           |
|                                              |                                                                                                        |                                                                                                                         |
| Item 3A(T).                                       | Controls and      Procedures                                                                                | 20                                                                                                                           |
|                                              |                                                                                                        |                                                                                                                         |   |
| PART II. OTHER      INFORMATION    |
|                                              |                                                                                                        |                                                                                                                         |   |
|                                              |                                                                                                        |                                                                                                                         |   |
| Item 1.                                           | Legal      Proceedings                                                                            | 21                                                                                                                           |
|                                              |                                                                                                        |                                                                                                                         |
| Item 2.                                           | Unregistered Sales of Equity      Securities and Use of Proceeds                                            | 21                                                                                                                           |
|                                              |                                                                                                        |                                                                                                                         |
| Item 3.                                           | Defaults Upon      Senior Securities                                                                        | 21                                                                                                                           |
|                                              |                                                                                                        |                                                                                                                         |
| Item 4.                                           | Submission of Matters to a Vote      of Security Holders                                                    | 21                                                                                                                           |
|                                              |                                                                                                        |                                                                                                                         |
| Item 5.                                           | Other    Information                                                                                        | 22                                                                                                                           |
|                                              |                                                                                                        |                                                                                                                         |
| Item 6.                                           | Exhibits                                                                                                    | 22                                                                                                                           |
|                                              |                                                                                                        |                                                                                                                         |
| SIGNATURES                                        |                                                                                                        | 23                                                                                                                           |

----

|                                                                                                                                       |   | Restated |       |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|
| CURRENT ASSETS:                                                                                                                            |   |     |       |
|      Cash                                                                                                         |   | $        | 337,223    |   |
|      Accounts receivable (net of      allowance for doubtful accounts of $186,046)                                |   |     | 7,686,491  |   |
|      Inventories                                                                                                  |   |     | 2,928,465  |   |
|      Advances on purchases                                                                                        |   |     | 6,257,807  |   |
|      Other      receivables                                                                                            |   |     | 54,421     |   |
|      Cash-restricted                                                                                                   |   |     | 266,042    |   |
|      Note      receivable                                                                                              |   |     | 159,625    |   |
|      Prepaid expenses and other      current assets                                                               |   |     | 849,922    |   |
|                                                                                                                                       |   |     |       |   |
|          Total      Current Assets                                                            |   |     | 18,539,996 |   |
|                                                                                                                                       |   |     |       |   |
|                                                                                                                                       |   |     |       |   |
| Property and equipment - net                                                                                                               |   |     | 3,005,161  |   |
| Land use rights - net                                                                                                                      |   |     | 2,615,955  |   |
| Intangible assets - net                                                                                                                    |   |     | 301,069    |   |
|                                                                                                                                       |   |     |       |   |
|          Total      Assets                                                                    |   | $        | 24,462,181 |   |
|                                                                                                                                       |   |     |       |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                       |
|                                                                                                                                       |   |     |       |   |
| CURRENT LIABILITIES:                                                                                                                       |   |     |       |   |
|      Notes payable - current      portion                                                                         |   | $        | 4,009,513  |   |
|      Accounts payable                                                                                             |   |     | 6,181,195  |   |
|      Accrued expenses                                                                                             |   |     | 357,999    |   |
|      Advances from customers                                                                                      |   |     | 141,694    |   |
|      Income tax payable                                                                                           |   |     | 1,572,585  |   |
|      Other      payables                                                                                               |   |     | 2,302,731  |   |
|      Liability in connection with      acquisition                                                                |   |     | 573,022    |   |
|      Due to related party                                                                                         |   |     | 341,626    |   |
|                                                                                                                                       |   |     |       |   |
|          Total      Current Liabilities                                                       |   |     | 15,480,365 |   |
|                                                                                                                                       |   |     |       |   |
|                                                                                                                                       |   |     |       |   |
| Minority Interest                                                                                                                          |   |     | 679,428    |   |
|                                                                                                                                       |   |     |       |   |
| STOCKHOLDERS' EQUITY:                                                                                                                      |   |     |       |   |
|      Preferred stock ($.001 Par      Value; 25,000,000 Shares Authorized: (No shares issued and outstanding)      |   |     | -          |   |
|      Common stock ($.001 Par Value;      200,000,000 Shares Authorized; 96,363,982 shares issued and outstanding) |   |     | 96,364     |   |
|      Additional paid-in capital                                                                                   |   |     | 10,143,001 |   |
|      Accumulated deficit                                                                                          |   |     | (2,521,314 | ) |
|      Other comprehensive income -      foreign currency                                                           |   |     | 584,337    |   |
|                                                                                                                                       |   |     |       |   |
|          Total      Stockholders' Equity                                                      |   |     | 8,302,388  |   |
|                                                                                                                                       |   |     |       |   |
|          Total      Liabilities and Stockholders' Equity                                      |   | $        | 24,462,181 |   |

----

|                                                         |   | For the three Months Ended  September 30, |       |
|--------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                         |   | 2007                                      |       |   | 2006 |   |
|                                                         |   | Restated                             |       |   | Restated |   |
|                                                         |   |                                      |       |   |   |   |
| NET REVENUES                                                 |   | $                                         | 7,929,498  |   |   | $ | 4,832,984 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| COST OF SALES                                                |   |                                      | 7,331,333  |   |   |   | 4,460,470 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| GROSS PROFIT                                                 |   |                                      | 598,165    |   |   |   | 372,514 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| OPERATING EXPENSES:                                          |   |                                      |       |   |   |   |   |   |
| Selling expenses                                             |   |                                      | 192,308    |   |   |   | 114,833 |   |
| General and administrative                                   |   |                                      | 234,339    |   |   |   | 313,360 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| Total Operating Expenses                                     |   |                                      | 426,647    |   |   |   | 428,193 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS:                               |   |                                      | 171,518    |   |   |   | (55,679 | ) |
|                                                         |   |                                      |       |   |   |   |   |   |
| OTHER INCOME (EXPENSE):                                      |   |                                      |       |   |   |   |   |   |
| Other income                                                 |   |                                      | 60,051     |   |   |   | 93,663 |   |
| Debt issuance costs                                          |   |                                      | (2,657     | ) |   |   | - |   |
| Interest (expense)                                           |   |                                      | (79,491    | )  |   |   | (33,432 | ) |
|                                                         |   |                                      |       |   |   |   |   |   |
| Total Other Income (Expense)                                 |   |                                      | (22,097    | ) |   |   | 60,231 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| INCOME BEFORE INCOME TAXES                              |   |                                      | 149,421    |   |   |   | 4,552 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| INCOME TAXES                                                 |   |                                      | (90,898    | ) |   |   |   |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| NET INCOME BEFORE MINORITY INTEREST                     |   |                                      | 58,523     |   |   |   | 4,552 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| MINORITY INTEREST IN INCOME OF SUBSIDIARY                    |   |                                      | (75,870    | ) |   |   |   |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| NET INCOME (LOSS)                                       |   |                                      | (17,347    | ) |   |   | 4,552 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| OTHER COMPREHENSIVE INCOME:                                  |   |                                      |       |   |   |   |   |   |
| Unrealized foreign currency translation                      |   |                                      | 98,779     |   |   |   | 83,054 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| COMPREHENSIVE INCOME                                    |   | $                                         | 81,432     |   |   | $ | 87,606 |   |
|                                                         |   |                                      |       |   |   |   |   |   |
|                                                         |   |                                      |       |   |   |   |   |   |
| NET LOSS PER COMMON SHARE – BASIC AND DILUTED          |   | $                                         | (0.00      | ) |   | $ | (0.00 | ) |
|                                                         |   |                                      |       |   |   |   |   |   |
| WEIGHTED COMMON SHARES OUTSTANDING – BASIC AND DILUTED |   |                                      | 96,363,982 |   |   |   | 64,532,069 |   |

----

|                                                                             |   | For the three Months Ended  September 30, |       |
|----------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                             |   | 2007                                      |       |   | 2006 |   |
|                                                                             |   | Restated                                  |       |   | Restated |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                            |   |                                      |       |   |   |   |
| Net income (loss)                                                                |   | $                                         | (17,347    | ) |   | $ | 4,552 |   |
| Adjustments to reconcile net loss to net cash used in      operating Activities: |   |                                      |       |   |   |   |   |   |
| Depreciation and amortization                                                    |   |                                      | 121,573    |   |   |   | 94,884 |   |
| Allowance for doubtful accounts                                                  |   |                                      | (20,408    | ) |   |   | 152,412 |   |
| Minority interest                                                                |   |                                      | 75,870     |   |   |   | - |   |
|                                                                             |   |                                      |       |   |   |   |   |   |
| Changes in assets and liabilities:                                               |   |                                      |       |   |   |   |   |   |
| Accounts receivable                                                              |   |                                      | (344,178   | ) |   |   | 23,983 |   |
| Inventories                                                                      |   |                                      | (830,611   | ) |   |   | 1,094,545 |   |
| Prepaid and other current assets                                                 |   |                                      | (781,197   | ) |   |   | (2,626,547 | ) |
| Other receivables                                                                |   |                                      | -          |   |   |   | 3,284 |   |
|  Increase in notes receivable                                               |   |                                      | 286,288    |   |   |   | - |   |
| Advances to employees                                                            |   |                                      | 25,618     |   |   |   | - |   |
| Advances on purchases                                                            |   |                                      | (2,090,774 | ) |   |   | 308,005 |   |
| Other assets                                                                     |   |                                      | (12,630    | ) |   |   | 12,787 |   |
| Accounts payable                                                                 |   |                                      | 3,022,509  |   |   |   | 923,959 |   |
|  Tax      payable                                                      |   |                                      | 175,468    |   |   |   |   |   |
|  Other      payables                                                   |   |                                      | (204,247   | ) |   |   |   |   |
| Accrued expenses                                                                 |   |                                      | (117,524   | ) |   |   | (93,902 | ) |
| Advances from customers                                                          |   |                                      | 116,339    |   |   |   | (20,974 | ) |
|                                                                             |   |                                      |       |   |   |   |   |   |
| NET CASH USED IN OPERATING ACTIVITIES                                            |   |                                      | (595,251   | ) |   |   | (123,012 | ) |
|                                                                             |   |                                      |       |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                            |   |                                      |       |   |   |   |   |   |
| Due to related parties                                                           |   |                                      | -          |   |   |   | (5,976 | ) |
| Capital expenditures                                                             |   |                                      | (229,269   | ) |   |   | (165,061 | ) |
|                                                                             |   |                                      |       |   |   |   |   |   |
| NET CASH FLOW (USED IN) PROVIDED BY INVESTING ACTIVITIES                         |   |                                      | (229,269   | ) |   |   | (171,037 | ) |
|                                                                             |   |                                      |       |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                            |   |                                      |       |   |   |   |   |   |
| Proceeds from notes payable                                                      |   |                                      | 63,135     |   |   |   | 67,000 |   |
| Repayment of notes payable                                                       |   |                                      | -          |   |   |   | (63,157 | ) |
| Decrease in restricted cash                                                 |   |                                      | -          |   |   |   | 9,660 |   |
|                                                                             |   |                                      |       |   |   |   |   |   |
| NET CASH FLOWS PROVIDED BY FINANCING ACTIVITITES                                 |   |                                      | 63,135     |   |   |   | 13,503 |   |
|                                                                             |   |                                      |       |   |   |   |   |   |
| EFFECT OF EXCHANGE RATE ON CASH                                                  |   |                                      | 66,089     |   |   |   | 76,736 |   |
|                                                                             |   |                                      |       |   |   |   |   |   |
| NET DECREASE IN CASH                                                             |   |                                      | (695,296   | ) |   |   | (203,810 | ) |
|                                                                             |   |                                      |       |   |   |   |   |   |
| CASH – Beginning of year                                                   |   |                                      | 1,032,519  |   |   |   | 466,272 |   |
|                                                                             |   |                                      |       |   |   |   |   |   |
| CASH – End of period                                                       |   | $                                         | 337,223    |   |   | $ | 262,462 |   |
|                                                                             |   |                                      |       |   |   |   |   |   |
| SUPPLEMENTA CASH FLOW INFORMATION:                                               |   |                                      |       |   |   |   |   |   |
| Cash paid for:                                                                   |   |                                      |       |   |   |   |   |   |
| Interest                                                                         |   | $                                         | 79,492     |   |   | $ | 33,432 |   |
| Income taxes                                                                     |   | $                                         | -          |   |   | $ | 1,651 |   |

----

| ·             | Dragon      International Group., a Florida corporation (“Dragon Florida”) is a wholly      owned subsidiary of Dragon Nevada.  Dragon Nevada acquired a      100% interest in Dragon Florida in October2004. |
|--------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·             | Ningbo      Dragon International Trade Co., Ltd., (“Ningbo Dragon”).  Ningbo      Dragon is a wholly owned subsidiary of Dragon Florida.  Dragon      Florida acquired a 70% interest in Ningbo Dragon in June 2004 and the      remaining 30% interest in December2004. |
|--------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·             | Ningbo      City Jiangdong Yonglongxin Special Paper co., Ltd. (“Yonglongxin”) was      created as a wholly owned subsidiary of Ningbo Dragon in November      1999.  Xianyang Naite Research and Development Center (“R&D      Center”), a wholly owned subsidiary of Yonglongxin, was acquired by      Yonglongxin in August 2005. |
|--------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·             | Ningbo      Dragon Packaging Technology Co., Ltd., (“Dragon Packaging”) is a wholly      owned subsidiary of Ningbo Dragon.  Ningbo Dragon acquired a      100% interest in Dragon Packaging in June2005. |
|--------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·             | Hangzhou      Yongxin Paper Co., Ltd., (“Yongxin”) is a 60% owned subsidiary of Ningbo      Dragon.  The 60% interest was acquired in July    2005. |
|--------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·             | Shanghai      JinKui Packaging Material Co., Ltd. (“JinKui”) is a wholly owned      subsidiary of Dragon Nevada.  Dragon Nevada acquired a 100%      interest in JinKui in June 2006. |
|--------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·             | Wellton      International Fiber Corp. (“Wellton”) is a 51% owned subsidiary of Dragon      Nevada.  Dragon Nevada acquired a 51% interest in Wellton in      June 2007.  On September 28, 2007, the Company entered into an      agreement to acquire the remaining 49% of Wellton not already owned.       This transaction is expected to close on or before December 1,      2007. |
|--------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | · | For the fiscal year ended June 30, 2006, the Company      erroneously filed financial statements presenting in their statement of      cash flows the decrease of restricted cash as an investing      activity.  The Company is now presenting this as a financing      activity, in accordance with SFAS 95 “Statement of Cash      Flows”.  This error did not affect the balance sheet as of      September 30, 2006, nor the statements of operations for the three month      period ended September 30, 2006.  With this correction, the      statements of cash flows for the three month period ended September 30,      2006 reflect an increase in cash flows from financing activities of      $13,503. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | For the fiscal years ended June 30, 2007 and 2006,      the Company erroneously did not value the reduction in exercise price of      existing warrants (from $0.30 to $0.15 for the 3,704,800 July 2005      Warrants and the reduction in exercise price from $0.40 to $0.15 for the      1,787,500 March 2005 Warrants) associated with an induced conversion      offer. The value of the reduction in exercise price was calculated at      $447,238, and was reflected in the statement of operations as an increase      in interest expense, and a resultant increase in net loss and net loss per      share for the year ended June 30, 2006. The Company had recorded the      valuation of the reduction in exercise price as an increase in additional      paid-in capital. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | For the fiscal years ended June 30, 2007 and 2006,      the Company erroneously had 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 its common stock to China Direct, Inc. and $395,675      related to the issuance of 4,700,000 common stock purchase warrants      exercisable at $0.15 per share over a five year period, also to China      Direct, Inc. In      addition, in February 2006, the Company issued warrants to purchase      500,000 shares of common stock, exercisable for five years at $.15 per      share, to Skybanc, Inc. for a one year financial advisory consulting      agreement.  The Company had incorrectly deferred the fair value      of these warrants of $71,243 over the contract term. The Company      has restated the related financial statements to recognize the full      expense of these agreements immediately upon entering into the consulting      agreements in January 2006 and February 2006, under the provisions of EITF      96-18 and SFAS 123. These corrections resulted in an increase in      consulting expense for year ended June 30, 2006 and a reduction in      consulting expense for subsequent periods and deferred compensation on our      balance sheets for a similar amount. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | In March 2007, pursuant to a consulting agreement,      the Company issued 4,000,000 shares of its common stock to Capital One      Resource, Co., Ltd., a wholly owned subsidiary of China Direct, Inc.      Initially, the Company 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. The Company has 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 consulting expenses for fiscal year ended June 30, 2007      of $360,000. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                             |   | As Filed |       |   |  Adjustment to Restate |      |   | Restated   |   |
|----------------------------------|--------|----------|------------|--------|-----------------------------|-----------|--------|------------|--------|
|                             |   |     |       |   |                        |      |   |       |   |   |
|  Additional paid-in capital |   | $        | 9,335,763  |   |                        | (b)  | $      | 447,238    |   |   | $ |   |   |
|                             |   |     |       |   |                        | (c)  |   | 360,000    |   |   |   |   |   |
|                             |   | $        | 9,335,763  |   |                        |      | $      | 807,238    |   |   | $ | 10,143,001 |   |
|                             |   |     |       |   |                        |      |   |       |   |   |   |   |   |
|                             |   |     |       |   |                        |      |   |       |   |   |   |   |   |
| Accumulated deficit              |   | $        | (1,293,525 | )      |                        | (a)  | $      | (507,429   | )      |   |   |   |   |
|                             |   |     |       |   |                        | (b)  |   | (447,238   | )      |   |   |   |   |
|                             |   |     |       |   |                        | (c)  |   | (360,000   | )      |   |   |   |   |
|                             |   |     |       |   |                        | (d)  |   | 86,878     |   |   |   |   |   |
|                             |   | $        | (1,293,525 | )      |                        |      | $      | (1,227,789 | )      |   | $ | (2,521,314 | ) |
|                             |   |     |       |   |                        |      |   |       |   |   |   |   |   |
| Deferred compensation            |   | $        | 420,551    |   |                        | (a)  | $      | (420,551   | )      |   | $ | - |   |

|                            |   | As Filed |   |   |  Adjustment to Restate |   |   | Restated       |   |
|---------------------------------|--------|----------|--------|--------|-----------------------------|--------|--------|----------------|--------|
|                            |   |     |   |   |                        |   |   |           |   |   |
| Stock-based consulting expenses |   | $        | 86,878 |   |                        | (a)    | $      |   (86,878 | )      |   | $ | - |   |
|                            |   |     |   |   |                        |   |   |           |   |   |   |   |   |
| Net loss per share              |   |     |   |   |                        |   |   |           |   |   |   |   |   |
| Basic                           |   | $        | (0.00  | )      |                        |   | $      | (0.00          | )      |   | $ | (0.00 | ) |
| Diluted                         |   |     | (0.00  | )      |                        |   |   | (0.00          | )      |   |   | (0.00 | ) |

|                            |   | As Filed |   |   | Adjustment to Restate |   |   | Restated       |   |
|---------------------------------|--------|----------|--------|--------|-----------------------|--------|--------|----------------|--------|
|                            |   |     |   |   |                  |   |   |           |   |   |
| Stock-based consulting expenses |   | $        | 86,878 |   |                  | (a)    | $      |   (86,878 | )      |   | $ | - |   |
|                            |   |     |   |   |                  |   |   |           |   |   |   |   |   |
| Net loss per common share       |   |     |   |   |                  |   |   |           |   |   |   |   |   |
| Basic                           |   | $        | (0.00  | )      |                  |   | $      | (0.00          | )      |   | $ | (0.00 | ) |
| Diluted                         |   |     | (0.00  | )      |                  |   |   | (0.00          | )      |   |   | (0.00 | ) |

|   | (a) | To expense the entire fair value of common stock and      warrants issued to China Direct Investment, Inc. in January 2006 and      Skybanc, Inc. in February 2006, previously accounted for as deferred      compensation and amortized as stock based consulting expenses and reverse      in subsequent periods 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 to Capital One Resource Co., Ltd., a wholly owned      subsidiary of China Direct, Inc. in March 2007. This transaction had      previously been accounted for as a cost of raising capital rather than      consulting expense. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (d) | Reverse      amortization of previously capitalized consulting fees $86,878 |
|-----|-----------------------------------------------------------------------------|

----

----

| Raw      materials  |   | $      | 504,579   |   |
|---------------------|--------|--------|-----------|--------|
| Finished      goods |   |   | 2,423,886 |   |
|                |   | $      | 2,928,465 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | Three      Month Period Ended September      30, |      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|-----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2007                                             |      |
| Land      Use Rights (estimated remaining life of 46 years)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                                                | 2,747,469 |   |
| Less:  Accumulated      Amortization                                                                                      |   |                                             | (131,514  | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $                                                | 2,615,955 |   |

----

| Notes      payable to Bank of Agriculture, due on June 26, 2008.  Interest      only payable monthly at a rate of 7.23%.  Secured by the assets      of Dragon Packaging                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | $      | 1,665,614     |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Notes      payable to Bank of Agriculture, due on June 21, 2008. Interest only      payable monthly at a rate of 7.23%.  Secured by the assets of      Dragon Packaging                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   | 866,120       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Notes      payable to Bank of Agriculture, due on June 15, 2008. Interest only      payable monthly at a rate of 7.88%.  Secured by a third party,      Yangke Co., Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   | 266,498       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Notes      payable to Bank of Agriculture, due on June 15, 2008 Interest only payable      monthly at a rate of 7.88%.  Secured by a third party, Yangke      Co., Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   | 266,498       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Notes      payable to Bank of Agriculture.  Interest only.  Secured by      assets of Dragon Packaging.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   | 133,249       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Notes      payable to Bank of Agriculture.  Interest only.  Secured by      assets of Dragon Packaging.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |  133,249 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Bank      guaranteed note to Bank of Transportation, due on November 16, 2007.      Non-interest bearing.  Secured by cash deposit of 50% of face value      of the note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   | 173,224       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Notes      payable to Bank of Transportation, due on November 15, 2007. Non-interest      bearing.  Secured by cash deposit of 50% of face value of the      note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   | 266,498       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Bank      guaranteed note to Bank of Transportation, due December 5, 2007.      Non-interest bearing.  Secured by cash deposit of 50% of the      face value of the note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   | 26,650        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Bank      guaranteed note to Bank of Transportation, due on December 5, 2007.      Non-interest bearing. Secured by cash deposit of 50% of the face value of      the note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   | 68,913        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Notes      Payable to two shareholders, Interest only payable annually at a rate of      8%, $100,000 due on January 10, 2008 and $43,000 due on April 11,      2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | 143,000       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Total                                                                                                                                        |   |   | 4,009,513     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Less      current      Portion                                                                                                               |   |   | (4,009,513    | )      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |          |   |
| Long-Term      Portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $      | -             |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Shares |       |   | WeightedAverageExercise      Price |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |       |   |                               |   |
| Outstanding      at July 1, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   | 43,315,282 |   |                               | $      | 0.145 |   |
| Granted                                                                                                                 |   |   | -          |   |                               |   | - |   |
| Exercised                                                                                                               |   |   | -          |   |                               |   | - |   |
| Forfeited                                                                                                               |   |   | -          |   |                               |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |       |   |                               |   |   |   |
| Outstanding      at September 30,      2007                                                                             |   |   | 43,315,282 |   |                               | $      | 0.145 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |       |   |                               |   |   |   |
| Warrants      exercisable at end of      period                                                                         |   |   | 43,315,282 |   |                               | $      | 0.145 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |       |   |                               |   |   |   |
| Weighted-average      fair value of warrants granted during the period                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | -          |   |                               |   | - |   |

----

|   Warrants      Outstanding and Exercisable |   |
|-------------------------------------------------------|--------|
|                                                  |   | Weighted |   |   |   |   |   |
|                                                  |   | Average |   | Weighted |   | Weighted |   |
| Range      of                                         |   | Remaining |   | Average |   | Average |   |
| Exercise                                              |   | Contractual |   | Exercise |   | Exercise |   |
| Prices                                                |   | Shares |   | Life      (Years) |   | Price |   |
| $0.300                                                |   | 150,000 |   | 2.78 |   | $  0.30 |   |
| $0.150                                                |   | 32,851,276 |   | 3.60 |   | $  0.15 |   |
| $0.125                                                |   | 10,000,006 |   | 4.34 |   | $0.125 |   |
| $0.010                                                |   | 314,000 |   | 3.03 |   | $  0.01 |   |

----

----

----

|   | · | Dragon      International Group., a Florida corporation (“Dragon Florida”) is a wholly      owned subsidiary of Dragon Nevada.  Dragon Nevada acquired a      100% interest in Dragon Florida in October2004. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Ningbo      Dragon International Trade Co., Ltd., (“Ningbo Dragon”).  Ningbo      Dragon is a wholly owned subsidiary of Dragon Florida.  Dragon      Florida acquired a 70% interest in Ningbo Dragon in June 2004 and the      remaining 30% interest in December2004. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Ningbo      City Jiangdong Yonglongxin Special Paper co., Ltd. (“Yonglongxin”) was      created as a wholly owned subsidiary of Ningbo Dragon in November      1999.  Xianyang Naite Research and Development Center (“R&D      Center”), a wholly owned subsidiary of Yonglongxin, was acquired by      Yonglongxin in August 2005. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Ningbo      Dragon Packaging Technology Co., Ltd., (“Dragon Packaging”) is a wholly      owned subsidiary of Ningbo Dragon.  Ningbo Dragon acquired a      100% interest in Dragon Packaging in June2005. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hangzhou      Yongxin Paper Co., Ltd., (“Yongxin”) is a 60% owned subsidiary of Ningbo      Dragon.  The 60% interest was acquired in July    2005. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Shanghai      JinKui Packaging Material Co., Ltd. (“JinKui”) is a wholly owned      subsidiary of Dragon Nevada.  Dragon Nevada acquired a 100%      interest in JinKui in June 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Wellton      International Fiber Corp. (“Wellton”) is a 51% owned subsidiary of Dragon      Nevada.  Dragon Nevada acquired a 51% interest in Wellton in      June 2007. On September 28, 2007, the Company entered into an agreement to      acquire the remaining 49% of Wellton not already owned.  This      transaction is expected to close on or before December 1,      2007. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

| Notes payable to Bank of Agriculture, due on June 26,      2008.  Interest only payable monthly at a rate of      7.23%.  Secured by the assets of Dragon Packaging |   | $      | 1,665,614     |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------------|--------|
|                                                                                                                                                                                         |   |   |          |   |
| Notes payable to Bank of Agriculture, due on June 21,      2008. Interest only payable monthly at a rate of 7.23%.  Secured      by the assets of Dragon Packaging            |   |   | 866,120       |   |
|                                                                                                                                                                                    |   |   |          |   |
| Notes payable to Bank of Agriculture, due on June 15,      2008. Interest only payable monthly at a rate of 7.88%.  Secured      by a third party, Yangke Co., Ltd.           |   |   | 266,498       |   |
|                                                                                                                                                                                    |   |   |          |   |
| Notes payable to Bank of Agriculture, due on June 15,      2008 Interest only payable monthly at a rate of 7.88%.  Secured      by a third party, Yangke Co., Ltd.            |   |   | 266,498       |   |
|                                                                                                                                                                                    |   |   |          |   |
| Notes payable to Bank of      Agriculture.  Interest only.  Secured by assets of Dragon      Packaging.                                                                  |   |   | 133,249       |   |
|                                                                                                                                                                                    |   |   |          |   |
| Notes payable to Bank of      Agriculture.  Interest only.  Secured by assets of Dragon      Packaging.                                                                       |   |   |  133,249 |   |
|                                                                                                                                                                                    |   |   |          |   |
| Bank guaranteed note to Bank of Transportation, due on      November 16, 2007. Non-interest bearing.  Secured by cash deposit of      50% of face value of the note.               |   |   | 173,224       |   |
|                                                                                                                                                                                    |   |   |          |   |
| Notes payable to Bank of Transportation, due on November      15, 2007. Non-interest bearing.  Secured by cash deposit of 50%      of face value of the note.                 |   |   | 266,498       |   |
|                                                                                                                                                                                    |   |   |          |   |
| Bank guaranteed note to Bank of Transportation, due      December 5, 2007. Non-interest bearing.  Secured by cash deposit      of 50% of the face value of the note.          |   |   | 26,650        |   |
|                                                                                                                                                                                    |   |   |          |   |
| Bank guaranteed note to Bank of Transportation, due on      December 5, 2007. Non-interest bearing. Secured by cash deposit of 50% of      the face value of the note.                  |   |   | 68,913        |   |
|                                                                                                                                                                                    |   |   |          |   |
| Notes Payable to two shareholders, Interest only payable      annually at a rate of 8%, $100,000 due on January 10, 2008 and $43,000 due      on April 11, 2008                         |   |   | 143,000       |   |
|                                                                                                                                                                                    |   |   |          |   |
| Total                                                                                                                                                                                   |   |   | 4,009,513     |   |
|                                                                                                                                                                                    |   |   |          |   |
| Less current Portion                                                                                                                                                                    |   |   | (4,009,513    | )      |
|                                                                                                                                                                                    |   |   |          |   |
| Long-Term Portion                                                                                                                                                                       |   | $      | -             |   |

----

|  | · | For the fiscal year ended June 30, 2006, the Company      erroneously filed financial statements presenting in their statement of      cash flows the decrease of restricted cash as an investing      activity.  The Company is now presenting this as a financing      activity, in accordance with SFAS 95 “Statement of Cash      Flows”.  This error did not affect the balance sheet as of      September 30, 2006, nor the statements of operations for the three month      period ended September 30, 2006.  With this correction, the      statements of cash flows for the three month period ended September 30,      2006 reflect an increase in cash flows from financing activities of      $13,503. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | For the fiscal years ended June 30, 2007 and 2006,      the Company erroneously did not value the reduction in exercise price of      existing warrants (from $0.30 to $0.15 for the 3,704,800 July 2005      Warrants and the reduction in exercise price from $0.40 to $0.15 for the      1,787,500 March 2005 Warrants) associated with an induced conversion      offer. The value of the reduction in exercise price was calculated at      $447,238, and was reflected in the statement of operations as an increase      in interest expense, and a resultant increase in net loss and net loss per      share for the year ended June 30, 2006. The Company had recorded the      valuation of the reduction in exercise price as an increase in additional      paid-in capital. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | For the fiscal years ended June 30, 2007 and 2006,      the Company erroneously had 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 its common stock to China Direct, Inc. and $395,675      related to the issuance of 4,700,000 common stock purchase warrants      exercisable at $0.15 per share over a five year period, also to China      Direct, Inc. In      addition, in February 2006, the Company issued warrants to purchase      500,000 shares of common stock, exercisable for five years at $.15 per      share, to Skybanc, Inc. for a one year financial advisory consulting      agreement.  The Company had incorrectly deferred the fair value      of these warrants of $71,243 over the contract term. The Company      has restated the related financial statements to recognize the full      expense of these agreements immediately upon entering into the consulting      agreements in January 2006 and February 2006, under the provisions of EITF      96-18 and SFAS 123. These corrections resulted in an increase in      consulting expense for year ended June 30, 2006 and a reduction in      consulting expense for subsequent periods and deferred compensation on our      balance sheets for a similar amount. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | In March 2007, pursuant to a consulting agreement,      the Company issued 4,000,000 shares of its common stock to Capital One      Resource, Co., Ltd., a wholly owned subsidiary of China Direct, Inc.      Initially, the Company 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. The Company has 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 consulting expenses for fiscal year ended June 30, 2007      of $360,000. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (i)    a      description of the conclusions of our principal executive and principal      financial officers, or persons performing similar functions, regarding the      effectiveness of our disclosure controls and procedures (as defined in      Rule      13a-15(e) or Rule 15d-15(e)      under the Exchange Act) as of the end of the period covered by the report,      based on the evaluation of these controls and procedures required by      paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act;      and |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |
|--------|--------|
|   | (ii)   a      report of management on the small business issuer's internal control over      financial reporting; as well as changes in our internal control over      financial reporting identified in connection with its evaluation that      occurred during our last fiscal quarter that has materially affected, or      is reasonably likely to materially affect, our internal control over      financial reporting. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

----