**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON** **,
      D.C. 20549**





**FORM
      10-K**


**ANNUAL
      REPORT**


**PURSUANT
      TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**(Mark
      One)**


x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES **EXCHANGE
                ACT OF 1934****
              
              ****For
                the Fiscal year ended December 25,
                2005****





**OR**




o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
              
              **Fo**r
                the transition period from __________****to
                __________****





**Commission
      File Number: 001-15046**





**NEW
      DRAGON ASIA CORP.**


**(Exact
      name of Registrant as Specified in its Charter)**




**Florida**
            
            **88-0404114****(State
                or Other Jurisdiction ofIncorporation or
                Organization)**
            
            **(IRS
                Employer Identification
                No.)**




**Suite
      2808, International Chamber of Commerce Tower**


**Fuhua
      Three Road, Shenzhen, China**


**(Address
      of Principal Executive Offices) (Zip Code)**





**(86
      755) 8831-2115**


**(Registrant’s
      telephone number, including area code)**





**Securities
      registered pursuant Section 12(b) of the Exchange Act:** **Class
      A Common Stock, $ 0.0001 par value**





**Securities
      registered pursuant Section 12(g) of the Exchange Act: None.**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
o
      No x





Indicated
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
o
      No x




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      past 90 days. Yes x No o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. x





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
      Accelerated Filer o   Accelerated
      Filer o   Non-Accelerated
      Filer x











Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
o
      No x





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      last sold, or the average bid and asked price of such common equity, as of
      the
      last business day of the registrant’s most recently completed second fiscal
      quarter. As of June 25, 2005 the aggregate market value of the voting and
      non-voting equity held by non-affiliates was approximately $8.27
      million.





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date. As of March 9, 2006, there were 50,501,988
      shares of Class A Common Stock outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the registrant’s definitive proxy statement (the “Proxy Statement”) related
      to the 2006 annual meeting of shareholders are incorporated by reference into
      Part III of this Form 10-K.








TABLE
        OF
        CONTENTS
 
 PAGEPART
                  IITEM
                  1. Business
              
              
              1ITEM
                  1A. Risk Factors
              
              
              4ITEM
                  1B. Unresolved Staff Comments
              
              
              9ITEM
                  2. Properties
              
              
              9ITEM
                  3. Legal Proceedings
              
              
              10ITEM
                  4. Submission of Matters of a Vote of Security Holders
              
              
              10PART
                  IIITEM
                    5. Market for Registrant’s Common Equity, Related Stockholder Matters and
                    Issuer Purchases of Equity Securities
              
              
              11ITEM
                  6. Selected Financial Data
              
              
              12ITEM
                  7. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operation
              
              
              12ITEM
                  7A. Quantitative and Qualitative Disclosure About Market
                  Risk
              
              
              18ITEM
                  8. Financial Statements and Supplementary Data
              
              
              19ITEM
                  9. Changes in and Disagreements with Accountants on Accounting
                  and
                  Financial Disclosure
              
              
              19ITEM
                  9A. Controls and Procedures
              
              
              19ITEM
                  9B Other Information
              
              
              19PART
                  IIIITEM
                  10. Directors and Executive Officers of the Registrant
              
              
              20ITEM
                  11. Executive Compensation
              
              
              22ITEM
                    12. Security Ownership of Certain Beneficial Owners and Management
                    and
                    Related Stockholder Matters
              
              
              24ITEM
                  13. Certain Relationships and Related Transactions
              
              
              25ITEM
                  14. Principal Accounting Fees and Services
              
              
              25PART
                  IVITEM
                  15. Exhibits and Financial Statement Schedules
              
              
              27SIGNATURES
              
              
              30FINANCIAL
                  STATEMENTS
              
              
              F-1




**Forward-Looking
      Information**





This
      Annual Report on Form 10-K contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
      Securities Exchange Act of 1934. These
      statements relate to future events or the Company’s future financial
      performance .
      The
      Company has attempted to identify forward-looking statements by terminology
      including “anticipates”, “believes”, “expects”, “can”, “continue”, “could”,
“estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predict”,
“should” or “will” or the negative of these terms or other comparable
      terminology. These statements are only predictions, uncertainties and other
      factors, including the risks outlined under Risk Factors contained in Item
      1A of
      this Annual Report may cause the Company’s actual results, levels of activity,
      performance or achievements to be materially different from any future results,
      levels or activity, performance or achievements expressed or implied by these
      forward-looking statements. Although the Company believes that the expectations
      reflected in the forward-looking statements are reasonable, the Company cannot
      guarantee future results, levels of activity, performance or achievements.
      The
      Company expectations are as of the date this Form 10-K is filed, and the Company
      does not intend to update any of the forward-looking statements after the date
      this Annual Report on Form 10-K is filed to confirm these statements to actual
      results, unless required by law.





**Availability
      of SEC Filings**





The
      Company files annual reports on Form 10-K, quarterly reports on Form 10-Q,
      current reports on Form 8-K and proxy and information statements and amendments
      to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the
      Securities Exchange Act of 1934, as amended. The public may read and copy these
      materials at the Securities and Exchange Commission’s (“SEC”) Public Reference
      Room at 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain
      information on the operation of the public reference room by calling the SEC
      at
      1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that
      contains reports, proxy and information statements and other information
      regarding the Company and other companies that file materials with the SEC
      electronically. You may also obtain copies of the Company’s reports filed with
      the SEC, free of charge, on our website at http://www.newdragonasia.com .











**PART
      I**





**ITEM
      1. BUSINESS**





**OVERVIEW**





New
      Dragon Asia Corp. and its subsidiaries (collectively, “New Dragon”, “NWD” or
“the Company”, “We”, “us”, or “our”) are engaged in the milling, sale and
      distribution of flour and related products, including instant noodles and
      soybean-derived products, to retail and wholesale customers throughout China.
      We
      are headquartered in Shandong Province in the People’s Republic of China (“PRC”
or “China”). With a well-known brand name called “Long Feng”, we market our
      well-established product line through a countrywide network of over 200 key
      distributors and 16 regional offices in 27 Chinese provinces. We have six
      manufacturing plants in the PRC with an aggregate annual production capacity
      of
      approximately 110,000 tons of flour and approximately 1.1 billion packets of
      instant noodles and 4,500 tons of Soybean powder. We were incorporated in the
      State of Florida on March 18, 1999 under the name Bio-Aqua Systems,
      Inc.





**OUR
      PRODUCTS AND PRODUCTION**





We
      produce and market a broad range of wheat flour for use in bread, dumplings,
      noodles and confectionary products. Our flour products are marketed under the
      “Long Feng” brand name and sold throughout the country at both wholesale and
      retail levels.





We
      provide a wide range of instant noodle products to our customers. Our products
      can be separated into two broad categories for selling and marketing purposes:
      (i) packet noodles for home preparation and (ii) snacks and cup noodles for
      outdoor convenience.





In
      late
      2005, we started producing two types of soybean products - soybean protein
      powder and soybean powder. They are principally supplied to food and beverage
      manufacturers.





Our
      product breakdown for the year ended December 25, 2005 was approximately 65%
      for
      flour products and 35% for instant noodles. For more information, please refer
      to Note 20 of the accompanying consolidated financial statements “Segment
      Information”.





We
      believe that we have developed a reputation in China for producing high quality
      food products. Our production plants operate to the highest level of hygiene
      and
      efficiency and all of our plants are certified under the ISO9002 standards.
      Most
      of our “state of the art” manufacturing equipment is imported from Switzerland,
      Japan and Korea. We also operate strict quality control systems, resulting
      in a
      favorable customer perception of the “Long Feng” brand.





Flour
      and
      water are the two main ingredients used to produce our noodle products. Flour
      is
      extracted from wheat through a milling process. Wheat sourced by our milling
      operation in Shandong Province is generally regarded as being the highest
      quality available in China. To produce our noodles, we mix flour with water
      and
      other ingredients and then extrude or roll the mixture into the desired shape
      of
      the noodle. The mixture then travels through a series of state-of-the-art dryers
      before being stabilized at room temperature. After stabilization, the noodles
      are steamed and cooked in deep fryers, cooled and then mixed with various
      seasonings and freeze dried additives such as chicken, vegetables or beef which
      are prepared from raw ingredients in a separate building within our production
      complex. The finished product is then packed, palletized and shipped.





**MARKETING
      AND SALES**





Most
      of
      our products are regionally marketed and distributed throughout China. Our
      sales
      and marketing strategy focuses on maintaining our relationships with our
      distributors by holding annual sales order meetings and hosting regular
      distributor conferences. We also believe that we have an excellent quality/price
      dynamic.





Our
      domestic distribution system is the key to its continued success in developing
      “Long Feng” as one of the leading brands in China. We have more than 200 points
      of distribution, of which 10 are our direct sales offices, spread over 27
      provinces in China. The remaining 190 sales points are owned and managed by
      distributors. Most of our distributors have long-term relationships with us
      and
      are loyal and efficient vendors of our products.




1




Our
      primary customer base for both our flour products and instant noodles consists
      of stores in the rural areas throughout China, where, we believe, our brand
      has
      long been recognized as the highest quality available for the price. The rural
      market is rapidly growing benefiting from increases in rural consumer income.
      We
      believe that brand loyalty is strongest in this sector. The Company also sells
      to supermarkets mainly in urban areas.




In
      addition to domestic sales, we also export noodles to other countries such
      as
      South Korea, Australia, Malaysia and Indonesia. During 2005, export sales
      accounted for approximately 7% of our instant noodle sales.





During
      2005, we also received orders for flour from certain KFC Corporation (“KFC”)
      locations in China and KFC’s intermediary suppliers for flour. KFC requires
      rigorous quality control standards for its flour of at least the ISO9002 level.
      We believe that KFC’s orders reflect the positive brand reputation and quality
      of Long Feng as well as the Company’s commitment to maintaining international
      quality standards.





**COMPETITION**





The
      flour
      industry in the PRC is very competitive. Our largest competitors are Shandong
      Guang Rao Ban Qiu Flour and Hebei Wu De Li Flour in the Northern market and
      Shenzhen Nanshun Flour in the Southern market.





The
      instant noodle segment in the PRC is also highly competitive. We compete against
      well-established foreign companies, and many smaller companies. Our largest
      competitors are the “Master Kang” brand manufactured by Tingyi (Cayman Island)
      Holdings Corporation and the “President” brand manufactured by Uni-President
      Group, both based in Taiwan. Both are focused predominately in the more
      developed and competitive urban markets.





**STRATEGY**





Our
      strategy for growth is to capitalize on our strong brand name and pursue
      strategic partnerships and acquisitions that will enhance our sales. The
      following are some of the key elements of our business growth
      strategy:





-
      Acquire
      additional locations to increase our production capacity





-
      Build
      strategic alliances with multinational food groups to enhance product range
      and
      capitalize on our China distribution network





Plans
      for
      expansion of the existing plants are expected to be funded through current
      working capital from ongoing sales. Acquisitions of plants will require an
      additional infusion of funds in the form of debt or equity, or a combination
      of
      both. However, there can be no assurance these funds will be
      available.





**EMPLOYEES**





We
      employ
      approximately 1,500 employees. All of them are located in the eight plants
      and
      the executive office located in Shenzhen. We have maintained good relationships
      with our employees and no major disputes have incurred since our
      inception.





**GOVERNMENTAL
      REGULATIONS ON OUR OPERATIONS IN CHINA**





All
      of
      our PRC subsidiary companies operate in facilities that are located in China.
      Accordingly, our PRC subsidiaries’ operations have to conform to the
      governmental regulations and rules of China.





We
      are
      subject to the PRC’s national Environmental Protection Law, which was enacted on
      December 26, 1989, as well as a number of other national and local laws and
      regulations regulating air, water, and noise pollution and setting pollutant
      discharge standards. Violation of such laws and regulations could result in
      warnings, fines, orders to cease operations, and even criminal penalties,
      depending on the circumstances of such violation. We believe that all
      manufacturing operations are in compliance with applicable environmental laws,
      including those laws relating to air, water, and noise pollution.





We
      are
      also subject to various laws and regulations administered by various local
      governments relating to the operation of our production facilities. We believe
      that we are in compliance with all governmental laws and regulations related
      to
      our products and facilities.




2




**THE
      CHINESE LEGAL SYSTEM**





The
      practical effect of the PRC’s legal system on our business operations in China
      can be viewed from two separate but intertwined considerations.





First,
      as
      a matter of substantive law, the Foreign Invested Enterprise laws provide
      significant protection from government interference. In addition, these laws
      guarantee the full enjoyment of the benefits of corporate articles and contracts
      to Foreign Invested Enterprise participants. These laws, however, do impose
      standards concerning corporate formation and governance, which are not
      qualitatively different from the General Corporation Laws of the several states.
      Therefore, as a practical matter, a Foreign Invested Enterprise needs to retain
      or have ready access to a local Chinese law firm for routine compliance
      purposes.





Similarly,
      the PRC accounting laws mandate accounting practices, which are not co-existent
      with U.S. Generally Accepted Accounting Principles. The China accounting laws
      require that an annual “statutory audit” be performed in accordance with PRC
      accounting standards and that the books of account of Foreign Invested
      Enterprises are maintained in accordance with Chinese accounting laws. Article
      14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law
      requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
      reports and statements to designated financial and tax authorities, at the
      risk
      of business license revocation. As a practical matter, a Foreign Invested
      Enterprise must retain a local Chinese accounting firm that has experience
      with
      both the Chinese standards and U.S. Generally Accepted Accounting Principles.
      This type of accounting firm can serve the dual function of performing the
      annual Chinese statutory audit and preparing the Foreign Invested Enterprise’s
      financial statements in a form acceptable for an independent U.S. certified
      public accountant to issue an audit report in accordance with Generally Accepted
      Auditing Standards.





Second,
      while the enforcement of substantive rights may appear less clear than United
      States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned
      Enterprises are Chinese registered companies, which enjoy the same status as
      other Chinese registered companies in business-to-business dispute resolution.
      Because the terms of the respective Articles of Association provide that all
      business disputes pertaining to Foreign Invested Enterprises are to be resolved
      by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm,
      Sweden applying Chinese substantive law, the Chinese minority partner in our
      joint venture companies will not assume a privileged position regarding such
      disputes. Any award rendered by this arbitration tribunal is, by the express
      terms of the respective Articles of Association, enforceable in accordance
      with
      the “United Nations Convention on the Recognition and Enforcement of Foreign
      Arbitral Awards (1958).” Therefore, as a practical matter, although no
      assurances can be given, the Chinese legal infrastructure, while different
      in
      operation from its United States counterpart, should not present any significant
      impediment to the operation of Foreign Invested Enterprises.





**CURRENCY
      CONVERSION AND EXCHANGE**





Substantially
      all our revenues and expenses are denominated in the Chinese Renminbi. However,
      we use the United States dollar for financial reporting purposes. The value
      of
      Chinese Renminbi against the United States dollar and other currencies may
      fluctuate as a result of changes in two countries’ economic conditions. To date,
      we have not engaged in any currency hedging transactions in connection with
      our
      operations.





**CUSTOMERS**





We
      have
      approximately 550 customers for our products. None of our customers account
      for
      more than 5% of our revenue. We source our wheat and soybean from approximately
      30 suppliers. None of the supplier accounts for more than 5% of our purchase.
      Historically, our fourth quarter revenue is much higher than the other three
      quarters due to Chinese New Year holiday.




3




**ITEM
      1A. RISK FACTORS.**





In
      addition to the other information in this annual report, the following factors
      should be considered carefully in evaluating the Company’s business and
      prospects. THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE
      EFFECT ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS
      OR
      PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
      STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL
      BE
      DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY
      CAUSE
      ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
      OR STATEMENTS. We
      are
      subject to, among others, the following risks:





**RISKS
      RELATED TO OUR CLASS A COMMON STOCK**





We
      have
      never declared or paid any dividends on our Class A Common Stock. The
      declaration and payment in the future of any cash or stock dividends on the
      Class A Common Stock will be at the discretion of our Board of Directors and
      will depend upon a variety of factors, including our ability to service our
      outstanding indebtedness, if any, and to pay dividends on securities ranking
      senior to the Class A Common Stock, including the shares of our outstanding
      Series A and Series B Preferred Stock, our future earnings, if any, capital
      requirements, financial condition and such other factors as our Board of
      Directors may consider to be relevant from time to time. We do not expect to
      declare or pay any dividends on our Class A Common Stock in the foreseeable
      future.





We
      are
      controlled by our major shareholder, which is controlled by our Chairman, Mr.
      Heng Jing Lu. Ms. Ling Wang, our Vice President and a director, is the holder
      of
      record of 100% of the equity interests of Long Feng Food Overseas Ltd. (“Long
      Feng Food”), which in turn owns 100% of the equity interests of New Dragon
      Pacific Holding Ltd., which in turn holds 100% of the equity interests of New
      Dragon Asia Food Ltd. By virtue of an understanding with Ms. Wang, Mr. Lu has
      sole voting and dispositive control over the shares of Long Feng Food and,
      accordingly, has sole voting and dispositive control of the shares of us held
      by
      New Dragon Asia Food Ltd., which is our majority shareholder. As a result,
      Mr.
      Lu through this shareholder, effectively exercises control over all matters
      requiring shareholder approval, including the election of directors and approval
      of significant corporate transactions. This concentration of ownership may
      also
      have the effect of delaying or preventing a change in control of us that may
      not
      be viewed as beneficial by other shareholders.





**RISKS
      RELATED TO OUR BUSINESS**





***Our
      business may experience adverse effects from competition in the noodle, flour
      and soybean product markets.***





The
      noodle, flour and soybean product markets in the PRC are highly competitive.
      Competition in these markets takes many forms, including the following:


-
        establishing favorable brand recognition;
 
 -
        developing products sought by consumers;
 
 -
        implementing appropriate pricing;
 
 -
        providing strong marketing support; and
 
 -
        obtaining access to retain outlets and sufficient shelf space.




Many
      of
      our competitors are larger and have greater financial resources, including
      our
      primary competitors, the manufactures of each of the brand names “Master Kang”
and “President”. We may not be able to compete successfully with such
      competitors. Competition could cause us to lose our market share, increase
      expenditures or reduce pricing, each of which could have a material adverse
      effect on our business and financial results.





***An
      inability to respond quickly and effectively to new trends would adversely
      impact our competitive position.***





Our
      failure to maintain our technological capabilities or to respond effectively
      to
      technological changes could adversely affect our ability to retain existing
      business and secure new business. We will need to constantly seek out new
      products and develop new solutions to maintain in our portfolio. If we are
      unable to keep current with new trends, our competitors’ technologies or
      products may render us noncompetitive and our products obsolete.




4




***Increases
      in prices of main ingredients and other materials could adversely affect our
      business.***





The
      main
      ingredients that we use to manufacture our products are wheat, soybeans and
      eggs. We also use paper products, such as corrugated cardboard, as well as
      films
      and plastics, to package our products. The prices of these materials have been,
      and we expect them to continue to be, subject to volatility. We may not be
      able
      to pass price increases in these materials onto our customers, which could
      have
      an adverse effect on our financial results.





***We
      are subject to risks associated with joint ventures and third party agreements.***





We
      conduct certain of our milling and sales operations through joint ventures
      established with certain Chinese parties. Any deterioration of these strategic
      relationships may have an adverse effect on our operation. Changes in laws
      and
      regulations, or their interpretation, or the imposition of confiscatory
      taxation, restrictions on currency conversion, imports and sources of supply,
      devaluations of currency or the nationalization or other expropriation of
      private enterprises could have a material adverse effect on our business,
      results of operations and financial condition. Under its current leadership,
      the
      Chinese government has been pursuing economic reform policies that encourage
      private economic activity and greater economic decentralization. There is no
      assurance, however, that the Chinese government will continue to pursue these
      policies, or that it will not significantly alter these policies from time
      to
      time without notice.





We
      may
      have limited legal recourse under Chinese law if disputes arise under our
      agreements with joint ventures or third parties. The Chinese government has
      enacted some laws and regulations dealing with matters such as corporate
      organization and governance, foreign investment, commerce, taxation and trade.
      However, the government’s experience in implementing, interpreting and enforcing
      these laws and regulations is limited, and our ability to enforce commercial
      claims or to resolve commercial disputes is unpredictable. If our new business
      ventures are unsuccessful, or other adverse circumstances arise from these
      transactions, we face the risk that the parties to these ventures may seek
      ways
      to terminate the transactions, or, may hinder or prevent us from accessing
      important information regarding the financial and business operations of these
      acquired companies. The resolution of these matters may be subject to the
      exercise of considerable discretion by agencies of the Chinese government,
      and
      forces unrelated to the legal merits of a particular matter or dispute may
      influence their determination. Any rights we may have to specific performance,
      or to seek an injunction under Chinese law, in either of these cases, are
      severely limited, and without a means of recourse by virtue of the Chinese
      legal
      system, we may be unable to prevent these situations from occurring. The
      occurrence of any such events could have a material adverse effect on our
      business, financial condition and results of operations.





***We
      may be subject to product liability claims and product recalls, which could
      negatively impact its profitability.***





We
      sell
      food products for human consumption, which involves risks such as product
      contamination or spoilage, product tampering and other adulteration of food
      products. We may be subject to liability if the consumption of any of its
      products causes injury, illness or death.  In addition, we will voluntarily
      recall products in the event of contamination or damage.  A significant
      product liability judgment or a widespread product recall may negatively impact
      our profitability for a period of time depending on product availability,
      competitive reaction and consumer attitudes.  Even if a product liability
      claim is unsuccessful or is not fully pursued, the negative publicity
      surrounding any assertion that company products caused illness or injury could
      adversely affect our reputation with existing and potential customers and our
      corporate and brand image.





***We
      have limited business insurance coverage.***





The
      insurance industry in China is still in an early stage of development. Insurance
      companies in China offer limited business insurance coverage. As a result,
      we do
      not have any business liability insurance coverage for our operations. Moreover,
      while business disruption insurance is available, management has determined
      that
      the risks of disruption and cost of the insurance are such that we do not
      require it at this time. Any business disruption, litigation or natural disaster
      might result in substantial costs and diversion of resources.





***We
      have a limited concentration of credit risk.***





Concentration
      of credit risk with respect to customer receivables is limited due to the large
      number of customers comprising our customer base, and their dispersion across
      China. In addition, we perform ongoing credit evaluations of each customer’s
      financial condition and maintain reserves for potential credit losses. Such
      losses in the aggregate have not exceeded management’s expectations.




5




***We
      may experience risks resulting from our plans for expansion.***





We
      have
      acquired several companies and businesses and plan to continue to acquire
      companies in the future. Entering into an acquisition entails many risks, any
      of
      which could harm our business, including: (a) diversion of management’s
      attention from other business concerns; (b) failure to integrate the acquired
      company with our existing businesses; (c) additional operating expenses not
      offset by additional revenue; and (d) dilution of our stock as a result of
      issuing equity securities.





If
      we are
      unable to implement our acquisition strategy, we may be less successful in
      the
      future. A key component of our growth strategy is accomplished by acquiring
      additional flour and noodle factories and, if our acquisition of a soybean
      business proves successful, our acquisition strategy may expand to include
      future acquisitions of soybean businesses. While there are many such companies,
      we may not always be able to identify and acquire companies meeting our
      acquisition criteria on terms acceptable to us. Additionally, financing to
      complete significant acquisitions may not always be available on satisfactory
      terms. Further, our acquisition strategy presents a number of special risks
      to
      us that we would not otherwise contend with absent such strategy, including
      possible adverse effects on our earnings after each acquisition, diversion
      of
      management’s attention from our core business due to the special attention that
      a particular acquisition may require, failure to retain key acquired personnel
      and risks associated with unanticipated events or liabilities arising after
      each
      acquisition, some or all of which could have a material adverse effect on our
      business, financial condition and results of operations.





**RISKS
      ASSOCIATED WITH DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF CHINA.**





***We
      are subject to the risks associated with doing business in the People’s Republic
      of China.***





As
      most
      of our operations are conducted in the PRC, we are subject to special
      considerations and significant risks not typically associated with companies
      operating in North America and Western Europe. These include risks associated
      with, among others, the political, economic and legal environments and foreign
      currency exchange. Our results may be adversely affected by changes in the
      political and social conditions in the PRC, and by changes in governmental
      policies with respect to laws and regulations, anti-inflationary measures,
      currency conversion and remittance abroad, and rates and methods of taxation,
      among other things.





Although
      the majority of productive assets in the PRC are owned by the Chinese
      government, in the past several years the government has implemented economic
      reform measures that emphasize decentralization and encourage private economic
      activity. Because these economic reform measures may be inconsistent or
      ineffectual, there are no assurances that:


-
        We will
        be able to capitalize on economic reforms;
 
 -
        The
        Chinese government will continue its pursuit of economic reform
        policies;
 
 -
        The
        economic policies, even if pursued, will be successful;
 
 -
        Economic policies will not be significantly altered from time to time;
        and
 
 -
        Business operations in China will not become subject to the risk of
        nationalization.





***Economic
      reform policies or nationalization could result in a total investment loss
      in
      our Class A Common Stock.***





Since
      1979, the Chinese government has reformed its economic systems. Because many
      reforms are unprecedented or experimental, they are expected to be refined
      and
      improved. Other political, economic and social factors, such as political
      changes, changes in the rates of economic growth, unemployment or inflation,
      or
      in the disparities in per capita wealth between regions within China, could
      lead
      to further readjustment of the reform measures. This refining and readjustment
      process may negatively affect our operations.





Over
      the
      last few years, China’s economy has registered a high growth rate. Recently,
      there have been indications that rates of inflation have increased. In response,
      the Chinese government has taken measures to curb this excessively expansive
      economy. These measures include restrictions on the availability of domestic
      credit, reducing the purchasing capability of certain of its customers, and
      limited re-centralization of the approval process for purchases of some foreign
      products. The Chinese government may adopt additional measures to further combat
      inflation, including the establishment of freezes or restraints on certain
      projects or markets. These measures may adversely affect our manufacturing
      operations.




6




To
      date,
      reforms to China’s economic system have not adversely impacted our operations
      and are not expected to adversely impact operations in the foreseeable future;
      however, there can be no assurance that the reforms to China’s economic system
      will continue or that we will not be adversely affected by changes in China’s
      political, economic, and social conditions and by changes in policies of the
      Chinese government, such as changes in laws and regulations, measures which
      may
      be introduced to control inflation and changes in the rate or method of
      taxation.





On
      November 11, 2001, China signed an agreement to become a member of the World
      Trade Organization (“WTO”), the international body that sets most trade rules,
      further integrating China into the global economy and significantly reducing
      the
      barriers to international commerce. China’s membership in the WTO was effective
      on December 11, 2001. China has agreed upon its accession to the WTO to reduce
      tariffs and non-tariff barriers, remove investment restrictions and provide
      trading and distribution rights for foreign firms. The tariff rate reductions
      and other enhancements will enable us to develop better investment strategies.
      In addition, the WTO’s dispute settlement mechanism provides a credible and
      effective tool to enforce members’ commercial rights. Also, with China’s entry
      to the WTO, it is believed that the relevant laws on foreign investment in
      China
      will be amplified and will follow common practices.





***The
      Chinese legal system is not fully developed and has inherent uncertainties
      that
      could limit the legal protections available to investors.***





The
      Chinese legal system is a system based on written statutes and their
      interpretation by the Supreme People’s Court. Prior court decisions may be cited
      for reference but have limited legal precedents. Since 1979, the PRC government
      has been developing a comprehensive system of commercial laws, and considerable
      progress has been made in introducing laws and regulations dealing with economic
      matters such as foreign investment, corporate organization and governance,
      commerce, taxation and trade. Two examples are the promulgation of the Contract
      Law of the PRC to unify the various economic contract laws into a single code,
      which went into effect on October 1, 1999, and the Securities Law of the
      People’s Republic of China, which went into effect on July 1, 1999. However,
      because these laws and regulations are relatively new, and because of the
      limited volume of published cases and their non-binding nature, interpretation
      and enforcement of these laws and regulations involve uncertainties. In
      addition, as the Chinese legal system develops, changes in such laws and
      regulations, their interpretation or their enforcement may have a material
      adverse effect on our business operations.





***Enforcement
      of regulations in China may be inconsistent.***





Although
      the Chinese government introduced new laws and regulations to modernize its
      securities and tax systems on January 1, 1994, China does not yet possess a
      expansive body of business law. As a result, the enforcement, interpretation
      and
      implementation of regulations may prove to be inconsistent and it may be
      difficult to enforce contracts.





***We
      may experience lengthy delays in resolution of legal disputes.***





As
      China
      has not developed a dispute resolution mechanism similar to the Western court
      system, dispute resolution over Chinese projects and joint ventures can be
      difficult and there is no assurance that any dispute involving our business
      in
      China can be resolved expeditiously and satisfactorily.




***We
      may experience an impact of the United States Foreign Corrupt Practices Act
      on
      our business.***





We
      are
      subject to the United States Foreign Corrupt Practices Act, which generally
      prohibits Unites States companies from engaging in bribery or other prohibited
      payments to foreign officials for the purpose of obtaining or retaining
      business. Foreign companies, including some that may compete with us, are not
      subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
      and other fraudulent practices occur from time-to-time in mainland China. We
      have attempted to implement safeguards to prevent and discourage such practices
      by our employees and agents. We cannot assure you, however, that our employees
      or other agents will not engage in such conduct for which we might be held
      responsible. If our employees or other agents are found to have engaged in
      such
      practices, we could suffer severe penalties and other consequences that may
      have
      a material adverse effect on our business, financial condition and results
      of
      operations.




7




***Impact
      of governmental regulation on our operations.***





We
      may be
      subjected to liability for product safety that could lead to a product recall.
      Our operations and properties are subject to regulation by various Chinese
      government entities and agencies. As a producer of food products, our operations
      are subject to production, packaging, quality, labeling and distribution
      standards. Our production and distribution facilities are also subject to
      various local environmental laws and workplace regulations.





We
      believe that our current legal and environmental compliance programs adequately
      address such concerns and that we are in compliance with applicable laws and
      regulations. However, compliance with, or any violation of, current and future
      laws or regulations could require material expenditures or otherwise adversely
      effect our business and financial results.





We
      may be
      liable if the consumption of any of our products cause injury, illness or death.
      We may also be required to recall certain of our products that become
      contaminated or are damaged. We are not aware of any material product liability
      judgment against us. However, a product liability judgment or a product recall
      could have a material adverse effect on our business or financial
      results.





***It
      may be difficult to serve us with legal process or enforce judgments against
      our
      management or us.***





All
      of
      our assets are located in China. In addition, all of our directors and officers
      are non-residents of the United States, and all, or substantial portions of
      the
      assets of such non-residents, are located outside the United States. As a
      result, it may not be possible to effect service of process within the United
      States upon such persons. Moreover, there is doubt as to whether the courts
      of
      China would enforce:





-  Judgments
      of United States courts against us, our directors or our officers based on
      the
      civil liability provisions of the securities laws of the United States or any
      state; or


-  Original
      actions brought in China relating to liabilities against non-residents or us
      based upon the securities laws of the United States or any state.





***The
      Chinese government could change its policies toward private enterprise or even
      nationalize or expropriate it, which could result in the total loss of your
      investment.***





Our
      business is subject to significant political and economic uncertainties and
      may
      be adversely affected by political, economic and social developments in China.
      Over the past several years, the Chinese government has pursued economic reform
      policies including the encouragement of private economic activity and greater
      economic decentralization. The Chinese government may not continue to pursue
      these policies or may significantly alter them to our detriment from time to
      time with little, if any, prior notice. Changes in policies, laws and
      regulations or in their interpretation or the imposition of confiscatory
      taxation, restrictions on currency conversion, restrictions or prohibitions
      on
      dividend payments to shareholders, devaluations of currency or the
      nationalization or other expropriation of private enterprises could have a
      material adverse effect on our business. Nationalization or expropriation could
      even result in the total loss of our investment in China and in the total loss
      of your investment.





***If
      relations between the United States and China worsen, our stock price may
      decrease and we may have difficulty accessing U.S. capital
      markets.***





At
      various times during recent years, the United States and China have had
      significant disagreements over political and economic issues. Controversies
      may
      arise in the future between these two countries. Any political or trade
      controversies between the United States and China, whether or not directly
      related to our business, could adversely affect the market price of our Class
      A
      Common Stock and our ability to access U.S. capital markets.





***The
      Chinese economic, political and social conditions as well as government policies
      could affect our business.***





All
      of
      our business, assets and operations are located in China. The economy of China
      differs from the economies of most developed countries in many respects,
      including:





-  government
      involvement


-  level
      of
      development


-  growth
      rate


-  control
      of foreign exchange; and


-  allocation
      of resources




8




The
      economy of China has been transitioning from a planned economy to a more
      market-oriented economy. Although in recent years the Chinese government has
      implemented measures emphasizing the utilization of market forces for economic
      reform, the reduction of state ownership of productive assets and the
      establishment of sound corporate governance in business enterprises, a
      substantial portion of productive assets in China is still owned by the Chinese
      government. In addition, the Chinese government continues to play a significant
      role in regulating industry by imposing industrial policies. It also exercises
      significant control over China’s economic growth through the allocation of
      resources, controlling payment of foreign currency-denominated obligations,
      setting monetary policy and providing preferential treatment to particular
      industries or companies.





The
      economy of China has experienced significant growth in the past 20 years, but
      growth has been uneven both geographically and among various sectors of the
      economy. The Chinese government has implemented various measures from time
      to
      time to control the rate of economic growth. Some of these measures benefit
      the
      overall economy of China, but may have a negative effect on us. For example,
      our
      operating results and financial condition may be adversely affected
      by:





-  changes
      in the rate or method of taxation


-  imposition
      of additional restrictions on currency conversion and remittances
      abroad


-  reduction
      in tariff or quota protection and other import restrictions; and


-  changes
      in the usage and costs of state-controlled transportation services





***Fluctuations
      in the value of the Chinese Renminbi relative to foreign currencies could affect
      our operating results.***





Substantially
      all our revenues and expenses are denominated in the Chinese Renminbi. However,
      we use the United States dollar for financial reporting purposes. The value
      of
      Chinese Renminbi against the United States dollar and other currencies may
      fluctuate and is affected by, among other things, changes in China’s political
      and economic conditions. The Chinese government values the exchange rate of
      the
      Chinese Renminbi against a number of currencies, rather than just exclusively
      to
      the United States dollar. Although the Chinese government has stated its
      intention to support the value of the Chinese Renminbi, we cannot assure you
      that the government will not revalue it. As our operations are primarily in
      China, any significant revaluation of the Chinese Renminbi may materially and
      adversely affect our cash flows, revenues and financial condition. For example,
      to the extent that we need to convert United States dollars into Chinese
      Renminbi for our operations, appreciation of this currency against the United
      States dollar could have a material adverse effect on our business, financial
      condition and results of operation. Conversely, if we decide to convert our
      Chinese Renminbi into United States dollars for other business purposes and
      the
      United States dollar appreciates against this currency, the United States dollar
      equivalent of the Chinese Renminbi would be reduced. To date, we have not
      engaged in any hedging transactions in connection with our
      operations.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS.**





Not
      applicable





**ITEM
      2. PROPERTIES.**





Our
      corporate office is located in Shenzhen. Our six manufacturing plants, at four
      locations in Shandong and Beijing, consist of 30 noodle production lines and
      flour milling lines, located in Yantai, Penglai, Longkou and Beijing.
      Manufacturing operations are vertically integrated, with the flour production
      utilized in the noodle manufacturing process. All of our manufacturing
      facilities have been awarded ISO9002 quality certification.





Facility
            
            Address
            
            Owned/Rented
            
            Size
                (Sq meters)Yantai
                Flour Mill, Yantai Noodle
              Factory
                & Soybean Plants
            
            No.
                10 Huancheng Road (N), Longkou, Shandong
            
            Owned
            
            25,345Sanhe
                Noodle Factory
            
            1
                Yanjiao Jing Ha Road (N), Beijing
            
            Owned
            
            26,274Penglai
                Flour Mill
            
            Xiao
                Men Town, Penglai, Shandong
            
            Rented
            
            33,330Longyuan
                Plant
            
            Huancheng
                Beihuan Road, Longkou, Shandong
            
            Owned
            
            35,000




9




**ITEM
      3. LEGAL PROCEEDINGS.**





We
      are
      not a party to any material pending legal proceedings.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**





On
      December 14, 2005, we sought and obtained the written consent, in lieu of a
      meeting of stockholders, of the holder of 70.6% of our outstanding Class A
      Common Stock, approving the terms of a proposed private placement involving
      the
      potential issuance, at below market price, of greater than 19.999% of our shares
      of Class A Common Stock outstanding immediately prior to the private placement,
      which was completed on December 22, 2005. Further information relating to the
      matter is stated in the Company’s Definitive Information Statement on Schedule
      14C, filed with the SEC on January 5, 2006.




10





**PART
      II**





**ITEM
      5.****MARKET
      FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.**





MARKET
      PRICES OF COMMON STOCK





Our Class
      A
      Common Stock is
      traded
      on the American Stock Exchange under the symbol NWD. The high and low sale
      prices of the Class
      A
      Common Stock as
      reported on AMEX for the periods indicated are set forth on the table below.





PRICE
                RANGE OF COMMON STOCKHIGH
            
            LOWYear
                Ended December 25, 2004:First
                Quarter
            
            $
                1.18
            
            $
                0.74Second
                Quarter
            
            $
                1.10
            
            $
                0.50Third
                Quarter
            
            $
                0.82
            
            $
                0.55Fourth
                Quarter
            
            $
                0.93
            
            $
                0.61Year
                Ended December 25, 2005:First
                Quarter
            
            $
                0.90
            
            $
                0.72Second
                Quarter
            
            $
                1.06
            
            $
                0.79Third
                Quarter
            
            $
                2.78
            
            $
                0.96Fourth
                Quarter
            
            $
                2.43
            
            $
                1.31





SHAREHOLDERS





As
      of
      March 9, 2006, there were 50,501,988 shares
      of our Class
      A
      Common Stock outstanding and we had approximately 5,000 shareholders of record. American
      Stock Transfer & Trust Company is the registrar and transfer agent for our Class
      A
      Common Stock .





DIVIDEND
      POLICY





We
      have
      never declared or paid any cash dividends on our Class
      A
      Common Stock and we
      do not anticipate paying any cash dividends in the foreseeable future. We
      currently intend to retain future earnings, if any, to finance operations and
      the expansion of our business. Any future determination to pay cash dividends
      will be at the discretion of the board of directors and will be based upon
      our
      financial condition, operating results, capital requirements, plans for
      expansion, restrictions imposed by any financing arrangements and any other
      factors that the board of directors deems relevant.





RECENT
      SALES OF UNREGISTERED SECURITIES





All
      unregistered sales of
      equity securities during the year ended December 25, 2005 have been previously
      reported by the Company.





ISSUER
      PURCHASES OF EQUITY SECURITIES





None




11




**ITEM
      6. SELECTED FINANCIAL DATA**





The
      following selected consolidated financial data of the Company is presented
      as of
      and for the years ended December 25, 2005, 2004, 2003 and 2002. The selected
      financial data should be read in conjunction with the Company’s audited
      consolidated financial statements and the notes thereto, and Management’s
      Discussion and Analysis of Financial Condition and Results of Operation.





YEARS
                ENDED DECEMBER 25,2005
            
            2004
            
            2003
            
            2002(in
                thousand, except per share data)CONSOLIDATED
                STATEMENTS OF OPERATIONS DATA:Net
                revenues
            
            $
            44,180
            
            $
            39,221
            
            $
            30,773
            
            $
            33,704Operating
                expenses:Selling
                and distribution
            
            
            721
            
            
            1,178
            
            
            1,330
            
            
            1,161General
                and administrative
            
            
            2,358
            
            
            1,611
            
            
            2,398
            
            
            601Income
                from operations
            
            
            4,950
            
            
            4,545
            
            
            2,193
            
            
            4,346Interest
                expense
            
            
            1,814
            
            
            **-**
            
            
            **-**
            
            
            **-**Income
                before tax and minority interests
            
            
            5,488
            
            
            5,900
            
            
            3,174
            
            
            4,762Net
                income
            
            
            3,995
            
            
            4,645
            
            
            2,727
            
            
            4,153Earnings
                per common shareBasic
            
            
            0.09
            
            
            0.10
            
            
            0.06
            
            
            0.10Diluted
            
            
            0.08
            
            
            0.10
            
            
            0.06
            
            
            0.10Weighted
                average common shares outstanding:Basic
            
            
            46,125
            
            
            45,061
            
            
            42,108
            
            
            40,911Diluted
            
            
            49,860
            
            
            45,061
            
            
            42,108
            
            
            40,911CONSOLIDATED
                BALANCE SHEET DATA:Cash
                and cash equivalents
            
            $
            14,332
            
            $
            219
            
            $
            1,783
            
            $
            628Total
                assets
            
            
            59,134
            
            
            34,246
            
            
            34,357
            
            
            40,354Total
                stockholders’ equity
            
            
            46,461
            
            
            26,835
            
            
            22,190
            
            
            17,686





**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.**





This
      report includes forward-looking statements. Generally, the words “believes,”
“anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative thereof or comparable
      terminology are intended to identify forward-looking statements. Such statements
      are subject to certain risks and uncertainties, including the matters set forth
      in this report or other reports or documents we file with the Securities and
      Exchange Commission from time to time, which could cause actual results or
      outcomes to differ materially from those projected. Undue reliance should not
      be
      placed on these forward-looking statements, which speak only as of the date
      hereof. We undertake no obligation to update these forward-looking statements.





To
      supplement our consolidated financial statements presented in accordance with
      GAAP, we discuss our results in terms of financial measures that may be deemed
      to be “non-GAAP financial measures” under the rules and regulations of the
      Securities and Exchange Commission. Our management believes that these measures
      provide meaningful information regarding the company’s performance and liquidity
      by excluding certain expenses that may not be indicative of its core operating
      results and facilitate comparisons to its historical operations and competitors’
operating results. To the extent such measures are not readily reconcilable
      to
      the comparable GAAP financial measures contained in its consolidated financial
      statements, we provide detailed reconciliations that permit investors to
      determine how such non-GAAP financial measures have been derived.





The
      following discussion and analysis should be read in conjunction with “Item 6.
      Selected Financial Data” and our consolidated financial statements and the
      related notes thereto and other financial information contained elsewhere in
      this Form 10-K.




12




**OVERVIEW**





Headquartered
      in Shandong Province, PRC, New Dragon Asia Corp. is engaged in the milling,
      sale
      and distribution of flour and related products, including instant noodles and
      soybean-derived products, to retail and wholesale customers throughout China.
      With a well known brand name called LONG FENG, we market our well-established
      product line through a countrywide network of more than 200 key distributors
      and
      16 regional offices in 27 Chinese provinces. We have six manufacturing plants
      in
      the PRC with an aggregate production capacity of approximately 110,000 tons
      of
      flour and approximately 1.1 billion packets of instant noodles and 4,500 tons
      of
      Soybean powder.





**OPERATION
      PLAN**





Our
      current strategies are:


-
      to
      acquire additional plants to enlarge our capacity, and


-
      to
      build strategic alliances with multinational food groups to enhance product
      range and capitalize on our China  distribution
      network.





Plans
      for
      expansion of the existing plants are expected to be funded through current
      working capital from ongoing sales. A significant acquisition will require
      additional funds in the form of debt or equity, or a combination of both.
      However, there can be no assurance these funds will be available.





**ESTABLISHMENT
      AND ACQUISITIONS IN 2005**





***New
      Dragon Asia (Long Kou) Food Co. Ltd (“Soy Bean
      Plant”)***





In
      July
      2005, we acquired the plant and machinery utilized for the production for
      soybean-derived products from a state-owned enterprise in Shandong. The facility
      had originally been operated by the Company under a 10-year lease agreement
      signed on April 27, 2005, which was cancelled upon our acquisition of the
      facility later that year. We commenced our soybean product business on September
      1, 2005. We supply soybean powder in China to customers including Coca-Cola
      Shanghai.





***Shandong
      Xinlongya Industry and Trade Co. Ltd (“Xinlongya
      Distributor”)***





In
      October 2005, we acquired a state-owned distributor, Xinlongya Distribution
      Co.
      Ltd., which has been serving us as one of our distributors.





**YEAR
      ENDED DECEMBER 25, 2005 COMPARED TO YEAR ENDED DECEMBER 25,
      2004**





Selected
      Information from the Consolidated Statements of Operations




**For
                the years ended December 25,****2005**
            
            **2004**
            
            **2003**Net
                revenue
            
            $
            44,180
            
            $
            39,221
            
            $
            30,773Cost
                of goods sold
            
            
            (36,151
            )
            
            (31,887
            )
            
            (24,852
            )Selling
                and distribution expenses
            
            
            (721
            )
            
            (1,178
            )
            
            (1,330
            )General
                and administrative expenses
            
            
            (2,358
            )
            
            (1,611
            )
            
            (2,398
            )Interest
                expense
            
            
            (1,814
            )
            
            -
            
            
            -VAT
                refund
            
            
            2,158
            
            
            1,478
            
            
            1,226Net
                income
            
            
            3,995
            
            
            4,645
            
            
            2,727Adjusted
                net income
            
            
            5,625
            
            
            -
            
            
            -




13




**Derivation
                of Adjusted Net Income (in thousands)****2005**Net
                Income
            
            $
            3,995Add:
                Amortization of the fair value of
              warrants,
                beneficial conversion feature and
              preferred
                stock issuance costs
            
            
            1,630Adjusted
                net income
            
            $
            5,625





***Net
      Revenue***





Net
      revenue for the year ended December 25, 2005 was $44.18 million, an increase
      of
      $ 4.96 million, or 12.64%, as compared to $39.22 million for the prior year.
      This increase was primarily due to the growth in market demand for flour and
      instant noodles and the addition of the soybean products business. The selling
      prices for all our products remained stable.





***Cost
      of goods sold***





For
      the
      year ended December 25, 2005, cost of goods sold was $36.15 million, an increase
      of $4.26 million, or 13.37%, as compared to $31.89 million for 2004. The
      increase was primarily due to the growth of business.





For
      the
      year ended December 25, 2005, as a percentage of revenue, cost of goods sold
      increased slightly to 81.83% as compared to 81.30% for that of the prior year.
      For the year ended December 25, 2005, gross margin decreased slightly to 18%
      as
      compared to 19% for the prior year.





***Selling
      and distribution expenses***





Selling
      and distribution expenses consist primarily of salaries, commissions and
      associated employee benefits, travel expenses of sales and marketing personnel
      and promotional expenses.





For
      the
      year ended December 25, 2005, selling and distribution expenses decreased 38.80%
      to $0.72 million from $1.18 million in 2004. The decrease was primarily due
      to
      cost controls implemented in early 2005. To control costs, the Company has
      proposed and implemented more effective staffing of our facilities, restricted
      traveling costs and developed a more efficient sales methodology.





***General
      and administrative expenses*** ****





For
      the
      year ended December 25, 2005, general and administrative expenses increased
      $0.75 million to $2.36 million from $1.61 million of 2004. The increase was
      primarily due to expenses paid for public relations efforts and promotional
      activities implemented during 2005. In 2005, the Company successfully completed
      two private placements to raise $15.5 million. The Company also acquired the
      Soybean plant and the Longyuan plant to expand its business and, in connection
      therewith, the Company incurred various professional fees, which were recorded
      as G&A expenses.





***Interest
      expense***





In
      connection with the issuance of the Series A Preferred Stock and Series B
      Preferred Stock, the Company paid professional fees, placement agent fees and
      associated expenses amounting to $1.22 million, which were recorded as deferred
      financing costs and are being amortized over the term of both series of
      Preferred Stock as interest expense using the effective interest method. The
      Company also recorded $10.78 million related to the beneficial conversion
      feature and the fair value of warrants isssued in connection with the sale
      of
      both series of Preferred Stock. These amounts were recorded as a contra-account
      to the preferred stock liability on the balance sheet and are being amortized
      over the term of both series of Preferred Stock as interest expense using the
      effective interest method. For the year ended December 25, 2005, the
      amortization of such costs charged to the statement of operations was $1.63
      million, of which $1.56 million was non-cash.




14




For
      the
      year ended December 25, 2004, we did not issue any mandatorily redeemable
      convertible preferred stock and there were therefore no similar charges to
      the
      statement of operations.





***VAT
      refund***





VAT
      refund increased $0.68 million to $2.16 million for the year ended December
      25,
      2005 as compared to $1.48 million for the year ended December 25, 2004. This
      primarily represents the tax refund from the municipal government to encourage
      foreign investment.





***Net
      income***





For
      the
      year ended December 25, 2005, net income was $4.0 million, or $0.09 per share,
      a
      decrease of $0.65 million, or 13.99% as compared to $4.65 million for 2004.
      The
      decrease was primarily due to the amortization of the beneficial conversion
      feature, issuance cost and accretion of warrants related to issuance of the
      convertible preferred stock in 2005.





For
      the
      year ended December 25, 2005, as a percentage of revenue, net income decreased
      to 9.04% as compared to 11.84% for that of the prior year. The decrease was
      primarily due to the amortization of the beneficial conversion feature, issuance
      cost and accretion of warrants related to issuance of the convertible preferred
      stock in 2005.





***Adjusted**n*** ***et
      income***





For
      the
      year ended December 25, 2005, the Company has incurred non-cash amortization
      of
      deferred financing costs, value of warrants and beneficial conversion feature
      of
      $1.63 million. Should such amount be excluded, net income for 2005 would be
      adjusted to $5.63 million, or $0.12 per share, an increase of $0.98 million,
      or
      21.09% as compared to $4.65 million for 2004. As a percentage of revenue,
      adjusted net income for 2005 would have increased to 12.73% as compared to
      11.84% for 2004.





**YEAR
      ENDED DECEMBER 25, 2004 COMPARED TO YEAR ENDED DECEMBER 25, 2003**





The
      Company generated revenues of $39.2 million for the fiscal year ended December
      25, 2004, which was an $8.4 million or 27.3% increase from $30.8 million for
      the
      fiscal year ended December 25, 2003. This increase was primarily due
      to  organic  revenue
      growth, recovery from the negative effects of Severe Respiratory Syndrome,
      or
      SARS in 2003 and the revenue contribution of $1.00 million and $0.30 million
      from the  Longyuan  Plant
      and
      the Penglai Plant.





Selling
      and distribution expenses decreased from $1.33 million for the fiscal year
      ended
      December 25, 2003 to $1.18 million for the fiscal year ended December 25, 2004
      due to cost savings from the closure of six sales offices. General and
      administrative expenses decreased by $0.79 million primarily due to cost control
      and provision written-back on allowances for doubtful accounts and inventory.





Net
      income for 2004 was $4.65 million, or $0.10 per share, compared with $2.73
      million in 2003. The 70.33% increase in net income was mainly due to the
      improvement in expense controls and the recovery from the prior negative effects
      of SARS in 2003.




15




**CONTRACTUAL
      OBLIGATIONS AND COMMERCIAL COMMITMENTS**





As
      of
      December 25, 2005, the Company had long-term debt obligations that resulted
      from
      the mandatorily redeemable convertible preferred stock and had operating leases
      for manufacturing and warehouse facilities expiring at various dates through
      February 2009 and other commitments and long-term liabilities through August
      2049 as follows:





Payment
                Obligations By Period2006
            
            2007
            
            2008
            
            2009
            
            2010
            
            Thereafter
            
            Total(In
                thousands)Mandatorily
                redeemable convertible preferred stock
            
            $
            --
            
            $
            775
            
            $
            4,253
            
            $
            4,253
            
            $
            4,319
            
            $
            --
            
            $
            13,600Operating
                lease obligations
            
            
            62
            
            
            62
            
            
            62
            
            
            10
            
            
            --
            
            
            --
            
            
            196Acquisition
                of property, plant and equipment
            
            
            128
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            128Pre-determined
                annual fee charged by joint venture partners
            
            
            111
            
            
            111
            
            
            111
            
            
            111
            
            
            111
            
            
            3,877
            
            
            4,432Total
            
            $
            301
            
            $
            948
            
            $
            4,426
            
            $
            4,374
            
            $
            4,430
            
            $
            3,877
            
            $
            18,356





**FINANCIAL
      CONDITION, LIQUIDITY AND CAPITAL RESOURCES**





The
      Company’s primary liquidity needs are to purchase inventories and fund accounts
      receivable and capital expenditures. Historically, the Company has financed
      its
      working capital requirements through a combination of internally generated
      cash,
      and advances from related companies.





The
      Company’s working capital increased $19.27 million to $26.68 million at December
      25, 2005 as compared to $7.41 million at December 25, 2004. The increase was
      primarily due to the growth and profitability of the business, the proceeds
      from
      the issuance of $15.5 million of mandatorily redeemable convertible preferred
      stock (before related costs and expenses) and improved collections of accounts
      receivable during the year ended December 25, 2005. The Company believes that
      it
      has adequate sources of liquidity to finance its business operations for the
      foreseeable future.





Cash
      and
      cash equivalents were $14.33 million as of December 25, 2005, an increase of
      $14.11 million as compared to the balance at December 25, 2004 of $0.22 million.
      The increase was mainly due to the increase in revenue, the proceeds from the
      issuance of mandatorily redeemable convertible preferred stock and proceeds
      received from the exercise of warrants.





Net
      cash
      provided by operating activities for the year ended December 25, 2005 was $0.92
      million, as compared to $2.6 million for the year ended December 25, 2004.
      The
      decrease was primarily due to the purchase of inventory and prepayments. Net
      cash provided by financing activities of $16.04 million for the year ended
      December 25, 2005 was primarily due to the proceeds from the issuance of
      mandatorily redeemable convertible preferred stock and the exercise of warrants.
      In July 2005, we completed a private placement of our securities pursuant to
      which we received net proceeds of approximately $5.46 million after payment
      of a
      placement agent fee and other offering expenses. In December 2005, we completed
      another private placement of our securities pursuant to which we received net
      proceeds of approximately $8.82 million after payment of a placement agent
      fee
      and other offering expenses.





Net
      cash
      used in investing activities for the year ended December 25, 2005 was $3.65
      million, which was mainly due to the purchase of property, machinery and
      equipment.





***Off-balance
      sheet arrangements***





We
      have
      never entered into any off-balance sheet financing arrangements and have not
      formed any special purpose entities. We have not guaranteed any debt or
      commitments of other entities or entered into any options on non-financial
      assets.





**INFLATION
      AND CHANGING PRICES**





The
      Company does not foresee any adverse effects on its earnings as a result of
      inflation or changing prices.




16




**CRITICAL
      ACCOUNTING POLICIES**





The
      methods, estimates and judgments we use in applying our most critical accounting
      policies have a significant impact on the results we report in our consolidated
      financial statements. Critical accounting policies as those that are most
      important to the portrayal of our financial condition and results of operations
      and require us to make our most difficult and subjective judgments, often as
      a
      result of the need to make estimates of matters that are inherently uncertain.
      Based on this definition, our critical policies include revenue recognition,
      allowance for doubtful accounts, sales returns and allowances, asset impairment,
      and inventory valuation including product obsolescence. We believe that we
      consistently apply judgments and estimates and such consistent application
      results in financial statements and accompanying notes that fairly represent
      all
      periods presented. However, any factual errors or errors in these judgments
      and
      estimates may have a material impact on our consolidated statement of operations
      and financial conditions.





Management
      believes that the following reflect the more critical accounting policies that
      currently affect our financial condition and results of operations.





***Contractual
      joint ventures*** **





A
      contractual joint venture is an entity established between the Company and
      another joint venture partner, with the rights and obligations of each party
      governed by a contract. If the Company owns more than 50% of the joint venture
      and is able to govern and control its financial and operating policies and
      its
      board of directors, such joint venture is considered as a de facto subsidiary
      and is accounted for as a subsidiary.





***Revenue
      recognition***





The
      Company recognizes revenues in accordance with SEC Staff Accounting Bulletin
      No.
      101, “Revenue Recognition in Financial Statements” and SAB No. 104, “Revenue
      Recognition.” Revenues represent the invoiced value of goods, net of value added
      tax (“VAT”), supplied to customers, and are recognized upon delivery of goods
      and passage of title.





All
      of
      the Company’s sales made in mainland China are subject to mainland Chinese
      value-added tax at rates ranging from 13% to 17% (“output VAT”). Such output VAT
      is payable after offsetting VAT paid by the Company on purchases (“input
      VAT”).





***Allowance
      for doubtful accounts***





Management
      provides for an allowance for doubtful accounts for those third party trade
      accounts that are not collected within one year.





***Inventory
      Valuation*** **





Inventories
      are stated at the lower of cost, determined on a weighted average basis, or
      net
      realizable value. Costs of work-in-progress and finished goods are composed
      of
      direct material, direct labor and an attributable portion of manufacturing
      overhead. Net realizable value is the estimated selling price, in the ordinary
      course of business, less estimated costs to complete and dispose.





***Mandatorily
      redeemable convertible preferred stock*** **





Preferred
      stock is an unconditional obligation that must be either redeemed for cash
      or
      settled by issuing shares of Class A common stock. The Company accounts for
      preferred stock in accordance with SFAS No. 150 “Accounting for Certain
      Financial Instruments with Characteristics of Both Liabilities and Equity.”





In
      connection with the issuance of mandatorily redeemable convertible preferred
      stock, the Company incurred professional fees, placement agent fees and
      associated expenses, which were recorded as deferred financing cost and are
      being amortized over the term of the preferred stock as interest expense using
      the effective interest method. The Company also recorded the beneficial
      conversion feature and the fair value of warrants issued in connection with
      the
      preferred stock financings. These amounts were recorded as a contra-account
      to
      the preferred stock liability on the balance sheet and are being amortized
      over
      the term of the preferred stock as interest expense using the effective interest
      method.




17




***Stock-Based
      Compensation***





On
      December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based
      Payment” which replaces SFAS No. 123, “Accounting for Stock-Based
      Compensation” and supercedes APB Opinion No. 25, “Accounting for Stock
      Issued to Employees.” SFAS No. 123R requires all share-based payments to
      employees, including grants of employee stock options, to be recognized in
      the
      financial statements based on the grant date fair value of the award. SFAS
      No.
      123R was to be effective for interim or annual reporting periods beginning
      on or
      after June 15, 2005, but in April 2005 the SEC issued a rule that will permit
      most registrants to implement SFAS No. 123R at the beginning of their next
      fiscal year, instead of the next reporting period as required by SFAS No. 123R.
      The pro forma disclosures previously permitted under SFAS No. 123 no longer
      will
      be an alternative to financial statement recognition. Under SFAS No. 123R,
      we
      must determine the appropriate fair value model to be used for valuing
      share-based payments, the amortization method for compensation cost and the
      transition method to be used at date of adoption. The transition methods include
      prospective and retroactive adoption options. Under the retroactive options,
      prior periods may be restated either as of the beginning of the year of adoption
      or for all periods presented. The prospective method requires that compensation
      expense be recorded for all unvested stock options and restricted stock at
      the
      beginning of the first quarter of adoption of SFAS No. 123R, while the
      retroactive methods would record compensation expense for all unvested stock
      options and restricted stock beginning with the first period restated. We have
      adopted the requirements of SFAS No. 123R for the fiscal year beginning on
      December 26, 2004, and recorded the compensation expense for all unvested stock
      options existing prior to the adoption in the first quarter of
      2005.





***Recent
      accounting pronouncements***





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections.” SFAS No. 154 changes the requirements for the accounting for
      and reporting of a change in accounting principle. In addition, it carries
      forward without change the guidance contained in APB Opinion No. 20 for
      reporting the correction of an error in previously issued financial statements
      and a change in accounting estimate. SFAS No. 154 requires retrospective
      application to prior period financial statements of changes in accounting
      principle in most circumstances. The provisions of SFAS 154 are effective in
      fiscal years beginning after December 15, 2005. The Company plans to
      prospectively adopt SFAS No. 154 at the beginning of fiscal 2006.





In
      November 2004, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 151, Inventory Costs, which clarifies the accounting for abnormal
      amounts of the idle facility expense, freight, handling costs, and wasted
      material. SFAS No. 151 will be effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005. We do not believe the adoption
      of
      SFAS No. 151 will have a material impact on our financial
      statements.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
      RISK.**




We
      may be
      exposed to changes in financial market conditions in the normal course of
      business. Market risk generally represents the risk that losses may occur as
      a
      result of movements in interest rates and equity prices. W e
      currently do not use financial instruments in the normal course of business
      that
      are subject to changes in financial market conditions.





**Currency
      Fluctuations and Foreign Currency Risk**





The
      majority of our
      operations are conducted in the PRC except for some minor export business and
      limited overseas purchases of raw materials. Most of our sales and purchases
      are
      conducted within the PRC in Chinese Renminbi. Hence, the effect of the
      fluctuations of exchange rate is considered minimal to our business
      operations.




Substantially
      all of our revenues and expenses are denominated in Renminbi, which is the
      official currency of China. However, we use the United States dollar for
      financial reporting purposes. Conversion of Renminbi into foreign currencies
      is
      regulated by The People’s Bank of China through a unified floating exchange rate
      system. Although the PRC government has stated its intention to support the
      value of Renminbi, there can be no assurance that such exchange rate will not
      again become volatile or that Renminbi will not devalue significantly against
      the US dollar. Exchange rate fluctuations may adversely affect the value, in
      US
      dollar terms, of the our net assets and income derived from its operations
      in
      the PRC.




18




**Interest
      Rate Risk**





The
      Company does not have significant interest rate risk, as our debt obligations
      are primarily short-term in nature, with fixed interest rates.





**Credit
      Risk**





We
      have
      not experienced significant credit risk as most of our customers are long-term
      customers with outstanding payment records. We monitor our receivable regularly
      by our credit manager.





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**





The
      following financial statements and the footnotes thereto are included in the
      section beginning on page F-1.





1.
      Report
      of Independent Registered Public Accounting Firm.


2.
      Consolidated Balance Sheets as of December 25, 2005 and 2004.


3.
      Consolidated Statements of Operations for each of the three years ended December
      25, 2005, 2004 and 2003.


4.
      Consolidated Statements of Stockholders’ Equity and Comprehensive
      Income for each of the three years ended December 25, 2005, 2004 and
      2003.


5.
      Consolidated Statements of Cash Flows for each of the three years ended December
      25, 2005, 2004 and 2003.


6.
      Notes
      to Consolidated Financial Statements.





**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.**





There
      were no changes in or disagreements with accountants on accounting and financial
      disclosure.





**ITEM
      9A. CONTROLS AND PROCEDURES.**





(a)
      Under
      the supervision and with the participation of our management, including our
      chief executive officer and the chief financial officer, we conducted an
      evaluation of the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as of December 25, 2005, the end of the period
      covered by this report (the “Evaluation Date”). Based on this evaluation, our
      chief executive officer and chief financial officer concluded as of the
      Evaluation Date that our disclosure controls and procedures were effective
      such
      that the material information required to be included in our Securities and
      Exchange Commission (“SEC”) reports is recorded, processed, summarized and
      reported within the time periods specified in SEC rules and forms relating
      to us
      and our consolidated subsidiaries, and was made known to others within those
      entities, particularly during the period when this report was being prepared.





(b)
      Additionally, there were no significant changes in our internal controls or
      in
      other factors that could significantly affect these controls subsequent to
      the
      Evaluation Date. We have not identified any significant deficiencies or material
      weaknesses in our internal controls, and therefore there were no corrective
      actions taken.




**ITEM
      9B. OTHER INFORMATION**





(a)
      In
      August 2004, the Company appointed a consulting firm to assist the management
      team to strengthen and to document the internal controls and processes with
      the
      objective of full compliance with the Sarbanes-Oxley Act. This project is
      scheduled to be completed in late 2006.





19





**PART
      III**





**ITEM
      10.****DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT.**




The
      following table sets forth certain information concerning each of our directors
      continuing in office and each of our current executive officers:




**NAME**
            
            **AGE**
            
            **POSITION**
            
            **DIRECTOR
                SINCE**Heng
                Jing Lu
            
            54
            
            Chairman
            
            2003Li
                Xia Wang
            
            47
            
            Director
                and Chief Executive Officer
            
            2003Ling
                Wang
            
            41
            
            Director
                and Vice President
            
            2003Zhi
                Yong Jiang
            
            39
            
            Independent
                Non-Executive Director
            
            2003De
                Lin Yang
            
            51
            
            Independent
                Non-Executive Director
            
            2003Qi
                Xue
            
            53
            
            Independent
                Non-Executive Director
            
            2003Feng
                Ju Chen
            
            50
            
            Independent
                Non-Executive Director
            
            2004Peter
                Mak
            
            44
            
            Chief
                Financial Officer
            
            N/A





The
      business experience during at least the last five years of each of these
      individuals is as follows:




**Mr.
      Heng Jing Lu** ,
      Chairman of the Company, graduated from The Shandong Institute of Economics
      in
      accounting and is a PRC qualified accountant. Before joining the Company on
      December 15, 2003, he had been working in the oil and grain industry for over
      30
      years. Prior to joining the Company, he was the director of Oil and Grain Bureau
      of Longkou, Shandong PRC where he had worked since 1975. He has extensive
      experience in the management of agricultural and food related enterprises and
      strategic planning. He is primarily responsible for business development and
      overall company management.




**Ms.
      Li Xia Wang** ,
      director and Chief Executive Officer of the Company, graduated from The Shandong
      Institute of Economics in accounting and is a PRC qualified accountant. She
      joined the Longkou Oil & Grain Group Company in 1980 where she has remained,
      her last position being Deputy General Manager. She has over 20 years extensive
      experience in the field of finance and accounting. She joined as a director
      of
      the Company on December 15, 2003.




**Ms.
      Ling Wang** ,
      director and Vice President of the Company, graduated from Shandong Television
      Broadcast University in economics management. She has been working with the
      subsidiary of the Company since 1981 and her main responsibilities are in
      operation control and internal audit.




**Mr.
      Zhi Yong Jiang** ,
      independent non-executive director of the Company since December 15, 2003,
      currently serves on the audit committee, acting as Chairman. He graduated from
      Yantai Oil & Grain College with a degree in finance & accounting. He had
      been working with Longkou Jinsheng Electronics Co. Ltd since 2000 and prior
      to
      joining the Company, his last position was Vice President of Longkou Soybean
      Food Co., Ltd. He has been working in the accounting and financing field for
      more than 19 years in different industries. He has extensive experience in
      the
      field of finance and accounting.




**Mr.
      De Lin Yang** ,
      independent non-executive director of the Company since December 15, 2003,
      is
      currently the chairman of the Yantai Hong Yuan CPA, a public accounting firm.
      Mr. Yang graduated from Shandong Gan Bu Distance Learning University with a
      bachelor degree in Accounting. He joined the Longkou City Ceramics Factory
      as an
      accountant in 1975 and was promoted to Chief Accountant in 1982. From 1989
      to
      1999, Mr. Yang served as the deputy chairman of the Longkou City CPA. In 2000,
      Mr. Yang joined the Yantai Hong Yuan CPA as the deputy chairman and was promoted
      to the chairman of the firm in 2002.




20




**Mr.
      Qi Xue** ,
      independent non-executive director of the Company since March 15, 2003,
      graduated in 1987 from The Official Institute of Beijing Chemical Industry
      Management with a diploma of higher education specializing in industrial
      accounting. He is an associate member of The Chinese Institute of Certified
      Public Accountants. Since 1999, he has been the Principal of the Longkou Huayu
      Certified Public Accountants Co. Ltd.




**Ms.
      Feng Ju Chen** ,
      independent non-executive director of the Company, graduated from Yantai
      University in business management and is a member of The Chinese Institute
      of
      Certified Public Accountants. She has been the accounting manager of the Audit
      Bureau of Longkou City for more than 20 years. She has extensive experience
      in
      the field of accounting and joined the Company as a director on April 15, 2004.




**Mr.
      Peter Mak** ,
      joined
      the Company as Chief Financial Officer in November 2004. He graduated from
      Hong
      Kong Polytechnic University. He is a fellow of the Chartered Association of
      Certified Accountants in the U.K. and a fellow of the Hong Kong Certified Public
      Accountants. He is the founder and managing director of VENFUND Investment
      in
      Hong Kong and VENFUND VC Investment Management Ltd. in Shenzhen. Previously,
      he
      was the managing partner of Arthur Andersen Southern China and also a partner
      of
      Arthur Andersen Worldwide.


There
      are
      no family relationships between the directors and executive officers.




**Code
      of Ethics******




Our
      Board
      of Directors has adopted a Code of Conduct and Ethics (the “Code”) that applies
      to all of our employees, officers and directors. The Code covers compliance
      with
      law; fair and honest dealings with the company, with competitors and with
      others; fair and honest disclosure to the public; and procedures for compliance
      with the Code. You can obtain a copy of the Code by sending a written request
      to
      the attention of Mr. Peter Mak, Suite 3605, 36/F, News Building, No.2 Shen
      Nan
      Zhong Road, Shenzhen, PRC.




**Board
      Committees and Designated Directors**




The
      Board
      of Directors has a Compensation Committee, a Nominating Committee and an Audit
      Committee.




*Compensation
      Committee.* The
      Compensation Committee makes recommendations to the Board of Directors
      concerning salaries and incentive compensation for our officers, including
      our
      Chief Executive Officer, and employees and administers our stock option plans.
      Our Compensation Committee consists of Qi Xue, Feng Ju Chen and Zhi Yong Jiang.
      Compensation decisions during the fiscal year ended December 25, 2005 were
      made
      by all of the directors of the Committee. Each of the members of the Committee
      is independent and none have served as an officer or employee of the
      Company.




*Nominating
      Committee.* Under
      the
      rules of the American Stock Exchange (on which our Class A Common Stock is
      listed for trading), nominees for our Board must be selected either by a
      nominating committee consisting entirely of independent directors or by a
      majority of the independent directors, acting pursuant to a standing resolution
      governing the nominating process. Given the size of our company and the
      significant committee responsibilities that many directors already have, we
      have
      chosen to assign this function to the independent directors rather than to
      a
      nominating committee. Consequently, our three independent directors, Qi Xue,
      Feng Ju Chen and Zhi Yong Jiang, are responsible for nominations. They act
      pursuant to a standing resolution. To date, the independent directors have
      not
      engaged any third parties to assist them in identifying candidates for the
      Board.




Among
      the
      tasks that our independent directors may undertake in this capacity are these:


-
              Identifying
                  and selecting those persons who will be nominees for
                  director.
 
 -
              Considering
                  factors relevant to the selection of nominees, including requirements
                  oflaw,
                  stock exchange listing standards, matters of character, judgment,
                  businessexperience
                  and areas of expertise, the diversity of the Board, and other
                  factors.
 
 -
              Recruiting
                  appropriate candidates when necessary, and reviewing the qualifications
                  ofany
                  candidates nominated by
                  shareholders.
 
 -
              Evaluating
                  from time to time the size and composition of the Board and its
                  committees.


21


-
              Evaluating
                  the function and performance of the Board and its
                  directors.


*Audit
      Committee.* The
      Audit
      Committee operates under a written charter. The Audit Committee consists of
      three directors, Qi Xue, Zhi Yong Jiang and Feng Ju Chen, each of whom meets
      the
      independence requirements and standards currently established by the American
      Stock Exchange and the SEC. In addition, the Board of Directors has determined
      that Mr. Qi Xue is an “audit committee financial expert” and “independent”
as defined under the relevant rules of the SEC and the American Stock
      Exchange. The Audit Committee assists the Board of Directors in fulfilling
      its
      oversight of the quality and integrity of the Company’s financial statements and
      the Company’s compliance with legal and regulatory requirements. The Audit
      Committee is responsible for retaining (subject to stockholder ratification)
      and, as necessary, terminating, the independent auditors, annually reviews
      the
      qualifications, performance and independence of the independent auditors and
      the
      audit plan, fees and audit results, and pre-approves audit and non-audit
      services to be performed by the auditors and related fees. The Audit Committee
      also oversees the performance of the Company’s internal audit and compliance
      functions.




**Section 16(a) Beneficial
      Ownership Reporting Compliance**




Section
      16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
      requires our executive officers and directors and persons who own more than
      10%
      of a registered class of our equity securities to file with the Securities
      and
      Exchange Commission initial statements of beneficial ownership, reports of
      changes in ownership and annual reports concerning their ownership of common
      stock and other of our equity securities, on Forms 3, 4 and 5 respectively.
      Based on Company records and other information, we believe that all SEC filing
      requirements applicable to our directors and executive officers were complied
      with for 2005.




**ITEM
      11. EXECUTIVE COMPENSATION.**




The
      following tables reflects the cash compensation we paid, as well as certain
      other compensation paid or accrued, during each of our last three fiscal years
      to the identified persons (the “Named Executive Officers”).




**SUMMARY
      COMPENSATION TABLE**


**Long-term
                  Compensation****Annual
                  Compensation (1)**
              
              **Awards****Name
                  and principal position**
              
              **Year**
              
              **Salary**
                **($)**
              
              **Bonus**
                **($)**
              
              **Other
                  Annual Compensation ($) (1)**
              
              **Restricted
                  Stock Award(s)**
                **($)**
              
              **Securities
                  Underlying Options/SARs**
                **(#)**
              
              **Long-Term
                  Incentive Plan Payouts ($)**
              
              **All
                  Other Compensation ($) (2)**Li
                  Xia Wang,CEO
                  (2)
              
              
              2005
              
              
              20,000
              
              $
              0
              
              
              
              
              
              -0-
              
              
              -
              
              
              
              
              $
              0Peter
                  Mak,CFO
              
              
              2005
              
              
              180,000
              
              $
              0
              
              
              
              
              
              -0-
              
              
              600,000
              
              
              
              
              $
              0Peter
                  Mak, CFO
              
              
              2004
              
              
              -0-
              
              $
              0
              
              
              
              
              
              -0-
              
              
              400,000
              
              
              
              
              $
              0Heng
                  Jing Lu, CEO
              
              
              2004
              
              
              -0-
              
              $
              0
              
              
              
              
              
              -0-
              
              
              -
              
              
              
              
              $
              0Heng
                  Jing Lu, CEO (3)
              
              
              2003
              
              
              -0-
              
              $
              0
              
              
              
              
              
              -0-
              
              
              -
              
              
              
              
              $
              0Xue
                  Jun Song, CEO
              
              
              2003
              
              
              -0-
              
              $
              0
              
              
              
              
              
              -0-
              
              
              -
              
              
              
              
              $
              0




(1)  We
      have
      concluded that the aggregate amounts of perquisites and other personal benefits
      paid to the named individuals do not exceed the lesser of $50,000 or 10% of
      the
      compensation reported in the table for such individuals.




(2)  Ms.
      Wang
      assumed the position of Chief Executive Officer on April 1, 2005.




(3)  Mr.
      Lu
      assumed the position of Chief Executive Officer on December 15,
      2003.




22




**OPTION/SAR
      GRANTS DURING 2005 FISCAL YEAR (INDIVIDUAL GRANTS)**


**Individual
                  Grants**
              
              **Potential
                    Realizable Value at Assumed Annual Rates of Stock Price Appreciation
                    for
                    Option Term**
              
              **Alternate
                    to (f) And (g): Grant Date Value****Name**
              
              **Number
                  of Securities Underlying Options Granted**
              
              **Percent
                  of Total Options Granted to Employees in Fiscal
                  Year**
              
              **Exercise
                  or Base Price**
              
              **Expiration
                  Date**
              
              **5%
                  ($)(f)**
              
              **10%
                  ($)(g)**
              
              **Grant
                  Date Present Value $ (h)**Li
                  Xia Wang, CEO
              
              
              0
              
              
              0
              
              
              0
              
              
              N/A
              
              
              -
              
              
              -
              
              
              -Peter
                  Mak, CFO
              
              
              600,000
              
              
              100
              %
              $
              1.20
              
              
              June
                  22, 2015
              
              
              258,000
              
              
              834,000
              
              
              -






**AGGREGATED
      OPTION/SAR EXERCISES DURING 2005 FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR
      VALUES**


**Name**
              
              **Shares
                  Acquired on Exercise (#)**
              
              **Value
                  Realized ($)**
              
              **Number
                  of Securities Underlying Unexercised Options/SARs At Fiscal Year-End
                  (#)
                  Exercisable/Unexercisable**
              
              **Value
                  of Unexercised In-The-Money Options/SARs At Fiscal Year-End ($)
                  Exercisable/Unexercisable**Exercisable
              
              Unexercisable
              
              Exercisable
              
              UnexercisableLi
                  Xia Wang,CEO
              
              
              0
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Peter
                  Mak,CFO
              
              
              0
              
              
              -
              
              
              1,000,000
              
              
              0
              
              
              290,000
              
              
              0






**COMPENSATION
      COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION**




None
      of
      the members of the Compensation Committee have any relationship with the Company
      or any of its officers of employees other than in connection with their role
      as
      a director. None of the members of the Compensation Committee have participated
      in any related party transactions with the Company since the beginning of the
      Company’s last fiscal year.




**EMPLOYMENT
      CONTRACTS**




We
      have
      an Employment Contract with Mr. Peter Mak, our Chief Financial Officer. Mr.
      Mak
      is entitled to an annual compensation of US$180,000 per year until December
      31,
      2008 and stock options to acquire 400,000 shares of Class A Common Stock at
      an
      exercise price of $1.00 per share, 600,000 shares of Class A Common Stock at
      an
      exercise price of $1.20 per share and 2,000,000 shares of Class A Common Stock
      at an exercise price of $1.60 per share. As of March 9, 2006, Mr. Mak had
      exercised options to purchase 1,000,000 shares of Class A Common Stock and
      sold
      such shares of Class A Common Stock.




23




**COMPENSATION
      OF DIRECTORS**




Directors
      receive no compensation for serving on the Board of Directors, but are
      reimbursed for any out-of-pocket expenses, if any, incurred in attending board
      meetings.




**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.**




The
      following table sets forth, as of March 9, 2006, certain information concerning
      the beneficial ownership of Common Stock by (i) each stockholder known to us
      to
      beneficially own five percent or more of our outstanding Common Stock; (ii)
      each
      director; (iii) each executive officer; and (iv) all of our executive officers
      and directors as a group, and their percentage ownership and voting power.
      As of
      March 9, 2006, there were 50,501,988 shares of Common Stock
      outstanding.




**Name
                and Address of Beneficial Owner**
              
              **Amount
                  and Nature**
                **of
                  Beneficial Ownership**
              
              **Percent
                  of Class**New
                  Dragon Asia Food Ltd.
                Suite
                  2808, International Chamber of Commerce Tower,
                Fuhua
                  Three Road, Shenzhen, PRC 518048
              
              
              34,823,954
              
              
              68.96
              %Heng
                  Jing Lu†
                Chairman
              
              
              34,823,954
              (1)
              
              68.96
              %(1)Ling
                  Wang†
                Director
                  and Vice President
              
              
              -0-
              (2)
              
              *Zhi
                  Yong Jiang†
                Director
              
              
              -0-
              
              
              *De
                  Lin Yang†
                Director
              
              
              -0-
              
              
              *Qi
                  Xue†
                Director
              
              
              -0-
              
              
              *Feng
                  Ju Chen†
                Director
              
              
              -0-
              
              
              *Peter
                  Mak†
                Chief
                  Financial Officer
              
              
              2,000,000
              (3)
              
              3.96
              %All
                  Directors and Executive Officers (8 people)
              
              
              35,823,954
              
              
              72.9
              %







*
      Less
      than one percent.


†
Address
      of referenced person is c/o New Dragon Asia Corp. Suite 2808, International
      Chamber of Commerce Tower, Fuhua Three Road, Shenzhen, PRC 518048.




(1)
      Represents shares owned by New Dragon Asia Food Ltd. Ms. Ling Wang, our Vice
      President and a director, is the holder of record of 100% of the equity
      interests of Long Feng Food Overseas Ltd. (“Long Feng”), which in turn owns 100%
      of the equity interests of New Dragon Pacific Holding Ltd., which in turn holds
      100% of the equity interests of New Dragon Asia Food Ltd. By virtue of an
      understanding with Ms. Wang, Mr. Lu has sole voting and dispositive control
      over
      the shares of Long Feng and, accordingly, has sole voting and dispositive
      control of the shares held by New Dragon Asia Food Ltd.




(2)
      By
      virtue of an oral understanding between Ms. Wang and Mr. Lu, Mr. Lu has sole
      voting and dispositive control over the shares of Long Feng and, accordingly,
      has sole voting and dispositive control of the shares held by New Dragon Asia
      Food Ltd. Ms. Wang disclaims beneficial ownership of any equity interests of
      Long Feng and New Dragon Asia Food Ltd.




24




(3)
      Represents shares underlying immediately exercisable options, which includes
      options exercisable for 2,000,000 shares at an exercise price of $1.60 per
      share
      pursuant to an option granted on January 20, 2006.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**





Parties
      are considered to be related if one party has the ability, directly or
      indirectly, to control the other party or exercise significant influence over
      the other party in making financial and operational decisions. Parties are
      also
      considered to be related if they are subject to common control or common
      significant influence. For a summary of certain related party transactions,
      please refer to Note 18 of the Consolidated Financial Statements under the
      heading “Related Party Transactions” for significant details. The comprehensive
      summary of information required by Item 13 is set forth in our Proxy Statement
      under the caption “certain relationships and related transactions” and is
      incorporated herein by this reference.





**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES.**





The
      Audit
      Committee has selected Grobstein, Horwath & Company LLP as our independent
      accountants for the fiscal year ending December 25, 2005. Grobstein, Horwath
      & Company LLP was our independent accounting firm for the fiscal year ended
      December 25, 2004.





***Public
      Accountants’ fees***





For
      fiscal years ended December 25, 2005 and 2004, fees for services provided by
      Grobstein, Horwath & Company LLP were as follows:





2005
            
            2004Audit
                Fees
            
            $
            142,000
            
            $
            112,000Audit
                Related Fees
            
            $
            28,500
            
            $
            NilTax
                Fees
            
            $
            5,000
            
            $
            4,500All
                Other Fees
            
            $
            Nil
            
            $
            Nil





Audit
      Fees were for professional services rendered for the audit of the Company’s
      annual financial statements, the review of quarterly financial statements,
      and
      the preparation of statutory and regulatory filings. Audit-Related Fees relate
      to professional services rendered in connection with employee benefit plan
      audits, accounting consultations, due diligence and audits in connection with
      acquisitions. Tax fees consist of fees billed for professional services for
      tax
      compliance, tax planning and tax advice. These services include assistance
      regarding federal, state and international tax compliance and planning, tax
      audit defense, and mergers and acquisitions. All other fees consist of
      shareholder meeting attendance and printing services. The Audit Committee
      considered and determined that the provision of non-audit services provided
      by
      Grobstein, Horwath & Company LLP is compatible with maintaining the firm’s
      independence.





***Pre-Approval
      Policies and Procedures***





In
      accordance with the SEC’s auditor independence rules, the Audit Committee has
      established the following policies and procedures by which it approves in
      advance any audit or permissible non-audit services to be provided to the
      Company by its independent auditor.





Prior
      to
      the engagement of the independent auditor for any fiscal year’s audit,
      management submits to the Audit Committee for approval lists of recurring audit,
      audit-related, tax and other services expected to be provided by the auditor
      during that fiscal year. The Audit Committee adopts pre-approval schedules
      describing the recurring services that it has pre-approved, and is informed
      on a
      timely basis, and in any event by the next scheduled meeting, of any such
      services rendered by the independent auditor and the related fees.





The
      fees
      for any services listed in a pre-approval schedule are budgeted, and the Audit
      Committee requires the independent auditor and management to report actual
      fees
      versus the budget periodically throughout the year. The Audit Committee will
      require additional pre-approval if circumstances arise where it becomes
      necessary to engage the independent auditor for additional services above the
      amount of fees originally pre-approved. Any audit or non-audit service not
      listed in a pre-approval schedule must be separately pre-approved by the Audit
      Committee on a case-by-case basis.  Every
      request to adopt or amend a pre-approval schedule or to provide services that
      are not listed in a pre-approval schedule must include a statement by the
      independent auditors as to whether, in their view, the request is consistent
      with the SEC’s rules on auditor independence.




25




The
      Audit
      Committee will not grant approval for:





-
            any
                services prohibited by applicable law or by any rule or regulation of
                the SEC or other regulatory body applicable to the
                Company;


-
            provision
                by the independent auditor to the Company of strategic consulting
                services
                of the type typically provided by management consulting firms;
                or


-
            the
                retention of the independent auditor in connection with a transaction
                initially recommended by the independent auditor, the tax treatment
                of
                which may not be clear under the Internal Revenue Code and related
                regulations and which it is reasonable to conclude will be subject
                to
                audit procedures during an audit of the Company’s financial
                statements.





Tax
      services proposed to be provided by the auditor to any director, officer or
      employee of the Company who is in an accounting role or financial reporting
      oversight role must be approved by the Audit Committee on a case-by-case basis
      where such services are to be paid for by the Company, and the Audit Committee
      will be informed of any services to be provided to such individuals that are
      not
      to be paid for by the Company.





In
      determining whether to grant pre-approval of any non-audit services in the
“all
      other” category, the Audit Committee will consider all relevant facts and
      circumstances, including the following four basic guidelines **:**




-
              whether
                    the service creates a mutual or conflicting interest between
                    the auditor
                    and the Company;
 -
              whether
                  the service places the auditor in the position of auditing his
                  or her own
                  work;
 -
                whether
                    the service results in the auditor acting as management or an
                    employee of
                    the Company; and
 -
                whether the service places the auditor in a
                  position of
                  being an advocate for the
                  Company.




26





**PART
      IV**





**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**





**(a)  
      1.********Financial
      Statements**




An
      index
      to Consolidated Financial Statements appears on page F-1.




**2.  Schedules**




All
      financial statement schedules are omitted because they are not applicable,
      not
      required under the instructions or all the information required is set forth
      in
      the financial statements or notes thereto.




**(b)**  **Exhibits**




**Exhibit
                  Number**
              
              **Description**2.1
              
              Share
                  Exchange Agreement dated as of December 18, 2001 (incorporated
                  herein by
                  reference from our filing on the Definitive Proxy 14/A filed on
                  October
                  11, 2001).3.1
              
              Amended
                  Articles of Incorporation (incorporated herewith by reference to
                  Exhibit
                  3.1 to our Definitive Proxy 14/A filed on October 11,
                  2001).3.2
              
              By-laws
                  (incorporated herewith by reference to Exhibit 3.2 to our Definitive
                  Proxy
                  14/A filed on October 11, 2001).3.3
              
              Certificate
                  of Designations of Preferences, Rights and Limitations of the Series
                  A 7%
                  Convertible Preferred Stock (incorporated herewith by reference
                  to Exhibit
                  3.1 of our Form 8-K filed on July 12, 2005).3.4
              
              Certificate
                  of Designations of Preferences, Rights and Limitations of the Series
                  B 7%
                  Convertible Preferred Stock (incorporated herewith by reference
                  to Exhibit
                  3.1 of our Form 8-K filed on December 23, 2005).4.1
              
              Subscription
                  Agreement, dated September 4, 2003 (incorporated herewith by reference
                  to
                  Exhibit 4.1 to our Registration Statement on Form S-3 filed on
                  October 3,
                  2003).4.2
              
              Subscription
                  Agreement, dated October 3, 2003 (incorporated herewith by reference
                  to
                  Exhibit 4.2 to our Registration Statement on Form S-3 filed on
                  October 3,
                  2003).4.3
              
              Common
                  Stock Purchase Warrants for the September 4, 2003 Private Placement
                  (incorporated herewith by reference to Exhibit 4.3 to our Registration
                  Statement on Form S-3 filed on October 3, 2003).4.4
              
              Common
                  Stock Purchase Warrants for the October 3, 2003 Private Placement
                  (incorporated herewith by reference to Exhibit 4.4 to our Registration
                  Statement on Form S-3 filed on October 3, 2003).4.5
              
              Form
                  of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P.
                  (incorporated herewith by reference to Exhibit 4.1 to our Form
                  8-K filed
                  on July 12, 2005).




27


**Exhibit
                  Number**
              
              **Description**4.6
              
              Form
                  of Warrant issued to Alliance Financial, LLC, Renaissance Advisors
                  BVI,
                  John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell
                  (incorporated herewith by reference to Exhibit 4.2 to our Registration
                  Statement on Form S-3 filed on August 11, 2005).4.7
              
              Securities
                  Purchase Agreement, dated July 11, 2005, relating to the sale of
                  the
                  Series A 7% Convertible Preferred Stock (incorporated herewith
                  by
                  reference to Exhibit 10.1 to our Form 8-K filed on July 12,
                  2005).4.8
              
              Registration
                  Rights Agreement, dated July 11, 2005, by and among New Dragon
                  Asia Corp.
                  and the investors named therein (incorporated herewith by reference
                  to
                  Exhibit 10.2 to our Form 8-K filed on July 12, 2005).4.9
              
              Form
                  of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P.
                  (incorporated herewith by reference to Exhibit 4.1 to our Form
                  8-K filed
                  on December 23, 2005).4.10
              
              Form
                  of Warrant issued to Alliance Financial, LLC, Renaissance Advisors,
                  Inc.,
                  John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell
                  (incorporated herewith by reference to Exhibit 4.2 to our Registration
                  Statement on Form S-3 filed on January 20, 2006).4.11
              
              Securities
                  Purchase Agreement, dated December 22, 2005, relating to the sale
                  of the
                  Series B 7% Convertible Preferred Stock (incorporated herewith
                  by
                  reference to Exhibit 10.1 to our Form 8-K filed on December 23,
                  2005).4.12
              
              Registration
                  Rights Agreement, dated December 22, 2005, by and among New Dragon
                  Asia
                  Corp. and the investors named therein (incorporated herewith by
                  reference
                  to Exhibit 10.2 to our Form 8-K filed on December 23,
                  2005).4.13
              
              Registration
                  Rights Agreement, dated December 22, 2005, by and among New Dragon
                  Asia
                  Corp. and New Dragon Food Ltd. (incorporated herewith by reference
                  to
                  Exhibit 4.5 to our Registration Statement on Form S-3 filed on
                  January 20,
                  2006).10.1
              
              Sino-Foreign
                  Joint Venture Contract for the New Dragon Asia Flour (Yantai) Company
                  Limited, dated June 1, 1999 (incorporated herewith by reference
                  to Exhibit
                  10.1 to our Registration Statement on Form S-3 filed on October
                  3,
                  2003).10.2
              
              Subcontracting
                  Agreement, for the New Dragon Asia Flour (Yantai) Company Limited,
                  dated
                  June 26, 1999 (incorporated herewith by reference to Exhibit 10.2
                  to our
                  Registration Statement on Form S-3 filed on October 3,
                  2003).10.3
              
              Sino-Foreign
                  Joint Venture Contract for the New Dragon Asia Food (Yanti) Company
                  Limited, dated November 28, 1998 (incorporated herewith by reference
                  to
                  Exhibit 10.3 to our Registration Statement on Form S-3 filed on
                  October 3,
                  2003).10.4
              
              Subcontracting
                  Agreement, for the New Dragon Asia Food (Yantai) Company Limited,
                  dated
                  December 26, 1998 (incorporated herewith by reference to Exhibit
                  10.4 to
                  our Registration Statement on Form S-3 filed on October 3,
                  2003).10.5
              
              Sino-Foreign
                  Joint Venture Contract for the New Dragon Asia Food (Dalian) Company
                  Limited, dated November 28, 1998 (incorporated herewith by reference
                  to
                  Exhibit 10.5 to our Registration Statement on Form S-3 filed on
                  October 3,
                  2003).




28


**Exhibit
                    Number**
                
                **Description**10.6
                
                Subcontracting
                    Agreement, for the New Dragon Asia Food (Dalian) Company Limited,
                    dated
                    December 26, 1998 (incorporated herewith by reference to Exhibit
                    10.6 to
                    our Registration Statement on Form S-3 filed on October 3,
                    2003).10.7
                
                Sino-Foreign
                    Joint Venture Contract for the Sanhe New Dragon Asia Food Company
                    Limited,
                    dated November 28, 1998 (incorporated herewith by reference to
                    Exhibit
                    10.7 to our Registration Statement on Form S-3 filed on October
                    3,
                    2003).10.8
                
                Subcontracting
                    Agreement, for the Sanhe New Dragon Asia Food Company Limited,
                    dated
                    December 26, 1998 (incorporated herewith by reference to Exhibit
                    10.8 to
                    our Registration Statement on Form S-3 filed on October 3,
                    2003).10.9
                
                Employment
                    Agreement between New Dragon Asia Corp. and Peter Mak, dated
                    November 2,
                    2004 (incorporated herewith by reference to Exhibit 10.9 to our
                    Form 8-K
                    filed on June 29, 2005).10.10
                
                Employment
                    Supplement between New Dragon Asia Corp. and Peter Mak, dated
                    June 22,
                    2005 (incorporated herewith by reference to Exhibit 10.9 to our
                    Form 8-K
                    filed on June 29, 2005).10.11
                
                Supplementary
                    Agreement to Employment Agreement between New Dragon Asia Corp.
                    and Peter
                    Mak, dated January 20, 2006 (incorporated herewith by reference
                    to Exhibit
                    10.10 to our Form 8-K filed on January 24, 2006).10.11
                
                Equity
                    Incentive Plan (incorporated herewith by reference to Exhibit
                    B to our
                    Definitive Information Statement on Schedule 14C filed on March
                    14,
                    2006).23.1
                
                Consent
                    of Grobstein, Horwath & Company LLP, Independent Registered Public
                    Accounting Firm, filed herewith.31.1
                
                Certification
                    of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A)
                    of the
                    Securities Exchange Act of 1934, as adopted pursuant to Section
                    302 of the
                    Sarbanes-Oxley Act of 2002, filed herewith.31.2
                
                Certification
                    of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A)
                    of
                    the Securities Exchange Act of 1934, as adopted pursuant to Section
                    302 of
                    the Sarbanes-Oxley Act of 2002, filed herewith.32.1
                
                Certification
                    of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section
                    906 of the
                    Sarbanes-Oxley Act of 2002), filed herewith.32.2
                
                Certification
                    of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section
                    906 of
                    the Sarbanes-Oxley Act of 2002), filed
                    herewith.
  29




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.


Dated:
                March 23, 2006
              By:
              /s/ Li
                Xia WangName: Li
                Xia WangTitle:
                Chief Executive Officer





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.


Dated:
                  March 23, 2006
                By:
                /s/ Heng
                  Jing LuName: Heng
                  Jing LuTitle:
                  Chairman
 Dated:
                      March 23, 2006
                    By:
                    /s/ Peter
                      MakName: Peter
                      MakTitle:
                      Chief Financial Officer
 Dated:
                          March 23, 2006
                        By:
                        /s/ Ling
                          WangName: Ling
                          WangTitle:
                          Director
 Dated:
                              March 23, 2006
                            By:
                            /s/ De
                              Lin YangName: De
                              Lin YangTitle:
                              Director
 Dated:
                                  March 23, 2006
                                By:
                                /s/ Zhi
                                  Yong JiangName: Zhi
                                  Yong JiangTitle:
                                  Director
 Dated:
                                      March 23, 2006
                                    By:
                                    /s/ Qi
                                      XueName: Qi
                                      XueTitle:
                                      Director
 Dated:
                                          March 23, 2006
                                        By:
                                        /s/ Feng
                                          Ju ChenName: Feng
                                          Ju ChenTitle:
                                          Director
  30


**NEW
      DRAGON ASIA CORP.**





**FINANCIAL
      STATEMENTS**





**TABLE
      OF CONTENTS**


Report
                  of Independent Registered Public Accounting Firm
              
              F-1Consolidated
                  Balance Sheets as of December 25, 2005 and 2004
              
              F-2Consolidated
                  Statements of Operations for each of the three years in the period
                  ended
                  December 25, 2005
              
              F-3Consolidated
                  Statements of Stockholders' Equity and Comprehensive Income for
                  each of
                  the three years in the period ended December 25, 2005
              
              F-4Consolidated
                  Statements of Cash Flows for each of the three years in the period
                  ended
                  December 25, 2005
              
              F-5Notes
                  to Consolidated Financial Statements
              
              F-7







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Stockholders and Board of Directors of New Dragon Asia Corp. and Subsidiaries





We
      have
      audited the accompanying consolidated balance sheets of New Dragon Asia Corp.
      and Subsidiaries (the “Company”) as of December 25, 2005 and 2004 and the
      related consolidated statements of operations, stockholders’ equity and
      comprehensive income and cash flows for each of the three years in the period
      ended December 25, 2005. These consolidated financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these consolidated financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The
      Company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An
      audit
      also includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of New Dragon
      Asia
      Corp. and Subsidiaries as of December 25, 2005 and 2004, the consolidated
      results of their operations and their cash flows for each of the three years
      in
      the period ended December 25, 2005 in conformity with U.S. generally accepted
      accounting principles.





**/s/
      GROBSTEIN, HORWATH & COMPANY LLP**





Sherman
      Oaks, California


March
      15,
      2006




F-1




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**


(Amounts
      in thousands, except share data)




**December
                25,**
              **2005**
            
            **December
                25,**
              **2004****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            14,332
            
            $
            219Accounts
                receivable, net
            
            
            6,515
            
            
            6,414Deposits
                and prepayments, net
            
            
            4,970
            
            
            2,520Inventories,
                net
            
            
            7,630
            
            
            3,990Due
                from related companies
            
            
            679
            
            
            1,183Total
                current assets
            
            
            34,126
            
            
            14,326Deposit
                for property, machinery and equipment
            
            
            1,000
            
            
            --Property,
                machinery and equipment, net
            
            
            18,315
            
            
            16,098Land
                use rights, net
            
            
            3,980
            
            
            3,822Deferred
                financing cost, net
            
            
            1,713
            
            
            --Total
                assets
            
            $
            59,134
            
            $
            34,246**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            2,696
            
            $
            2,696Other
                payables and accruals
            
            
            2,298
            
            
            1,898Taxes
                payable
            
            
            1,854
            
            
            1,491Due
                to related companies
            
            
            598
            
            
            831Total
                current liabilities
            
            
            7,446
            
            
            6,916Due
                to New Dragon Asia Food Limited
            
            
            137
            
            
            303Due
                to joint venture partners
            
            
            54
            
            
            110Mandatorily
                redeemable convertible preferred stock, net of discount of
                $8,655
            
            
            4,945
            
            
            --Total
                liabilities
            
            
            12,582
            
            
            7,329Minority
                interests
            
            
            91
            
            
            82CommitmentsStockholders’
                equity:Preferred
                Stock, $0.0001 par value:
              Authorized
                shares - 5,000,000 - none issued and outstanding
            
            
            --
            
            
            --Class
                A Common Stock, $0.0001 par value:
              Authorized
                shares - 102,000,000
              Issued
                and outstanding - 49,322,291 in 2005 and 45,061,242 in 2004
              Class
                B Common Stock, $0.0001 par value:
              Authorized
                shares - 2,000,000 - none issued and outstanding
            
            
            5
              
              
              --
            
            
            4
              
              
              --Additional
                paid-in capital
            
            
            24,790
            
            
            9,909Receivable
                from stockholder
            
            
            (49
            )
            
            --Retained
                earnings
            
            
            20,917
            
            
            16,922Accumulated
                other comprehensive income
            
            
            798
            
            
            --Total
                stockholders’ equity
            
            
            46,461
            
            
            26,835Total
                liabilities and stockholders’ equity
            
            $
            59,134
            
            $
            34,246





The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-2




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(Amounts
      in thousands, except per share data)




**For
                the years ended December 25,****2005**
            
            **2004**
            
            **2003**Net
                revenue
            
            $
            44,180
            
            $
            39,221
            
            $
            30,773Cost
                of goods sold
            
            
            (36,151
            )
            
            (31,887
            )
            
            (24,852
            )Gross
                profit
            
            
            8,029
            
            
            7,334
            
            
            5,921Operating
                expenses:Selling
                and distribution expenses
            
            
            (721
            )
            
            (1,178
            )
            
            (1,330
            )General
                and administrative expenses
            
            
            (2,358
            )
            
            (1,611
            )
            
            (2,398
            )Income
                from operations
            
            
            4,950
            
            
            4,545
            
            
            2,193Other
                income (expense):Interest
                expense
            
            
            (1,814
            )
            
            (72
            )
            
            (249
            )Other
                income
            
            
            186
            
            
            (54
            )
            
            -Interest
                income
            
            
            8
            
            
            3
            
            
            4VAT
                refund
            
            
            2,158
            
            
            1,478
            
            
            1,226Income
                before income taxes and minority interests
            
            
            5,488
            
            
            5,900
            
            
            3,174Provision
                for income taxes
            
            
            (1,487
            )
            
            (1,296
            )
            
            (447
            )Income
                before minority interests
            
            
            4,001
            
            
            4,604
            
            
            2,727Minority
                interests
            
            
            (6
            )
            
            41
            
            
            --Net
                income
            
            $
            3,995
            
            $
            4,645
            
            $
            2,727Earnings
                per common shareBasic
            
            $
            0.09
            
            $
            0.10
            
            $
            0.06Diluted
            
            $
            0.08
            
            $
            0.10
            
            $
            0.06Weighted
                average number of common shares outstandingBasic
            
            
            46,125
            
            
            45,061
            
            
            42,108Diluted
            
            
            49,860
            
            
            45,061
            
            
            42,108





The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-3




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**


(Amounts
      in the thousands)


Class
                  A
              
              Additional
              
              Receivable
              
              
              
              Accumulated
                Other
              
              TotalCommon
                  Stock
              
              Paid-in
              
              from
              
              Retained
              
              Comprehensive
              
              Stockholders’
              
              ComprehensiveShares
              
              Amount
              
              Capital
              
              Stockholder
              
              Earnings
              
              Income
              
              Equity
              
              IncomeBalance
                  at December 25, 2002
              
              
              40,911
              
              $
              4
              
              $
              8,132
              
              $
              -
              
              $
              9,550
              
              $
              -
              
              $
              17,686
              
              $
              -Issuance
                  of common stock in connection with:
                Private
                  placement in September
              
              
              3,300
              
              
              -
              
              
              1,405
              
              
              -
              
              
              -
              
              
              -
              
              
              1,405
              
              
              -Private
                  placement in October
              
              
              850
              
              
              -
              
              
              372
              
              
              -
              
              
              -
              
              
              -
              
              
              372
              
              
              -Net
                  income for the year ended December 25, 2003
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,727
              
              
              -
              
              
              2,727
              
              
              2,727Balance
                  at December 25, 2003
              
              
              45,061
              
              
              4
              
              
              9,909
              
              
              -
              
              
              12,277
              
              
              -
              
              
              22,190
              
              
              -Net
                  income for the year ended December 25, 2004
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,645
              
              
              -
              
              
              4,645
              
              
              4,645Balance
                  atDecember
                  25, 2004
              
              
              45,061
              
              
              4
              
              
              9,909
              
              
              -
              
              
              16,922
              
              
              -
              
              
              26,835
              
              
              -Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,995
              
              
              -
              
              
              3,995
              
              
              3,995Stock-basedcompensation
                  expense
              
              
              -
              
              
              -
              
              
              105
              
              
              -
              
              
              -
              
              
              -
              
              
              105
              
              
              -Foreign
                  currencytranslation
                  adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              798
              
              
              798
              
              
              798Preferred
                  Stock issuance cost
              
              
              -
              
              
              -
              
              
              565
              
              
              -
              
              
              -
              
              
              -
              
              
              565
              
              
              -Fair
                  value of warrants issued
              
              
              -
              
              
              -
              
              
              5,047
              
              
              -
              
              
              -
              
              
              -
              
              
              5,047
              
              
              -Beneficial
                  conversion feature
              
              
              -
              
              
              -
              
              
              5,168
              
              
              -
              
              
              -
              
              
              -
              
              
              5,168
              
              
              -Conversion
                  of Preferred Stocks and related interest payments made in Class
                  A Common
                  Stock
              
              
              2,039
              
              
              0.5
              
              
              1,971
              
              
              -
              
              
              -
              
              
              -
              
              
              1,971.5
              
              
              -Exercise
                  of warrants
              
              
              2,222
              
              
              0.5
              
              
              2,025
              
              
              -
              
              
              -
              
              
              -
              
              
              2,025.5
              
              
              -Receivable
                  from stockholder
              
              
              -
              
              
              -
              
              
              -
              
              
              (49
              )
              
              -
              
              
              -
              
              
              (49
              )
              
              -Balance
                  at
                December
                  25, 2005
              
              
              49,322
              
              $
              5
              
              $
              24,790
              
              $
              (49
              )
              $
              20,917
              
              $
              798
              
              $
              46,461
              
              $
              4,793




The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-4




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(Amounts
      in thousands)




**For
                the years ended December 25,****2005**
            
            **2004**
            
            **2003****Cash
                flows from operating activities:**Net
                income
            
            $
            3,995
            
            $
            4,645
            
            $
            2,727Adjustments
                to reconcile net income to net cash provided byoperating
                activities:Allowance
                for doubtful accounts
            
            
            118
            
            
            (218
            )
            
            578Provision
                for inventory reserve
            
            
            (413
            )
            
            (35
            )
            
            -Depreciation
                and amortization of land use rights
            
            
            1,266
            
            
            1,187
            
            
            1,425Gain
                on disposal of PRC subsidiary
            
            
            --
            
            
            (162
            )
            
            --Loss
                (Gain) on sale of machinery and equipment
            
            
            5
            
            
            199
            
            
            (346
            )Amortization
                of deferred financing costs, value of warrants and beneficial conversion
                feature
            
            
            1,630
            
            
            --
            
            
            --Minority
                interests
            
            
            6
            
            
            (41
            )
            
            --Stock-based
                compensation expense
            
            
            105
            
            
            --
            
            
            --Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (219
            )
            
            735
            
            
            (186
            )Deposits
                and prepayments
            
            
            (3,450
            )
            
            (1,242
            )
            
            (216
            )Inventories
            
            
            (3,227
            )
            
            (1,278
            )
            
            2,439Due
                from related companies
            
            
            504
            
            
            (706
            )
            
            2,375Accounts
                payable
            
            
            --
            
            
            (1,583
            )
            
            (163
            )Other
                payables and accruals
            
            
            472
            
            
            920
            
            
            (48
            )Taxes
                payable
            
            
            363
            
            
            573
            
            
            32Due
                to related companies
            
            
            (233
            )
            
            (371
            )
            
            400Net
                cash provided by operating activities
            
            
            922
            
            
            2,623
            
            
            9,017**Cash
                flows from investing activities:**Proceeds
                from sale of property, machinery and equipment
            
            
            22
            
            
            126
            
            
            994Purchases
                of property, machinery and equipment
            
            
            (3,395
            )
            
            (2,207
            )
            
            (92
            )Purchases
                of land use rights
            
            
            (273
            )
            
            --
            
            
            --Net
                cash provided by (used in) investing activities
            
            
            (3,646
            )
            
            (2,081
            )
            
            902**Cash
                flows from financing activities:**Proceeds
                from issuance of preferred stock
            
            
            15,500
            
            
            --
            
            
            --Payments
                of issuance costs related to preferred stock
            
            
            (1,218
            )
            
            --
            
            
            --Proceeds
                from short-term borrowings
            
            
            --
            
            
            --
            
            
            4,325Repayments
                of short-term borrowings
            
            
            --
            
            
            (2,676
            )
            
            (5,094
            )Restricted
                cash
            
            
            --
            
            
            --
            
            
            181Proceeds
                from parent company
            
            
            --
            
            
            1,127
            
            
            --Repayment
                to parent company
            
            
            (166
            )
            
            --
            
            
            (5,586
            )Repayment
                to joint venture partners
            
            
            (56
            )
            
            (681
            )
            
            (4,367
            )Proceeds
                from exercise of warrants
            
            
            1,977
            
            
            --
            
            
            1,777Capital
                contribution from minority interests
            
            
            --
            
            
            124
            
            
            --Net
                cash provided by (used in) financing activities
            
            
            16,037
            
            
            (2,106
            )
            
            (8,764
            )Foreign
                currency translation adjustment
            
            
            800
            
            
            --
            
            
            --Net
                increase (decrease) in cash and cash equivalents
            
            
            14,113
            
            
            (1,564
            )
            
            1,155Cash
                and cash equivalents at the beginning of the period
            
            
            219
            
            
            1,783
            
            
            628Cash
                and cash equivalents at the end of the period
            
            $
            14,332
            
            $
            219
            
            $
            1,783




F-5







**Non-cash
                Investing and Financing Activities**Beneficial
                conversion feature on issuance of preferred stock
            
            $
            5,168
            
            $
            --
            
            $
            --Fair
                value discount of warrants attached to issuance of preferred stock
            
            $
            5,612
            
            $
            --
            
            $
            --Receivable
                from Stockholder upon exercise of warrants
            
            $
            49
            
            $
            --
            
            $
            --Conversion
                of preferred stock and related interest to common stock
            
            $
            1,900
            
            $
            --
            
            $
            --Interest
                payments on preferred stock in form of common stock
            
            $
            72
            
            $
            --
            
            $
            --**Supplemental
                disclosure of cash flows information:**Interest
                paid
            
            $
            68
            
            $
            72
            
            $
            249Income
                taxes paid
            
            $
            1,865
            
            $
            10
            
            $
            380





The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-6




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1. ORGANIZATION AND NATURE OF OPERATIONS**





New
      Dragon Asia Corporation, a corporation incorporated in the State of Florida,
      is
      principally engaged in the milling, sale and distribution of flour and related
      products, including instant noodles and soybean-derived products, to retail
      and
      wholesale customers throughout China through its foreign subsidiaries in China
      (collectively the “Company”). The Company is headquartered in Shandong Province,
      the People’s Republic of China (“PRC”) and has its corporate office in Shenzhen,
      and six manufacturing plants in Yantai, Beijing and Penglai.





Details
      of the subsidiaries are as follows:





Name
            
            Domicile
                and date of incorporation
            
            Paid-in
                capital
            
            Percentage
                of ownership
            
            Principal
                activitiesMix
                Creation Limited (“MC”)
            
            The
                British Virgin Islands
              November
                7, 1997
            
            US$1,500,000
            
            100%
            
            Investment
                holdingRich
                Delta Limited (“RD”)
            
            The
                British Virgin Islands
              October
                28, 1998
            
            US$1,000,000
            
            100%
            
            Investment
                holdingHero
                Treasure Limited (“HT”)
            
            The
                British Virgin Islands
              April
                19, 2004
            
            US$1
            
            100%
            
            Investment
                holdingKeen
                General Limited
              (“KG”)
            
            The
                British Virgin Islands
              July
                20, 1998
            
            US$1,500,000
            
            100%
            
            Investment
                holdingNew
                Dragon Asia Flour (Yantai) Company Limited (“NDAFLY”)
            
            The
                PRC
              August
                13, 1999
            
            RMB28,500,000
            
            90%
                (a)
            
            Manufacture,
                marketing and distribution of flourNew
                Dragon Asia Food (Yantai) Company Limited (“NDAFY”)
            
            The
                PRC
              December
                24, 1998
            
            RMB17,462,000
            
            90%
                (b)
            
            Manufacture,
                marketing and distribution of instant noodlesNew
                Dragon Asia Food (Sanhe) Company Limited (“NDAFS”)
            
            The
                PRC
              December
                25, 1998
            
            RMB51,191,432
            
            79.64%
                (b)
            
            Manufacture,
                marketing and distribution of instant noodlesPenglai
                New Dragon Jin Qiao Food Company Limited (“PNDJQ”)
            
            The
                PRC
              December
                5, 2003
            
            US$850,000
            
            100%
            
            Manufacture,
                marketing and distribution of flourLongkou
                City Longyuan Packing Materials Company Limited (“LCLPM”)
            
            The
                PRC
              March
                2004
            
            RMB2,280,000
            
            55%
                (c)
            
            Manufacture
                and sale of packing materialsNew
                Dragon Asia (LongKou) Food Company Limited (“NDALS”)
            
            The
                PRC
              March
                17, 2005
            
            RMB16,996,980
            
            100%
            
            Manufacture,
                marketing and distribution of soybean productsShandong
                Xinlongya Industry and Trade Company Limited (“SXDC”)
            
            The
                PRC
              September
                27, 2005
            
            US$404,400
            
            100%
            
            Marketing
                and distribution of instant noodles, flour and soybean
                products





(a)
      NDAFLY is a contractual joint venture established in the PRC to be operated
      for
      50 years until August 13, 2049. In September 2000, MC contributed 90% of the
      registered capital to NDAFLY. Under the joint venture agreement dated June
      1,
      1999 and the supplemental agreement dated June 26, 1999, the Chinese joint
      venture partner is entitled to receive a pre-determined annual fee and is not
      responsible for any profit or loss of NDAFLY effective from June 26, 1999.
      In
      view of the profit sharing arrangement NDAFLY is regarded as 100% owned by
      the
      Company. The annual fee has been charged to General and Administrative Expenses
      for the years ended December 25, 2005, 2004 and 2003.




F-7




(b)
      NDAFY
      and NDAFS are contractual joint ventures established in the PRC to be operated
      for 50 years until December 24, 2048. In March 1999, RD contributed 90% of
      the
      registered capital to NDAFY, while KG contributed 79.64% of the registered
      capital to NDAFS. Under the joint venture agreements dated November 28, 1998
      and
      the supplemental agreement dated December 26, 1998, the PRC joint venture
      partner is entitled to receive a pre-determined annual fee and is not
      responsible for any profit or loss of NDAFY and NDAFS effective from December
      26, 1998. In view of the profit sharing arrangements, NDAFY and NDAFS are
      regarded as 100% owned by the Company. The annual fees have been charged to
      General and Administrative Expenses for the years ended December 25, 2005,
      2004
      and 2003.





(c)
      LCLPM
      is a 55% owned subsidiary of NDAFY established in the PRC in March 2004. The
      remaining 45% equity is owned by Longkou City Longyuan Factory, our Chinese
      joint venture partner.





**NOTE
      2. BASIS OF PRESENTATION**





The
      consolidated financial statements include the financial statements of New Dragon
      Asia Corp. and its subsidiaries. All significant intercompany balances and
      transactions have been eliminated in consolidation.





The
      consolidated financial statements were prepared in accordance with accounting
      principles generally accepted in the United States of America (“U.S. GAAP”). The
      preparation of financial statements in conformity with U.S. GAAP requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities, the disclosure of contingent assets and liabilities
      as
      of the date of the financial statements and the reported amounts of revenues
      and
      expenses during the reporting period. The Company regularly evaluates estimates
      and assumptions related to allowances for doubtful accounts, sales returns
      and
      allowance, and inventory reserves. Although management believes these estimates
      and assumptions are adequate and reasonable under the circumstances, actual
      results could differ from those estimates. U.S. GAAP differs from that used
      in
      the statutory financial statements of the major operating subsidiaries of the
      Company, which were prepared in accordance with the relevant accounting
      principles and financial reporting regulations in the PRC. Certain accounting
      principles stipulated under U.S. GAAP are not applicable in the PRC.





**NOTE
      3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***Revenue
      recognition***





The
      Company recognizes sales in accordance with the United States Securities and
      Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No.101 “Revenue
      Recognition in Financial Statements” and SAB No. 104, “Revenue Recognition.” The
      Company recognizes revenue when the following fundamental criteria are met:
      (i)
      persuasive evidence of an arrangement exists, (ii) delivery has occurred or
      services have been rendered, (iii) the price to the customer is fixed or
      determinable and (iv) collection of the resulting receivable is reasonable
      assured. Revenue is not recognized until title and risk of loss is transferred
      to the customer, which occur upon delivery of goods. Revenues represent the
      invoiced value of goods, net of value added tax (“VAT”).





All
      of
      the Company’s sales made in Mainland China are subject to the Mainland China
      value-added tax at rates ranging from 13% to 17% (“output VAT”). Such output VAT
      is payable after offsetting VAT paid by the Company on purchases (“input VAT”).





Deposits
      or advance payments from customers prior to delivery of goods and passage of
      title of goods are recorded as deposits from customers.





***Cash
      and cash equivalents***





The
      Company considers cash on hand, deposits in banks, and short-term investments
      purchased with an original maturity date of three months or less to be cash
      and
      cash equivalents.





***Financial
      instruments***





The
      Company accounts for financial instruments under the provisions of Statements
      of
      Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities”, which requires that all derivative
      financial instruments be recognized in the consolidated financial statements
      and
      maintained at fair value regardless of the purpose or intent for holding them.
      Changes in fair value of derivative financial instruments are either recognized
      periodically in income or stockholders’ equity (as a component of comprehensive
      income), depending on whether the derivative is being used to hedge changes
      in
      fair value or cash flows. The adoption of SFAS 133 did not have a material
      impact on the Company’s consolidated financial position or its results of
      operations because the Company does not currently hold any derivative financial
      instruments and does not engage in hedging activities. The carrying amounts
      for
      cash and cash equivalents, accounts receivable, deposits and prepayments,
      accounts payable, other payables and accruals approximate their fair values
      because of their nature and respective duration.




F-8




***Accounts
      receivable***





Accounts
      receivable is stated at cost, net of allowance for doubtful accounts. The
      Company provides for an allowance for doubtful accounts for those third
      party trade accounts that are not collected within one year.





Financial
      instruments, which potentially subject the Company to concentration of credit
      risk, consist primarily of trade receivables. However, concentrations of credit
      risk are limited due to the large number of customers comprising the Company’s
      customer base and their dispersion across different business and geographic
      areas. The Company monitors its exposure to credit losses and maintains an
      allowance for anticipated losses. Such losses historically have not been
      significant and have been within management’s expectations. To reduce credit
      risk, the Company performs periodic credit valuations of its customers.





***Inventories***





Inventories
      are stated at the lower of cost, determined on a weighted average basis, or
      net
      realizable value. Costs of work-in-progress and finished goods are composed
      of
      direct material, direct labor and an attributable portion of manufacturing
      overhead. Net realizable value is the estimated selling price, in the ordinary
      course of business, less estimated costs to complete and dispose. The Company
      has provided an inventory reserve.




***Property,
      machinery and equipment***





Property,
      machinery and equipment is stated at cost, less accumulated depreciation and
      amortization. Depreciation and amortization is computed using the straight-line
      method over the estimated useful lives of the related assets that range from
      5
      to 50 years. Leasehold improvements are amortized using the straight-line method
      over the estimated useful life of the asset or the term of the lease, whichever
      is shorter. Costs for normal repairs and maintenance are expensed to operations
      as incurred, while renewals and major refurbishments are capitalized.





Assessments
      of whether there has been a permanent impairment in the value of property,
      machinery and equipment are periodically performed by considering factors such
      as expected future operating income, trends and prospects, as well as the
      effects of demand, competition and other economic factors. The Company believes
      no permanent impairment has occurred as of December 25, 2005.





***Land
      use right***





Land
      use
      rights are stated at cost, less accumulated amortization. Amortization is
      computed using the straight-line method over the estimated useful lives ranging
      from 27 to 50 years. In accordance with SFAS No.142, “Goodwill and Other
      Intangible Assets,” intangible assets with finite lives are subject to
      amortization, and impairment reviews are performed in accordance with SFAS
      No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” No
      event has occurred that would trigger an impairment assessment of the Company’s
      intangible assets with finite lives as of December 25, 2005.





***Income
      taxes***





The
      Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
      for Income Taxes”. Under this method, deferred income taxes are recognized for
      the estimated tax consequences in future years of differences between the tax
      bases of assets and liabilities and their financial reporting amounts and each
      year-end based on enacted tax laws and statutory rates applicable to the periods
      in which the differences are expected to affect taxable income. Valuation
      allowances are established to reduce deferred tax assets to the amount expected
      to be realized when, in management’s opinion, it is more likely than not that
      some portion of the deferred tax assets will not be realized. The provision
      for
      income taxes represents current taxes payable net of the change during the
      period in deferred tax assets and liabilities.





F-9




***Operating
      lease***





Operating
      leases represent those leases under which substantially all the risks and
      rewards of ownership of the leased assets remain with the lessors. Rental
      payments under operating leases are charged to expense on the straight-line
      basis over the period of the relevant leases.





***Comprehensive
      Income***





SFAS
      No.130, “Reporting Comprehensive Income,” establishes standards for reporting
      and displaying comprehensive income and its components in the consolidated
      financial statements. Accumulated other comprehensive income (loss) includes
      foreign currency translation adjustments.





***Foreign
      currency translation***





On
      July
      21, 2005, the People’s Bank of China announced an upward adjustment in the
      Renminbi exchange rate against the U.S. dollar of 2%. The exchange rate of
      the
      Renminbi will be valued against a number of currencies, rather than just
      exclusively to the United States dollar.





The
      functional currency of the Company is the Chinese Renminbi. However, the Company
      reports in U.S. dollars. The financial statements of the Company’s foreign
      subsidiaries have been translated into U.S. dollars in accordance with SFAS
      No.
      52, “Foreign Currency Translation”. All asset and liability accounts have been
      translated using the exchange rate in effect at the balance sheet date. Equity
      accounts have been translated at their historical exchange rates when the
      capital transaction occurred. Statements of Operations amounts have been
      translated using the average exchange rate for the year. At December 25, 2005,
      the revenues and expenses of the Company were translated to U.S. dollars at
      US$1.00 = RMB 8.2167 and the assets and liabilities of the Company maintained
      in
      Renminbi translated to U.S. dollars at US$1.00 = RMB 8.10. The foreign currency
      translation adjustment of $798,000 has been reported as comprehensive income
      in
      the consolidated statement of stockholders’ equity and comprehensive
      income.





***Earnings
      per share***





The
      Company follows SFAS No. 128, “Earnings Per Share” and SFAS No. 150, “Accounting
      for Certain Financial Instruments with Characteristics of Both Liabilities
      and
      Equity,” which establish standards for the computation, presentation and
      disclosure requirements for basic and diluted earnings per share for entities
      with publicly-held common shares and potential common stock issuances. Basic
      earnings per share are computed by dividing net income by the weighted average
      number of common shares outstanding. In computing diluted earnings per share,
      the weighted average number of shares outstanding is adjusted to reflect the
      effect of potentially dilutive securities, such as stock options and
      warrants.





***Stock-Based
      Compensation***





On
      December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based
      Payment”, which replaces SFAS No. 123, “Accounting for Stock-Based
      Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock
      Issued to Employees.” SFAS No. 123R requires all share-based payments to
      employees, including grants of employee stock options, to be recognized in
      the
      financial statements based on the grant date fair value of the award. SFAS
      No.
      123R was to be effective for interim or annual reporting periods beginning
      on or
      after June 15, 2005, but in April 2005 the SEC issued a rule that will permit
      most registrants to implement SFAS No. 123R at the beginning of their next
      fiscal year, instead of the next reporting period as required by SFAS No. 123R.
      The pro forma disclosures previously permitted under SFAS No. 123 no longer
      will
      be an alternative to financial statement recognition. Under SFAS No. 123R,
      the
      Company must determine the appropriate fair value model to be used for valuing
      share-based payments, the amortization method for compensation cost and the
      transition method to be used at date of adoption. The transition methods include
      prospective and retroactive adoption option. Under the retroactive option,
      prior
      periods may be restated either as of the beginning of the year of adoption
      or
      for all periods presented. The prospective method requires that compensation
      expense be recorded for all unvested stock options and restricted stock at
      the
      beginning of the first quarter of adoption of SFAS No. 123R, while the
      retroactive methods would record compensation expense for all unvested stock
      options and restricted stock beginning with the first period restated. The
      Company has adopted the requirements of SFAS No. 123R for the fiscal year
      beginning on December 26, 2004, and recorded the compensation expense for all
      unvested stock options existing prior to the adoption in the first quarter
      of
      2005.





F-10





***Recent
      accounting pronouncements***





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections.” SFAS No. 154 changes the requirements for the accounting for
      and reporting of a change in accounting principle. In addition, it carries
      forward without change the guidance contained in APB Opinion No. 20 for
      reporting the correction of an error in previously issued financial statements
      and a change in accounting estimate. SFAS No. 154 requires retrospective
      application to prior periods’ financial statements of changes in accounting
      principle in most circumstances. The provisions of SFAS 154 are effective in
      fiscal years beginning after December 15, 2005. The Company plans to
      prospectively adopt SFAS No. 154 at the beginning of fiscal 2006.





In
      November 2004, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 151, “Inventory Costs,” which clarifies the accounting for abnormal
      amounts of idle facility expense, freight, handling costs, and wasted material.
      SFAS No. 151 will be effective for inventory costs incurred during fiscal years
      beginning after June 15, 2005. The Company does not believe the adoption of
      SFAS
      No. 151 will have a material impact on the Company’s financial statements.





***Reclassifications***





Certain
      prior year amounts have been reclassified to conform with the current year
      presentation.





**NOTE
      4. ACCOUNTS RECEIVABLE**





Accounts
      receivable consisted of the following:




**December
                25,**
              **2005**
            
            **December
                25,**
              **2004**(In
                thousands)
            
            (In
                thousands)Accounts
                receivable
            
            $
            7,408
            
            $
            7,189Less:
                Allowance for doubtful accounts
            
            
            (893
            )
            
            (775
            )$
            6,515
            
            $
            6,414





The
      activity in the Company’s allowance for doubtful accounts is summarized as
      follows:





**December
                25,**
              **2005**
            
            **December
                25,**
              **2004**(In
                thousands)
            
            (In
                thousands)Balance
                at the beginning of the year
            
            $
            775
            
            $
            993Add:
                provision during the year
            
            
            250
            
            
            662Less:
                write-offs during the year
            
            
            (132
            )
            
            (880
            )Balance
                at the end of the year
            
            $
            893
            
            $
            775





**NOTE
      5. DEPOSITS AND PREPAYMENTS**





Deposits
      and prepayments consist of the following:




**December
                25,**
              **2005**
            
            **December
                25,**
              **2004**(In
                thousands)
            
            (In
                thousands)Deposits
                for raw materials
            
            $
            4,350
            
            $
            1,523Prepayments
                and advances
            
            
            620
            
            
            997$
            4,970
            
            $
            2,520





F-11





**NOTE
      6. INVENTORIES**





Inventories
      consisted of the following:




**December
                25,**
              **2005**
            
            **December
                25,**
              **2004**(In
                  thousands)
            
            (In
                thousands)Raw
                materials (including packing materials)
            
            $
            6,133
            
            $
            2,812Finished
                goods
            
            
            1,631
            
            
            1,7257,764
            
            
            4,537Less:
                Inventory reserve
            
            
            (134
            )
            
            (547
            )$
            7,630
            
            $
            3,990





The
      activity in the Company’s provision for inventory reserve is summarized as
      follows:





**December
                25,2005**
            
            **December
                25,2004**(In
                thousands)
            
            (In
                thousands)Balance
                at the beginning of the year
            
            $
            547
            
            $
            582Add:
                provision during the year
            
            
            -
            
            
            --Less:
                write-offs during the year
            
            
            (413
            )
            
            (35
            )Balance
                at the end of the year
            
            $
            134
            
            $
            547





**NOTE
      7. DUE FROM RELATED COMPANIES**





Due
      from
      related companies consisted of the following:





**December
                25,**
              **2005**
            
            **December
                25,**
              **2004**(In
                thousands)
            
            (In
                thousands)Due
                from affiliated companies for sales
            
            $
            679
            
            $
            1,183




**NOTE
      8. PROPERTY, MACHINERY AND EQUIPMENT**





Property,
      machinery and equipment consisted of the following:





Useful
                Life
            
            **December
                25,**
              **2005**
            
            **December
                25,**
              **2004**(In
                years)
            
            (
                In thousands)
            
            (In
                thousands)Buildings
            
            
            40
            
            $
            9,967
            
            $
            9,415Machinery
                and equipment
            
            
            5-
                12
            
            
            14,663
            
            
            11,94024,630
            
            
            21,355Less:
                Accumulated depreciation and amortization
            
            
            
            
            
            (6,315
            )
            
            (5,257
            )$
            18,315
            
            $
            16,098





Depreciation
      and amortization expense was approximately $1,151,000, $1,187,000, and
      $1,314,000 for the years ended December 25, 2005, 2004 and 2003, respectively.




F-12




**NOTE
      9. LAND USE RIGHTS**





Land
      use
      rights consisted of the following:





**December
                25,**
              **2005**
            
            **December
                25,**
              **2004**(In
                thousands)
            
            (In
                thousands)Land
                use rights
            
            $
            4,705
            
            $
            4,432Less:
                Accumulated amortization
            
            
            (725
            )
            
            (610
            )$
            3,980
            
            $
            3,822





Private
      ownership of land is not allowed in Mainland China. Rather, entities acquire
      the
      right to use land for a designated term. As of December 25, 2005 and 2004,
      the
      land use rights consisted of three parcels of land located in Mainland China
      held under land use rights of 27 to 50 years through 2025 to 2047.





Amortization
      expense was approximately $115,000, $103,000 and $112,000 for the years ended
      December 25, 2005, 2004 and 2003, respectively.




**NOTE
      10. OTHER PAYABLES AND ACCRUALS**





Other
      payables and accruals consisted of the following:





**December
                25,**
              **2005**
            
            **December
                25,**
              **2004**(In
                thousands)
            
            (In
                thousands)Deposits
                from customers
            
            $
            1,093
            
            $
            554Accruals
                for payroll, bonus and benefits
            
            
            334
            
            
            515Utilities
                and accrued expenses
            
            
            871
            
            
            829$
            2,298
            
            $
            1,898





**NOTE
      11. TAXATION**





The
      PRC
      subsidiaries within the Company are subject to PRC income taxes on an entity
      basis on income arising in or derived from the tax jurisdiction in which they
      operate. The group companies that are incorporated under the International
      Business Companies Act of the British Virgin Islands are exempt from payment
      of
      the British Virgin Islands income tax.





For
      the
      years ended December 25, 2005, 2004 and 2003, substantially all of the Company’s
      income was generated in the PRC, which is subject to PRC income taxes at rates
      ranging from 24% to a statutory rate of 33%. Four of the PRC subsidiaries of
      the
      Company will be eligible to be exempt from income taxes for a two-year period
      and then subject to a 50% reduction in income taxes for the next three years,
      starting from their first profitable year. Several PRC subsidiaries receive
      preferential tax rates in regions in which they operate and are also entitled
      to
      partial tax refunds from those tax bureaus.





As
      of
      December 25, 2005, 2004 and 2003, there were no material deferred tax assets
      or
      deferred tax liabilities.





A
      reconciliation of the provision for income taxes determined at the statutory
      average state and local income tax rate to the Company’s effective income tax
      rate is as follows:





**2005**
            
            **2004**
            
            **2003**Statutory
                income tax
            
            
            33
            %
            
            33
            %
            
            33
            %Reduction
                for preferential tax rate
            
            
            (9
            )
            
            (9
            )
            
            --Impact
                of effective tax holiday
            
            
            --
            
            
            --
            
            
            (21
            )Various
                differences
            
            
            3
            
            
            (2
            )
            
            2Effective
                rate
            
            
            27
            %
            
            22
            %
            
            14
            %




F-13




**NOTE
      12. CONVERTIBLE PREFERRED STOCK**





On
      July
      11, 2005, the Company issued 6,000 shares of Series A 7% Convertible Preferred
      Stock (“Preferred Stock A”), initially convertible into an aggregate of
      6,315,789 shares of Class A Common Stock at a conversion price of $0.95 per
      share, raising $6 million in gross proceeds. Six-year warrants to purchase
      an
      aggregate of 3,157,895 shares of Class A Common Stock at an exercise price
      of
      $1.04 per share were also issued to the investors. As part of the compensation
      to the placement agent, five-year warrants to purchase an aggregate of 378,947
      shares of Class A Common Stock at an exercise price of $1.04 share were also
      issued. As of December 25, 2005, of the warrants issued to the placement agent,
      277,368 were exercised cashlessly and 101,579 shares have not yet been
      exercised.





On
      December 22, 2005, the Company issued 9,500 shares of Series B 7% Convertible
      Preferred Stock (“Preferred Stock B”), initially convertible into an aggregate
      of 5,937,500 shares of Class A Common Stock at a conversion price of $1.60
      per
      share, raising $9.5 million in gross proceeds. Six-year warrants to purchase
      an
      aggregate of 2,968,750 shares of Class A Common Stock at an exercise price
      of
      $1.76 per share were also issued to the investors. As part of the compensation
      to the placement agent, five-year warrants to purchase an aggregate of 356,250
      shares of Class A Common Stock at an exercise price of $1.76 per share were
      also
      issued.





Pursuant
      to SFAS No. 150, “Accounting for Certain Financial Instruments with
      Characteristics of Both Liabilities and Equity,” the Preferred Stock is recorded
      as a liability since it has an unconditional obligation that must be either
      redeemed for cash or settled by issuing shares of Class A Common Stock.





In
      connection with the issuance of the Preferred Stock A and Preferred Stock B,
      the
      Company paid professional fees, placement agent fees and associated expenses
      amounting to $1,217,000 and incurred non-cash expenses totaling $10,780,000
      related to the beneficial conversion feature and the fair value of warrants
      attached to the issuance of the Preferred Stock. These professional fees,
      placement agent fees and associated expenses were recorded by the Company as
      deferred financing costs. The beneficial conversion feature and the fair value
      of the warrants were recorded as discount to the preferred stock liability
      on
      the balance sheet and are being amortized over the term of the Preferred Stock
      through interest expense using the effective interest method. For the year
      ended
      December 25, 2005, $1,630,000 of amortized deferred financing costs, beneficial
      conversion feature and the fair value of the warrants (of which $1,560,000
      were
      non-cash expenses) were charged to the interest expense.





**NOTE
      13. COMMON STOCK**





On
      September 4, 2003, the Company issued 3,300,000 shares of Class A Common Stock
      for an aggregate purchase amount of $1,650,000 or $0.5 per share. The shares
      were issued pursuant to an exemption provided by Section 4(2) of the Securities
      Act. The purchasers were also issued warrants to purchase 1,650,000 shares
      of
      the Company’s Class A Common Stock, which have a term of 5 years at an exercise
      price of $0.99 per share. As of December 25, 2005, all such warrants have been
      exercised.





On
      October 7, 2003, the Company issued 850,000 shares of Class A Common Stock
      for
      an aggregate purchase amount of $425,000 or $0.50 per share. The shares were
      issued pursuant to an exemption provided by Section 4(2) of the Securities
      Act.
      The purchasers were also issued warrants to purchase 850,000 shares of the
      Company’s Class A Common Stock, which have a term of 5 years and an exercise
      price of $0.979 per share. As of December 25, 2005, warrant holders have
      exercised the warrants and purchased 400,000 shares of Class A Common
      Shares.





**NOTE
      14. WARRANTS**





During
      the year ended December 25, 2005, warrant holders relating to the September
      2003
      and October 2003 private placement transactions exercised their warrants to
      purchase 1,650,000 and 400,000 shares of Class A Common Stock at exercise prices
      of $0.99 to $0.979, respectively. Accordingly, the excess of the exercise price
      over the par value of the Common Stock (amounting to $2,025,000) was recorded
      as
      additional paid-in capital. As of December 31, 2005, the Company had not
      received the proceeds from warrants exercised to purchase 49,647 shares of
      Class
      A Common Stock and has recorded a receivable from stockholder of $49,000. Legal
      action to recover such receivable has been commenced by the
      Company.




F-14




Number
      of
      shares of Class A Common Stock issuable under warrants related to the private
      placements and the respective exercise prices are summarized as
      follows:




Shares
                  of Class A Common Stock
                Issuable
                  Under warrants
              
              Exercise
                  PriceOctober
                  2003 private placement
              
              
              25,000
              
              $
              0.979July
                  2005 private placement6-year
                  warrants
              
              
              3,157,895
              
              
              1.045-year
                  warrants
              
              
              101,579
              
              
              1.04December
                  2005 private placement6-year
                  warrants
              
              
              2,968,750
              
              
              1.765-year
                  warrants
              
              
              356,250
              
              
              1.76





**NOTE
      15. DILUTED COMMON SHARES**





The
      diluted weighted average number of common shares was a summation of the number
      of outstanding common shares plus the number of common shares that
      could be converted from outstanding stock options and
      warrants.





**NOTE
      16. STOCK-BASED COMPENSATION**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123R, “Share-Based Payment,” which established standards for transactions in
      which an entity exchanges its equity instruments for goods or services. This
      standard requires a public entity to measure the cost of services received
      in
      exchange for an award of equity instruments based on the grant-date fair value
      of the award. The Company adopted the requirements of SFAS No.123R for the
      fiscal year 2005. As all the stock options as of December 25, 2004 were fully
      vested, no compensation charges were recorded in fiscal 2005 for these
      outstanding options. For stock options granted during the year, the Company
      used
      the Black-Scholes option-pricing model to estimate the fair value of the options
      at the date of grant using the following assumptions:





**DECEMBER
                25,2005**
            
            **DECEMBER
                25,2004**Life
                (years)
            
            10
            
            10Dividend
                yield
            
            
            None
            
            
            NoneRisk
                - free interest rate
            
            
            3.6
            %
            
            3.6
            %Volatility
            
            
            40
            %
            
            40
            %





In
      November 2004, options to purchase 400,000 shares of Class A Common Stock were
      issued to an officer at an exercise price of $1.00 per share with a term of
      10
      years. The market price of the Class A Common Stock as of the grant date was
      $0.64 per share. As of December 25, 2005, none of these options were
      exercised.




F-15




On
      June
      22, 2005, options to purchase an additional 600,000 shares of Class A Common
      Stock were issued to the same officer at an exercise price of $1.20 per share
      with a term of 10 years. The market price of the Class A Common Stock as of
      the
      grant date was $1.00 per share. As of December 25, 2005, none of these options
      were exercised.







**Options****Outstanding**
            
            **Price
                Range**
              **Per
                Share**
            
            **Weighted
                Average Exercise Price**
              **Per
                Share**Options
                outstanding at December 25, 2003
            
            
            --
            
            $
            --
            
            $
            --Granted
                on November 2, 2004
            
            
            400,000
            
            
            1.00
            
            
            1.00Options
                outstanding at December 25, 2004
            
            
            400,000
            
            
            1.00
            
            
            1.00Granted
                on June 22, 2005
            
            
            600,000
            
            
            1.20
            
            
            1.20Options
                outstanding at December 25, 2005
            
            
            1,000,000
            
            $
            1.00-1.20
            
            $
            1.12





The
      Company recorded compensation expense of $105,000 based on the fair value of
      the
      options granted through June 22, 2005.





**NOTE
      17. COMMITMENTS**





***Lease
      commitments***





The
      Company leases manufacturing and warehouse facilities under operating leases,
      which expire at various dates through March 2009. At December 25, the Company’s
      future minimum lease payments under operating leases were as follows:





Operating
                lease
              obligations(In
                thousands)2006
            
            $
            622007
            
            
            622008
            
            
            622009
            
            
            10Total
            
            $
            196





Total
      lease expenses were $62,000, $187,000 and $46,000 for the years ended December
      25, 2005, 2004 and 2003, respectively.





***Annual
      fees***





Under
      the
      supplementary joint venture agreements, the Company has committed to pay
      predetermined annual fees of $111,000 to the Chinese joint venture partners
      for
      each of the years in the period from December 26, 1998 to 2049. As of December
      25, total commitments under these arrangements were as follows (in thousands):





2006
            
            $
            1112007
            
            
            1112008
            
            
            1112009
            
            
            1112010
            
            
            111Thereafter
            
            
            3,877Total
            
            $
            4,432





***Acquisition
      of property, plant and equipment***





The
      Company has committed to purchase certain property, plant and equipment for
      approximately $128,000 during 2006.




F-16




**NOTE
      18. RELATED PARTY TRANSACTIONS**





Parties
      are considered to be related if one party has the ability, directly or
      indirectly, to control the other party or exercise significant influence over
      the other party in making financial and operational decisions. Parties are
      also
      considered to be related if they are subject to common control or common
      significant influence.





Particulars
      of significant transactions between the New Dragon Asia Corp. and related
      companies are summarized below (in thousands):





**2005**
            
            **2004**
            
            **2003**Sales
                of finished goods to:A
                joint venture partner, Shandong Longfeng Group Company (a)
            
            $
            --
            
            $
            2
            
            $
            --Related
                parties (b)
            
            
            8
            
            
            33
            
            
            113$
            8
            
            $
            35
            
            $
            113Sales
                of machinery to Shandong Longfeng Group Company
            
            $
            --
            
            $
            --
            
            $
            993Purchases
                of raw materials from related parties (b)
            
            $
            --
            
            $
            914
            
            $
            1,344Pre-determined
                annual fees charged by joint venture partners:Shandong
                Longfeng Group Company
            
            $
            75
            
            $
            72
            
            $
            78Shandong
                Longfeng Flour Company Limited (b)
            
            
            36
            
            
            36
            
            
            36$
            111
            
            $
            108
            
            $
            114Management
                fees charged by a related party (b)
            
            $
            12
            
            $
            -
            
            $
            -Interest
                expenses paid to a joint venture partner:Shandong
                Longfeng Group Company
            
            $
            --
            
            $
            3
            
            $
            17Rental
                expenses paid to related companies (b)
            
            $
            --
            
            $
            120
            
            $
            --Rental
                income from a joint venture partner:Shandong
                Longfeng Group Company
            
            $
            64
            
            $
            64
            
            $
            64Purchase
                of machinery from a related party (b)
            
            $
            70
            
            $
            -
            
            $
            -




(a)
      Shandong Longfeng Group Company is a joint venture partner of the Company and
      the parent company.




(b)
      Subsidiary(ies) of Shandong Longfeng Group Company.




The
      amounts due to New Dragon Asia Food Limited (the parent company) and
      joint venture partners are unsecured and non-interest bearing. Balances are
      the result of normal commercial transactions.





**NOTE
      1** **9.
      DISPOSAL OF SUBSIDIARY**





On
      December 20, 2004, the Company sold its 100% share holding in Noble Point
      Limited (“NP”) which in turn owned a 90% equity interest in New Dragon Asia Food
      (Dalian) Company limited (“NDAFD”), to its parent company and assumed its loan
      due to the parent company, at a consideration of $20,000 which approximates
      to
      the net asset value of NP and NDAFD in aggregate after the assignment of the
      loan. NP had no business other than the investment holding in NDAFD whilst
      NDAFD
      had ceased business in December 2003.




F-17




**NOTE
      20. SEGMENT INFORMATION**





The
      Company classifies its products into two core business segments, namely instant
      noodles and flour. In view of the fact that the Company operates principally
      in
      Mainland China, no geographical segment information is presented.





**2005**
            
            **2004**
            
            **2003**(In
                thousands)Net
                revenue:Instant
                noodles
            
            $
            15,353
            
            $
            12,909
            
            $
            11,702Flour
            
            
            28,827
            
            
            26,312
            
            
            19,070$
            44,180
            
            $
            39,221
            
            $
            30,773Income
                from operations:Instant
                noodles
            
            $
            1,336
            
            $
            607
            
            $
            296Flour
            
            
            3,614
            
            
            3,938
            
            
            1,897$
            4,950
            
            $
            4,545
            
            $
            2,193Interest
                expenses:Instant
                noodles
            
            $
            1
            
            $
            6
            
            $
            22Flour
            
            
            183
            
            
            66
            
            
            227$
            184
            
            $
            72
            
            $
            249Depreciation
                and amortization:Instant
                noodles
            
            $
            537
            
            $
            587
            
            $
            868Flour
            
            
            729
            
            
            600
            
            
            557$
            1,266
            
            $
            1,187
            
            $
            1,425Identifiable
                long-term assets:Instant
                noodles
            
            $
            11,836
            
            $
            12,031
            
            $
            14,001Flour
            
            
            12,172
            
            
            7,889
            
            
            7,468$
            24,008
            
            $
            19,920
            
            $
            21,469





**NOTE
      21. MAJOR CUSTOMERS**





No
      single
      customer accounted for more than 5%, 5% and 6% of sales for the years ended
      December 25, 2005, 2004 and 2003, respectively.





**NOTE
      22. RETIREMENT PLAN**





As
      stipulated by the regulations of the PRC government, companies operating in
      the
      PRC have defined contribution retirement plans for their employees. The PRC
      government is responsible for the pension liability to these retired employees.
      Commencing January 1, 2002, the Company was required to make specified
      contributions to the state-sponsored retirement plan at 20% of the basic salary
      cost of their staff. Each of the employees of the PRC subsidiaries is required
      to contribute 6% of his/her basic salary. For the years ended December 25,
      2005,
      2004 and 2003, contributions made by the Company were approximately $161,000,
      $122,000 and $151,000, respectively.





**NOTE
      23. BUSINESS COMBINATIONS**





The
      Company completed two acquisitions during the year ended December 25, 2005.
      These acquisitions were accounted for using the purchase method pursuant to
      SFAS
      No. 141, “Business Combinations”. The consolidated financial statements include
      the results of operations of these acquired companies commencing as of their
      respective acquisition dates. No pro forma information is presented due to
      the
      immaterial effect of these acquisitions on the results of operations.





***Soy
      Bean Plant***





On
      July
      28, 2005, the Company acquired assets consisting of the plant and machinery
      utilized for the production for soybean-derived products from a state-owned
      enterprise in Shandong for a cash consideration of $2,100,000. The facility
      had
      originally been operated by the Company under a 10-year lease agreement signed
      on April 27, 2005, which was cancelled upon the acquisition of the facility
      in
      July 2005.




F-18




The
      soybean business is now operated under New Dragon Asia (LongKou) Food Company
      Limited, the Company’s 100% owned subsidiary.





***Xinlongya
      Distributor***





On
      October 2005, the Company acquired the 100% equity in a state-owned distributor,
      Shandong Xinlongya Industry and Trade Co. Ltd, for a cash consideration of
      $404,000. The distributor has been serving as one of the Company’s distributors.





Allocation
                of Initial Purchase Consideration (in thousands):Cash
                and cash equivalent
            
            $
            414Accounts
                Receivable
            
            
            25Other
                receivable
            
            
            154Inventory
            
            
            122Fixed
                assets, net
            
            
            70785Accounts
                payable
            
            
            (355
            )Other
                payable
            
            
            (26
            )(381
            )Net
                asset value
            
            $
            404Acquisition
                consideration
            
            $
            404





**NOTE
      24. QUARTERLY FINANCIAL DATA (UNAUDITED)**




Net
                  Income (loss) per shareYear
                  Ended December 25, 2005
              
              Net
                  Revenue
              
              Gross
                  Profit
              
              Net
                  Income
              
              Basic
              
              Diluted(In
                  thousands, except per share data)First
                  Quarter
              
              $
              8,282
              
              $
              1,492
              
              $
              588
              
              $
              0.01
              
              $
              0.01Second
                  Quarter
              
              
              8,993
              
              
              1,409
              
              
              1,372
              
              
              0.03
              
              
              0.03Third
                  Quarter
              
              
              11,645
              
              
              2,157
              
              
              1,627
              
              
              0.04
              
              
              0.03Fourth
                  Quarter
              
              
              15,260
              
              
              2,971
              
              
              408
              
              
              0.01
              
              
              0.01$
              44,180
              
              $
              8,029
              
              $
              3,995Year
                  Ended December 25, 2004First
                  Quarter
              
              $
              7,398
              
              $
              1,333
              
              $
              338
              
              $
              0.01
              
              $
              0.01Second
                  Quarter
              
              
              8,547
              
              
              1,561
              
              
              539
              
              
              0.01
              
              
              0.01Third
                  Quarter
              
              
              9,886
              
              
              1,928
              
              
              1,192
              
              
              0.03
              
              
              0.03Fourth
                  Quarter
              
              
              13,390
              
              
              2,512
              
              
              2,576
              
              
              0.06
              
              
              0.06$
              39,221
              
              $
              7,334
              
              $
              4,645




F-19





**NOTE
      25. SUBSEQUENT EVENTS**





***Acquisition
      of Chengdu Plant***





On
      February 24, 2006, the Company acquired a noodle manufacturing facility in
      Chengdu, Sichuan Province, for a cash consideration of $3,300,000. The Chengdu
      Plant serves the Western China market.





***Expansion
      of Longyuan Packing Plant***





On
      January 10, 2006, the Company established New Dragon Asia (Long Kou) Packing
      Materials Company Limited (“NDAPM”), a wholly-owned subsidiary in Longkou,
      Shandong Province. NDAPM is principally engaged in the manufacture and sale
      of
      packing materials, with a registered capital of $3,600,000. It is planned to
      be
      the second phase of the development of LCLPM, our 55% owned subsidiary. It
      was
      established as a separate entity in order to (i) acquire the remaining interests
      in LCLPM (45%) from the Chinese joint venture partner at net book value and
      (ii)
      enjoy new income tax holiday. The 55% equity interest in LCLPM will be
      transferred in the second quarter of 2006 to NDAPM at net book value. Upon
      completion of the above-mentioned transactions, LCLPM becomes a 100% owned
      subsidiary of NDAPM, which is indirectly owned 100% by the Company.





F-20