SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


____________________________




FORM
10-Q/A


____________________________





x QUARTERLY REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For the
quarterly period ended May 31, 2007





 ̈ TRANSITION REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES


EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD


FROM
_______________ to _______________




Commission
File # 000-52268





ASIAN
DRAGON GROUP INC.


(Exact
name of small business issuer as specified in its charter)




Nevada


(State or
other jurisdiction of incorporation or organization)




98-0418754


(IRS
Employer Identification Number)




1312
North Monroe Street, Suite 108, Spokane, Washington 99201


(Address
of principal executive offices)





(509)
252-8428


(Issuer’s
telephone number)





#202 -
1028 Hamilton Street, Vancouver, BC, Canada V6B 2R9


(Former
address, if changed since last report)




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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated file.


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




The
issuer had 32,975,000 shares of common stock issued and outstanding as of July
9, 2007.







ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)







Table of Contents




PagePART I. Financial InformationItem 1. Financial Statements.
            1Restated Balance Sheets at May 31, 2007 (unaudited) and August
      31, 2006 (audited)
            F-1Restated Unaudited Statements of Operations for the three and
      nine months ended May 31, 2007 and the Exploration Stage Period of August
      15, 2006 to May 31, 2007
            F-2Restated Unaudited Statements of Cash Flows for the nine months
      ended May 31, 2007 and the Exploration Stage Period of August 15, 2006 to
      May 31, 2007
            F-3Notes to Unaudited Financial Statements
            F-4 to F-14Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            15Item 3. Quantitative and Qualitative Disclosures about Market
      Risk
            24Item 4. Controls and Procedures
            24PART II. Other InformationItem 1. Legal Proceedings
            25Item 1A. Risk Factors
            25Item 2. Unregistered Sales of Equity Securities and Use of
      Proceeds
            29Item 3. Defaults Upon Senior Securities
            30Item 4. Submission of Matters to a Vote of Security
      Holders
            30Item 5. Other Information
            30Item 6. Exhibits
            30Signatures
            31








Table of Contents




PART I– FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS (unaudited)








ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Balance Sheets





Restated
              May
      31, 2007
              (unaudited)
            
            
            August
      31, 2006
              (Note
      1)ASSETSCURRENT
      ASSETSCash
            
            $
            12,971
            
            
            $
            72Prepaid
      expenses
            
            
            11,096
            
            
            
            -Accounts
      receivable
            
            
            -
            
            
            
            2,003Total current
    assets
            
            
            24,067
            
            
            
            2,075Total assets
            
            $
            24,067
            
            
            $
            2,075LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued liabilities
            
            
            199,868
            
            
            
            15,536Shareholder
      loans (Notes 7 and 8)
            
            
            226,722
            
            
            
            161,802Total current
      liabilities
            
            $
            426,590
            
            
            $
            177,338COMMITMENTS
      AND CONTINGENCIES  (Notes 3 and 5)
            
            
            -
            
            
            
            -STOCKHOLDERS’
      EQUITY (DEFICIT)Common
      shares, 100,000,000 shares with par value $0.001authorized.
      32,975,000 and 32,025,000 respectively issuedand
      outstanding as of May 31, 2007 and August 31, 2006 (Note
8)
            
            
            32,975
            
            
            
            32,025Paid-in
      Capital (Note 8)
            
            
            4,508,291
            
            
            
            9,241Accumulated
      deficit
            
            
            (215,105
            )
            
            
            (215,105
            )Accumulated
      deficit in the development stage
            
            
            (4,728,835
            )
            
            
            (1,424
            )Accumulated
      other comprehensive income (loss)
            
            
            151
            
            
            
            -Total stockholders’
      (deficit)
            
            
            (402,523
            )
            
            
            (175,263
            )Total liabilities and
      stockholders’ equity
            
            $
            24,067
            
            
            $
            2,075











F-1





The
accompanying notes to financial statements are an integral part of this
statement


1
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Statements of Operations


(Unaudited)




Restated
              Three
      Months
              Ended
              May
      31,
              2007
            
            
            Three
      Months
              Ended
              May
      31,
              2006
            
            
            Restated
              Nine
      Months
              Ended
              May
      31,
              2007
            
            
            Nine
      Months
              Ended
              May
      31,
              2006
            
            
            Restated
              August
      15, 2006 (date of inception of Exploration Stage) to May 31,
              2007EXPENSES:Exploration expenses
            
            $
            1,415,683
            
            
            $
            -
            
            
            $
            4,442,416
            
            
            $
            -
            
            
            $
            4,442,416Agent
      fees
            
            
            15,000
            
            
            
            -
            
            
            
            45,000
            
            
            
            -
            
            
            
            45,000Professional & consultant fees
            
            
            62,772
            
            
            
            -
            
            
            
            103,633
            
            
            
            -
            
            
            
            104,634Investor relations
            
            
            20,521
            
            
            
            -
            
            
            
            45,522
            
            
            
            -
            
            
            
            45,522Administrative expenses
            
            
            19,376
            
            
            
            -
            
            
            
            83,618
            
            
            
            -
            
            
            
            83,689Total expenses
            
            $
            1,533,352
            
            
            $
            -
            
            
            $
            4,720,189
            
            
            $
            -
            
            
            $
            4,721,261Net
      loss from operations
            
            $
            (1,533,352
            )
            
            $
            -
            
            
            $
            (4,720,189
            )
            
            $
            -
            
            
            $
            (4,721,261
            )Interest
      expense
            
            
            (2,753
            )
            
            
            -
            
            
            
            (7,222
            )
            
            
            -
            
            
            
            (7,574
            )Net
      loss from continuing operations
            
            
            (1,536,105
            )
            
            
            -
            
            
            
            (4,727,411
            )
            
            
            -
            
            
            
            (4,728,835
            )Discontinued
      Operations:-
      Net Loss from terminated subsidiary
            
            
            -
            
            
            
            (5,928
            )
            
            
            -
            
            
            
            (20,308
            )
            
            
            (68,995
            )-
      Net Loss from Development Stage period
            
            
            -
            
            
            
            (10,355
            )
            
            
            -
            
            
            
            (39,608
            )
            
            
            (146,110
            )Loss
      from Discontinued Operations
            
            
            
            
            
            
            (16,283
            )
            
            
            
            
            
            
            (59,916
            )
            
            
            (215,105
            )Net
      Loss
            
            $
            (1,536,105
            )
            
            $
            (16,283
            )
            
            $
            (4,727,411
            )
            
            $
            (59,916
            )
            
            $
            (4,943,940
            )Loss
      per common share, basic and diluted
            
            $
            (0.05
            )
            
            $
            Nil
            
            
            $
            (0.15
            )
            
            $
            NilWeighted
      average shares outstanding
            
            
            32,521,337
            
            
            
            32,521,337
            
            
            
            32,521,337
            
            
            
            32,521,337OTHER
      COMPREHENSIVE LOSS:Net
      loss
            
            $
            (1,536,105
            )
            
            $
            (16,283
            )
            
            $
            (4,727,411
            )
            
            $
            (59,916
            )
            
            $
            (4,943,940
            )Foreign
      currency translation adjustment
            
            
            151
            
            
            
            -
            
            
            
            151
            
            
            
            -
            
            
            
            151Total
      other comprehensive (loss)
            
            $
            (1,535,954
            )
            
            $
            (16,283
            )
            
            $
            (4,727,260
            )
            
            $
            (59,916
            )
            
            $
            (4,943,789
            )






F-2


The
accompanying notes to financial statements are an integral part of this
statement


2
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Statements of Cash Flows


(Unaudited)




Restated
              Nine
      Months
              Ended
              May
      31,
              2007
            
            
            Nine
      Months
              Ended
              May
      31,
              2006
            
            
            Restated
              August
      15, 2006
              (date
      of inception of Exploration Stage)
              to
      May 31,
              2007Cash
      flows from operating activities:Net loss for the
      period
            
            $
            (4,727,411
            )
            
            $
            -
            
            
            $
            (4,728,835
            )Reconciling
      adjustments:Adjustments to
      reconcile net loss to net cashused
      in operating activities:Net change in operating assets
      and liabilities:Accounts receivable
            
            
            2,003
            
            
            
            -
            
            
            
            -Prepaid expenses
            
            
            (11,096
            )
            
            
            -
            
            
            
            (11,096
            )Accounts payable and
      accrued liabilities
            
            
            184,332
            
            
            
            -
            
            
            
            200,220Net
      cash provided (used) by operating activities
            
            
            (4,552,172
            )
            
            
            -
            
            
            
            (4,539,711
            )Cash
      flows from discontinued operating activities:-
      Net loss from terminated subsidiary
            
            
            -
            
            
            
            (20,308
            )
            
            
            (68,995
            )-
      Net loss from Development Stage period
            
            
            -
            
            
            
            (39,608
            )
            
            
            (146,110
            )-
      Accrued interest on shareholder loans
            
            
            -
            
            
            
            3,985
            
            
            
            8,761-
      Depreciation
            
            
            -
            
            
            
            -
            
            
            
            318-
      Prepaid expenses
            
            
            -
            
            
            
            1,200
            
            
            
            9,500-
      Accounts payable and accrued liabilities
            
            
            -
            
            
            
            (6,921
            )
            
            
            (9,220
            )-
      Purchase (sale) of property and equipment
            
            
            -
            
            
            
            (318
            )
            
            
            (318
            )-
      Common stock issued for cash
            
            
            -
            
            
            
            -
            
            
            
            31,266-
      Common stock issued for debt conversion
            
            
            -
            
            
            
            -
            
            
            
            10,000-
      Loans by shareholders
            
            
            -
            
            
            
            61,183
            
            
            
            152,689Net
      cash provided (used) by discontinued operating activities:
            
            
            -
            
            
            
            (787
            )
            
            
            (12,109
            )Cash
      flows from financing activities:Common stock issued for
      cash
            
            
            4,500,000
            
            
            
            -
            
            
            
            4,500,000Loans by
    stockholders
            
            
            64,920
            
            
            
            -
            
            
            
            64,568Net
      cash provided by financing activities
            
            
            4,564,920
            
            
            
            -
            
            
            
            4,564,568Effect
      of foreign currency translation
            
            
            151
            
            
            
            -
            
            
            
            151Net
      increase (decrease) in cash
            
            
            12,899
            
            
            
            (787
            )
            
            
            12,899Cash,
      beginning of period
            
            
            72
            
            
            
            1,205
            
            
            
            72Cash,
      end of period
            
            $
            12,971
            
            
            $
            418
            
            
            $
            12,971











F-3





The
accompanying notes to financial statements are an integral part of this
statement


3
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Notes to Financial Statements


(Unaudited)








Note
1 – Nature of Business and Operations





Asian
Dragon Group Inc. (“Asian Dragon”, “ADG”, “We”, the “Registrant”, or the
“Company”) was incorporated as a Nevada company on June 11, 2003. Effective
August 15, 2006, the business of its operating subsidiary, Galaxy Telnet SRL,
was wound-up and the subsidiary was de-registered as a corporate entity. Asian
Dragon’s August 31, 2006 audited financial statements were presented to reflect
the discontinuation of operation of Galaxy Telnet SRL and concurrently the date
at which Asian Dragon became an Exploration Stage Company was set as August 15,
2006.





Our
fiscal year end is August 31st.





Exploration
Stage Activities





The
Company has been in the exploration stage since its August 15, 2006 and has not
yet realized any revenues from its operations.





Note
2 – Basis of Presentation and Summary of Significant Accounting
Policies





The
financial statements included herein have been prepared by Asian Dragon without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”) for reporting on interim statements. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted as allowed by such rules and regulations, and the Company believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested these financial statements be read in conjunction with the
August 31, 2006 audited financial statements and accompanying notes included in
the Company’s annual report on Form 10-KSB filed with the SEC. While management
believes the procedures followed in preparing these financial statements are
reasonable, the accuracy of the amounts are in some respects dependent upon the
facts that will exist, and procedures that will be followed by the Company later
in the year. The results of operations for the interim periods are not
necessarily indicative of the results for the full year. In management’s opinion
all adjustments necessary for a fair presentation of the Company’s financial
statements are reflected in the interim periods included.





Amounts
shown for August 31, 2006 are based upon the audited financial statements of
that date.





Going
Concern





Generally
accepted accounting principles in the United States of America contemplate the
continuation of the Company as a going concern. However, the Company has
accumulated operating losses since its inception and has limited business
operations, which raises substantial doubt about the Company’s ability to
continue as a going concern. As of May 31, 2007, the Company’s ability to
continue as a going concern is contingent upon the successful completion of
additional financing arrangements and its ability to successfully fulfill its
business plan. Management plans to raise additional funds to finance the
operating and capital







F-4


4
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Notes
to Financial Statements


(Unaudited)








requirements
of the Company through a combination of equity and debt financings. While the
Company is expending its best efforts to achieve the above plans, there is no
assurance that any such activity will generate funds that will be available for
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. These financial statements do not include any
adjustments that might arise from this uncertainty.





Summary
of Significant Accounting Policies





Notes to
the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year
end August 31, 2006 as contained in the Company’s annual report on Form 10-KSB,
have been omitted.





Mineral
Property Rights Acquisition and Exploration Expenditures





The
Company follows a policy of expensing exploration expenditures until a
production decision in respect of the project and the Company is reasonably
assured that it will receive regulatory approval to permit mining operations,
which may include the receipt of a legally binding project approval
certificate.





Costs of
acquiring mining properties and exploration and development costs are expensed
upon acquisition. Mine development costs incurred either to develop new ore
deposits, expand the capacity of mines, or to develop mine areas substantially
in advance of current production are capitalized once proven and probable
reserves exist and the property is a commercially minable property. Costs
incurred to maintain current production or to maintain assets on a standby basis
are charged to operations. Costs of abandoned projects are charged to operations
upon abandonment. The Company evaluates the carrying value of capitalize mining
costs and related property, plant and equipment costs, to determine if these
costs are in excess of their net recoverable amount whenever events or changes
in circumstances indicate that their carrying amounts may not be recoverable.
The periodic evaluation of carrying value of capitalized costs and any related
property, plant and equipment costs are based upon expected future cash flows
and/or estimated salvage value in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for Impairment or Disposal of
Long-lived Assets.





The
Company does not set a predetermined holding period for properties with unproven
deposits, however, properties which have not demonstrated suitable metal
concentrations at the conclusion of each phase of an exploration program are
re-evaluated to determine if future exploration is warranted, whether there has
been any impairment in value and that their carrying values are
appropriate.





If an
area of interest is abandoned or it is determined that its carrying value cannot
be supported by future production or sale, the related costs are charged against
operations in the year of abandonment or determination of value.  The
amounts recorded as mineral leases and claims represent costs to date and do not
necessarily reflect present or future values.





The
Company’s exploration activities and proposed mine development are subject to
various laws and regulations governing protection of the environment. These laws
are continually changing, generally becoming more restrictive. The Company has
made, and expects to make in the future, expenditures to comply with such laws
and regulations.








F-5


5
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)




Notes
to Financial Statements


(Unaudited)








The
accumulated costs of properties that are developed to the stage of commercial
production will be amortized to operations through unit-of-production
depletion.





Revenue
Recognition





Revenue
from the sale of precious and/or base metals and co-products will be recognized
when the following conditions are met: persuasive evidence of an arrangement
exists; delivery has occurred in accordance with the terms of the arrangement;
the price is fixed or determinable and collectability is reasonably assured.
Revenue for precious metal bullion is recognized at the time of delivery and
transfer of title to counter-parties.





Asset
Retirement Obligations





The
Company has adopted SFAS No. 143, Accounting for Asset Retirement
Obligations which requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred. SFAS No. 143 requires a liability to be recorded for the present
value of the estimated site restoration costs with corresponding increase to the
carrying amount of the related long-lived asset. The liability will be
accreted and the asset will be depreciated over the life of the related
assets. Adjustments for changes resulting from the passage of time and
changes to either the timing or amount of the original present value estimate
underlying the obligation will be made.





The
Company is in its Exploration Stage and does not yet have title to the Mining
Rights of its projects. As such the Company has not yet estimated any site
restoration costs attributable to its mineral properties in China to May 31,
2007. Under Chinese law, companies with exploration licenses may be required to
incur expenses to reclaim the properties or to pay for disruption to properties.
The obligations and amounts with respect to a given property are subject to
negotiation with the government at the time the work on a property is
completed.





Foreign
Currency Translation




The books
of record of the Company are maintained in United States dollars and this is the
Company’s functional and reporting currency. The operations of the Company’s
Joint Ventures which are located in China are to be maintained in Chinese
Renminbi Yuan. When foreign currency transactions are factored into the
books, the following method will be used:





Monetary items, at the rate of exchange
prevailing as at the balance sheet date


Non-Monetary items including equity, at
the historical rate of exchange


Revenues and expenses, at the period
average in which the transaction occurred




Translation
adjustments are recorded in Other Comprehensive Income.








F-6


6
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Notes
to Financial Statements


(Unaudited)








Recent
Account Pronouncements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value
Measurements”. This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements,
the Board having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years and earlier application is
encouraged. The Company has adopted this Statement and this adoption did not
impact the Company's financial position, results of operations, or cash
flows.





Note
3 – Joint Ventures & Exploration Development Initiatives





To May
31, 2007, the Company had entered into the following material agreements with
respect to exploration licenses in China.





ADG, WFEI
and its joint venture partners are currently negotiating various changes to some
of the following noted agreements. ADG expects these changes will include
addition of some payment terms for the issuance of stock by ADG to joint venture
partners and will clarify some of the logistical and administrative components
of the various JV and JVOA agreements. We project these amendments will be
completed prior to year end.





Jinjishan
Property Joint Venture





Pursuant
to a Letter of Intent and by a joint venture option agreement (the “Jinjishan
JVOA”) dated October 31, 2006 Asian Dragon acquired WFEI’s rights to a 70%
ownership and the rights to explore certain assets of WFEI (the “Assets”)
flowing through WFEI’s 70% ownership in a joint venture company named Luoyang
Canadian United Mining Ltd. (“Luoyang”) which has been established between WFEI
and the PRC. The Assets, which are the property of Luoyang, entail another joint
venture corporation (the “Operating JVC”) formed between WFEI and the PRC via
its agency, the Henan Province Gold Bureau (the “Bureau”) and consist of a
contiguous 28.3 sq km Exploration License located in the northwest part of the
County (the “Jinjishan Exploration Claim”). Under the Operating JVC agreement,
WFEI has rights to acquire a 70% interest in the Jinjishan Exploration Claim
(the “Jinjishan Rights”) and the Bureau holds a 30% interest. The Jinjishan
Rights, optioned to Asian Dragon by WFEI under the Jinjishan JVOA, entitle Asian
Dragon to administer the project and hold a 70% equity interest in the Assets in
exchange for total investment of US$2,500,000 and a grant of Asian Dragon common
shares to WFEI. Pursuant to the Jinjishan JVOA, Asian Dragon has to date
deposited with WFEI US$1,191,000 which has been designated to be used for costs
of exploration of the Jinjishan Exploration Claim and which is required by the
PRC to be held by WFEI, as the joint venture partner, for the Joint Venture
Business License (the “JVL”) to be issued to Luoyang by the PRC. Payment terms
for the Jinjishan Rights are: (i) deposit of US$50,000 within 14 days of
issuance of the JVL by the PRC; (ii) deposit of US$250,000 within 45 days from
the issuance of the JVL by the PRC; (iii) deposit of a further US$300,000 within
6 months from the issuance of the JVL; and (iv) deposit of the balance of
US$1,900,000 within three







F-7


7
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)




Notes
to Financial Statements


(Unaudited)








years
year from the initial deposit. Additionally, in accordance with further
exploration requirements and business expansion, the parties are entitled to
make additional investments in Luoyang of up to a total of US$12,500,000 (Rmb
100,000,000). However, should Asian Dragon be the unilateral investor of the
capital input, the PRC shall always retain 15% equity of Luoyang. As
consideration for WFEI granting this option to Asian Dragon, Asian Dragon has
agreed to issue to WFEI 250,000 restricted common shares in the capital stock of
Asian Dragon. Such shares to be issued to WFEI upon payment of the full amount
of the final deposit of US$1,900,000 by Asian Dragon to Luoyang.





Shizhaigou
Property Joint Venture





Pursuant
to a Letter of Intent dated November 19, 2006 and by a joint venture option
agreement (the “Shizhaigou JVOA”) dated December 4, 2006 Asian Dragon acquired
WFEI’s ownership interest and rights to explore the Shizhaigou Property
Exploration Claim (“Shizhaigou”) in the Xiaoqinling Region of China. WFEI’s
interest in Shizhaigou flow through a 70% ownership in Sanmenxia Yunjiu
Investment & Consulting Company Limited (“Sanmenxia”), a joint venture
corporation formed between WFEI and a private Chinese company (the “Shizhaigou
Partner”). Under their agreement, WFEI has rights to acquire a 70% interest in
the Shizhaigou Property Exploration Claim (the “Shizhaigou Rights”) and the
Shizhaigou Partner holds a 30% interest. The Shizhaigou Rights, optioned to
Asian Dragon by WFEI under the Shizhaigou JVOA, entitle Asian Dragon to
administer the project and hold a 70% equity interest in Shizhaigou in exchange
for total investment of US$2,500,000 and a grant of Asian Dragon common shares
to WFEI. Pursuant to the Shizhaigou JVOA, Asian Dragon has made deposits with
WFEI which are designated to be used for costs of exploration of Shizhaigou and
which are required by the PRC to be held by WFEI, as the joint venture partner,
for the Joint Venture Business License (the “JVL”) to be issued to Sanmenxia by
the PRC. Payment terms for the Rights are: (i) deposit of US$50,000 within 14
days of issuance of the JVL by the PRC; (ii) deposit of US$250,000 within 45
days from the issuance of the JVL by the PRC; (iii) deposit of a further
US$300,000 within 6 months from the issuance of the JVL; and (iv) deposit of the
balance of US$1,900,000 within three years from the date of the initial deposit.
As consideration for WFEI granting this option to Asian Dragon, Asian Dragon has
agreed to issue to WFEI 250,000 restricted common shares in the capital stock of
Asian Dragon. Such shares to be issued to WFEI upon payment of the full amount
of the final deposit of US$1,900,000 by Asian Dragon to Sanmenxia.





Loning
Property Joint Venture





By a
joint venture option agreement (the “Loning JVOA”) dated January 16, 2007 Asian
Dragon acquired WFEI’s ownership interest and rights to explore the Loning
Property (“Loning”) in the Xiaoqinling Region of China. WFEI’s interest in
Loning flow through a 70% ownership in Henan Yunfeng Resource of Mine
Development Company Ltd. (“Henan”), a joint venture corporation formed between
WFEI and a private Chinese company (the “Loning Partner”). Under their
agreement, WFEI has rights to acquire a 70% interest in the Loning Property
Exploration Claim (the “Loning Rights”) and the Loning Partner holds a 30%
interest. The terms of the Loning JVOA require Asian Dragon to invest US$2
million in 4 phases over 3 years in return for a 70% interest. Pursuant to the
Loning JVOA, Asian Dragon has made deposits with WFEI which are designated to be
used for costs of exploration of Loning and which are required by the PRC to be
held by WFEI, as the joint venture partner, for the Joint Venture Business
License (the “JVL”) to be issued to Henan by the PRC. Payment terms for the
Rights are: (i) deposit of US$50,000 within 14 days of issuance of the JVL by
the PRC; (ii) deposit of US$350,000 within 45 days





F-8




8
 Table of Contents




ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)




Notes
to Financial Statements


(Unaudited)








from the
issuance of the JVL by the PRC; (iii) deposit of a further US$300,000 within 6
months from the issuance of the JVL; and (iv) deposit of the balance of
US$1,300,000 within three years year from the date of the initial deposit.
Loning consists of a 9.1 sq km Exploration Lease and is located 2 km
Southwest of Asian Dragon's Jinjishan Property. As consideration for WFEI
granting this option to Asian Dragon, Asian Dragon has agreed to issue to WFEI
250,000 restricted common shares in the capital stock of Asian Dragon. Such
shares to be issued to WFEI upon payment of the full amount of the final deposit
of US$1,300,000 by Asian Dragon to Henan.





Lingbao
Jinshan Property Joint Venture





By a
joint venture option agreement (the “Lingbao Jinshan JVOA”) dated January 30,
2007 Asian Dragon acquired WFEI’s ownership interest and rights to explore the
Lingbao Jinshan Property (“Lingbao Jinshan”) in the Xiaoqinling Region of China.
Parallel to the arrangements with Shizhaigou, WFEI’s interest in Lingbao Jinshan
flow through its 70% ownership of Sanmenxia. The terms of the Lingbao Jinshan
JVOA require Asian Dragon to invest up to US$3 million in 4 phases over 3 years
in return for a 70% interest. Pursuant to the Lingbao Jinshan JVOA, Asian Dragon
has made deposits with WFEI which are designated to be used for costs of
exploration of Lingbao Jinshan and which are required by the PRC to be held by
WFEI, as the joint venture partner, for the Joint Venture Business License (the
“JVL”) to be issued to Sanmenxia by the PRC. Payment terms for the Rights are:
(i) deposit of US$50,000 within 14 days of issuance of the JVL by the PRC; (ii)
deposit of US$250,000 within 45 days from the issuance of the JVL by the PRC;
(iii) deposit of a further US$300,000 within 6 months from the issuance of the
JVL; and (iv) deposit of the balance of US$2,400,000 within three years year
from the date of the initial deposit. As consideration for WFEI granting this
option to Asian Dragon, Asian Dragon has agreed to issue to WFEI 250,000
restricted common shares in the capital stock of Asian Dragon. Such shares to be
issued to WFEI upon payment of the full amount of the final deposit of
US$2,400,000 by Asian Dragon to Sanmenxia.





Tiepuling
819# and 846# Mining Center Sections Joint Venture





On March
29, 2007 Asian Dragon finalized negotiations to enter into a Joint Venture
Option Agreement (the “TLP JVOA”) to acquire WFEI’s option interest and rights
to develop the newly created 819# and 846# mining center sections belonging to
Henan Qianyin Mining Co., Ltd. in the Tieluping Mine Area (“Tieluping”) of
Luoning County, Henan, China. WFEI’s interest in Tieluping flows through its 70%
ownership of Luoyang Canadian United Mines Limited. The terms of the TLP JVOA
will require Asian Dragon to make a one time payment of 8 Million Yuan
(estimated as US$1,050,000) in return for a 70% interest. The Company
anticipates execution of the TLP JVOA during QIV-07 and Asian Dragon has to date
deposited no funds with WFEI for this project. All funds which will be deposited
upon execution of the TLP JVOA will be designated to be used for operation costs
of Tieluping. These funds are required by the PRC to be held by WFEI, as the
joint venture partner, for the Joint Venture Business License (the “JVL”) to be
issued to Luoyang Canadian United Mines Limited by the PRC. The 819# and 846#
mining center sections of the Tieluping are newly created tunnels of the
Tieluping Mine Area, which have not yet begun production. Tiepuling is located
in Henan Province. As consideration for WFEI granting this option to Asian
Dragon, Asian Dragon has agreed to issue to WFEI 5,000,000 restricted common
shares in the capital stock of Asian Dragon. Such shares to be issued to WFEI
upon full payment of funds for the project by Asian Dragon.








F-9




9
 Table of Contents




ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Notes
to Financial Statements


(Unaudited)








Fuding
Mining Development Co. Ltd.





On April
4th, 2007, through a deposit of US$1,400,000, Asian Dragon executed an agreement
in principal (“AIP”) to acquire a 51% interest in the Fuding Mining Development
Co., Ltd. ("FMDC"). FMDC specializes in the sourcing, optioning and development
of base metal properties in China. The AIP requires Asian Dragon within one year
to invest US$10 million to purchase 51% of the shareholdings of the current
investors of FMDC. The AIP also requires stock grants, on a property by property
basis, to each of WFEI, and the relevant FMDC shareholders as a group, for any
property currently under option to FMDC upon which Asian Dragon completes
successful due diligence and acquires through FMDC. Under the AIP, Asian Dragon
also attains the ability to increase its interest to 70% by investing a further
US$20 million for a total investment of US$30 million if completed within 3
years. Asian Dragon is currently undertaking due diligence on the projects
under option to FMDC and expects to finalize both its selections and a formal
agreement with FMDC during the first quarter of fiscal 2008. Asian Dragon will
terminate any other options FMDC now holds which do not fit the Company’s
business plan. No agreements have been finalized with respect to formal
acquisition of properties held under option by FMDC.





Deposits
to the various projects will be facilitated by the release of funds transferred
by Asian Dragon to its agent World Fortune Enterprises Inc. under the agency
agreement between the companies. For the purposes of these financial statements,
all transfers to WFEI have been treated as exploration expenses.





NOTE
4 – Mineral Properties and Exploration Rights





Jinjishan
Property


The
Jinjishan Property is a large exploration property located in the Northwest part
of Luoning County, Henan Province, People’s Republic of China in the Changshui
community. The Jinjishan Property consists of one 28.3 sq km Exploration License
Area which is contiguous. Its geographical coordinates are comprised within the
following perimeter: Longitude 111°19’30” E to 111°24’00”E Latitude 34°22’00” N
to 34° 25’00” N. The closest important city is Luoning. Luoning is situated at
about 1300 km WNW of Shanghai, 1300 km SSW of Beijing, 270 km west of Zhengzhou
the provincial capital and 130 km west of Luoyang, the prefecture of Luoning
County. Access to the Jinjishan Property is provided on a 120km large paved road
which runs southwesterly to the city of Luoning. From Luoning, a paved road
leads southwesterly to the town of Changshui and from that locality, a recently
paved road leads northwesterly to the Jinjishan village and then to the
Jinjishan mining site. The distance from Changshui to the property is
approximately 10 km. This road also links Luoning to Lushi, another important
city to the southwest. The Chinese government rights registration resides at the
Mining Development Centre Zhongduan, Jefang Road, Luoyang, Henan.





Shizhaigou
Property


The
Shizhaigou Property consists of a contiguous 9.51 sq km Exploration License of
which Asian Dragon has acquired 3.22 sq km. The Shizhaigou Property is located
approximately 1.5 km from the Jinjishan Property. From the city of Luoning, the
property is accessible by an all weather paved road to the village of Changshui
(Hu Chih Kou) over a distance of 40 km, then by a 19 km unpaved
road.








F-10


10
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Notes
to Financial Statements


(Unaudited)








Loning
Property


The
Loning Property consists of a 9.1 sq km Exploration License and is located 2 km
Southwest of the Jinjishan Property.





Lingbao
Jinshan Property


The
Lingbao Jinshan Property consists of a 3.84 sq km Mining Permit and 20.74 sq km
Exploration license. The Mining Permit was recently renewed for a validity
period of 5 years. The Lingbao Jinshan Property is situated within the
jurisdiction of Lingbao City and is approximately 125 km from the Jinjishan
Property.





Tiepuling
819# and 846# Mining Center Sections


The
Tiepuling 819# and 846# Mining Center Sections are located in located in the
Henan Province of China.





Note
5 – Commitments and Contingencies





(1)        The
Company’s remaining commitments under its Joint Venture Option Agreements
regarding the Joint Venture rights optioned to ADG by World Fortune Enterprises
Inc. referenced in Note 3 are as follows:





Project
      Item
            
            Installment
            
            
            Balance
      Due
            
            DeadlineJinjishan
      JVOA Installment Four
            
            $
            1,900,000
            
            
            $
            1,309,000
            
            October
      31, 2009Shizhaigou
      JVOA Installment Three
            
            
            300,000
            
            
            
            300,000
            
            May
      19, 2007Shizhaigou
      JVOA Installment Four
            
            
            1,900,000
            
            
            
            1,900,000
            
            November
      19, 2009Loning
      JVOA Installment Three
            
            
            300,000
            
            
            
            300,000
            
            June
      16, 2007Loning
      JVOA Installment Four
            
            
            1,300,000
            
            
            
            1,300,000
            
            January
      16, 2010Lingbao
      Jinshan JVOA Installment Three
            
            
            300,000
            
            
            
            300,000
            
            June
      30, 2007Lingbao
      Jinshan JVOA Installment Four
            
            
            2,400,000
            
            
            
            2,400,000
            
            January
      30, 2010Total
      Balance Due
            
            
            
            
            
            $
            7,809,000





(2)        On
October 20, 2006 the Company entered into an Agency and Cooperative Agreement
with WFEI. Under the terms of this agreement, the Company has committed to
provide consideration to WFEI on a project by project basis. As referenced in
Note 4, Asian Dragon’s present commitments to WFEI are as follows:








F-11


11
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Notes
to Financial Statements


(Unaudited)








Project
            Consideration
            
            #
      Shares
            
            
            Balance
      Due
            
            TimingJinjishan
            Asian
      Dragon Restricted Common Shares
            
            
            250,000
            
            
            
            250,000
            
            Concurrent
      with JVOA Installment FourShizhaigou
            Asian
      Dragon Restricted Common Shares
            
            
            250,000
            
            
            
            250,000
            
            Concurrent
      with JVOA Installment FourLoning
            Asian
      Dragon Restricted Common Shares
            
            
            250,000
            
            
            
            250,000
            
            Concurrent
      with JVOA Installment FourLingbao
      Jinshan
            Asian
      Dragon Restricted Common Shares
            
            
            250,000
            
            
            
            250,000
            
            Concurrent
      with JVOA Installment FourTotal
      Shares Due
            
            
            
            
            
            
            1,000,000





Note
6 – Shareholder Loans





As at May
31, 2007, the Company had one related party shareholder loan outstanding of
$226,722, which had $7,222 of accrued interest, recorded in accrued liabilities
on the balance sheet, for the nine month period ended May 31, 2007. This loan is
unsecured and has no fixed repayment dates.





Note
7 – Related Party Transactions





During
the nine month period ending May 31, 2007, related party transactions during the
quarter include: (i) the shareholder loan recorded in Note 6; (ii) the payment
of $53,355 in legal fees to Karlsson Law Corporation Inc., of which our CEO is
principal; and (iii) the provision of office facilities by John Karlsson for no
charge.





Note
8 – Common Stock





On
November 6, 2006, the Company completed a private placement sale of 250,000
shares of its common stock at $4.00 per share for aggregate proceeds of
$1,000,000.





On
December 18, 2006, the Company completed a private placement sale of 400,000
shares of its common stock at $5.00 per share for aggregate proceeds of
$2,000,000.





On April
2, 2007, the Company completed a private placement sale of 300,000 shares of its
common stock at $5.00 per share for aggregate proceeds of
$1,500,000.










F-12


12
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Notes
to Financial Statements


(Unaudited)








Note
9 – Income Taxes





The
Company is subject to federal income taxes in the United States and Chinese
income taxes (to the extent of its operations in China). The Company had no
income tax expenses during the reported periods due to net operating losses. The
Company’s tax asset recognized in these financial statements is $Nil as at May
31, 2007 due to offsetting valuation allowances.





Note
10 – Restatement of Previously Filed Financial Statements





The
financial statements included herein have been restated to reflect the
re-allocation of some expenses originally reported as occurring in Quarter Four
of the year ended August 31, 2007. This error occurred as the result of the
delayed submission of some documentation from parties in China and these
expenses should have been recorded in Quarters One, Two and Three of the same
year. There has also been: a re-allocation amongst expense categories for some
expenses to more appropriately represent the substance of these costs; the
addition of income statement data to carry forward the recording of discontinued
operations; and the addition of comparative income statement data for the prior
year.





Composite
expense totals for the year ended August 31, 2007 are not affected by these
corrections and these changes did not result in any prior period
adjustments.





The
expense line items affected by these corrections during the three month periods
ended November 30, 2006,


February
28, 2007 and May 31, 2007 are as follows:





QUARTER
      ONE 2007
              (Three
      months ended November 30, 2006)
            
            Originally
      Reported
              Three
      Months
              Ended
              November
      30, 2006
            
            
            Adjustments
            
            
            Restated
              Three
      Months
              Ended
              November
      30, 2006Exploration
      expenses
            
            $
            1,000,000
            
            
            $
            13,733
            
            
            $
            1,013,733Administrative
      expenses
            
            
            486
            
            
            
            46,136
            
            
            
            46,622Interest
      expense
            
            
            2,095
            
            
            
            (16
            )
            
            
            2,079Total
            
            $
            1,002,581
            
            
            $
            59,853
            
            
            $
            1,062,434Net
      Loss
            
            $
            (1,004,090
            )
            
            $
            (59,853
            )
            
            $
            (1,063,943
            )Loss
      per common share, basic and diluted
            
            $
            (0.03
            )
            
            $
            -
            
            
            $
            (0.03
            )





(continued)








F-13


13
 Table of Contents


ASIAN
DRAGON GROUP INC.


(An
Exploration Stage Company)





Notes
to Financial Statements


(Unaudited)








QUARTER
      TWO 2007
              (Three
      months ended February 29, 2007)
            
            Originally
      Reported
              Three
      Months
              Ended
              February
      29, 2007
            
            
            Adjustments
            
            
            Restated
              Three
      Months
              Ended
              February
      29, 2007Exploration
      expenses
            
            $
            1,969,770
            
            
            $
            43,230
            
            
            $
            2,013,000Agent
      fees
            
            
            -
            
            
            
            30,000
            
            
            
            30,000Investor
      relations
            
            
            -
            
            
            
            25,001
            
            
            
            25,001Administrative expenses
            
            
            25,074
            
            
            
            (7,454
            )
            
            
            17,620Interest
      expense
            
            
            2,374
            
            
            
            16
            
            
            
            2,390Total
            
            $
            1,997,218
            
            
            $
            90,793
            
            
            $
            2,088,011Net
      Loss
            
            $
            (2,036,570
            )
            
            $
            (90,793
            )
            
            $
            (2,127,363
            )Loss
      per common share, basic and diluted
            
            $
            (0.06
            )
            
            $
            (0.01
            )
            
            $
            (0.07
            )








QUARTER
      THREE 2007
              (Three
      months ended May 31, 2007)
            
            Originally
      Reported
              Three
      Months
              Ended
              May
      31, 2007
            
            
            Adjustments
            
            
            Restated
              Three
      Months
              Ended
              May
      31, 2007Agent
      fees
            
            $
            -
            
            
            $
            15,000
            
            
            $
            15,000Professional
      and consultant fees
            
            
            61,272
            
            
            
            1,500
            
            
            
            62,772Investor
      relations
            
            
            22,769
            
            
            
            (2,248
            )
            
            
            20,521Administrative expenses
            
            
            5,794
            
            
            
            13,582
            
            
            
            19,376Interest
      expense
            
            
            2,748
            
            
            
            5
            
            
            
            2,753Total
            
            
            92,583
            
            
            
            27,839
            
            
            
            120,422Net
      Loss
            
            $
            (1,508,266
            )
            
            $
            (27,839
            )
            
            $
            (1,536,105
            )Loss
      per common share, basic and diluted
            
            $
            (0.05
            )
            
            $
            -
            
            
            $
            (0.05
            )





The
summary of the re-allocations is as follows:





Quarter
      One
              2007
            
            
            Quarter
      Two
              2007
            
            
            Quarter
      Three
              2007
            
            
            Quarter
      Four
              2007EXPENSES:Exploration
      expenses
            
            $
            13,733
            
            
            $
            43,230
            
            
            $
            -
            
            
            $
            (56,963
            )Agent
      fees
            
            
            -
            
            
            
            30,000
            
            
            
            15,000
            
            
            
            (45,000
            )Professional
      and consultant fees
            
            
            
            
            
            
            -
            
            
            
            1,500
            
            
            
            (1,500
            )Investor
      relations
            
            
            
            
            
            
            25,001
            
            
            
            (2,248
            )
            
            
            (22,753
            )Administrative
      expenses
            
            
            46,136
            
            
            
            (7,454
            )
            
            
            13,582
            
            
            
            (52,264
            )Interest
      expense
            
            
            (16
            )
            
            
            16
            
            
            
            5
            
            
            
            -Total
            
            $
            59,853
            
            
            $
            90,793
            
            
            $
            27,839
            
            
            $
            (178,480
            )







F-14


14
 Table of Contents




ITEM 2.MANAGEMENTS’ DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION




This
quarterly report on Form 10-Q contains "forward-looking statements" relating to
the registrant which represent the registrant's current expectations or beliefs
including, statements concerning registrant’s operations, performance, financial
condition and growth. For this purpose, any statement contained in this
quarterly report on Form 10-Q that are not statements of historical fact are
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "anticipation", "intend", "could", "estimate", or
"continue" or the negative or other comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, such as credit losses, dependence on
management and key personnel and variability of quarterly results, ability of
registrant to continue its growth strategy and competition, certain of which are
beyond the registrant's control. Should one or more of these risks or
uncertainties materialize or should the underlying assumptions prove incorrect,
actual outcomes and results could differ materially from those indicated in the
forward-looking statements.





COMPANY
HISTORY





The
following discussion and analysis should be read in conjunction with the
information set forth in the Company’s unaudited financial statements included
in this report and the audited financial statements for the year ended August
31, 2006 filed with the SEC on Form 10-KSB.





When ADG
closed its operating subsidiary, Galaxy Telnet SRL, it became required under
generally accepted accounting principles (“GAAP”) to reset the exploration
period of the Company to a start date of August 15, 2006, the date of the
dissolution of the subsidiary. The following discussion and analysis covers
material changes in the financial condition of Asian Dragon from August 15, 2006
without the inclusion of its terminated subsidiary.





The
Company’s common stock is traded in the NASD Over-The-Counter market under the
symbol “AADG” and the Company is also listed on the Frankfurt Stock Exchange
under the trading symbol “P2J1”.





MINING
PROPERTY INFORMATION





We note
that the Company has acquired along with certain properties, most notably being
the Jinjishan Mine, infrastructure including buildings and a formerly operating
concentration mill. All of this infrastructure, without exception, has no
value from an accounting or operational perspective due to its age and state of
repair. The Company is, however, utilizing these facilities as a
foundation for required infrastructure development and will incur costs to
upgrade buildings and plants to bring them to operation.





Jinjishan
Property





The
Jinjishan Project is a large exploration property located in the Luoning County,
Henan Province, People’s Republic of China. The mining property consists of
contiguous 28.3 sq kmExploration
License located in the northwest part of Luoning County. More precisely it
is located in the west part of the Henan Province and in the northwest part
of the Luoning County and in the Changshui community. The closest important
city is Luoning. Luoning is situated at about 1300 km WNW of Shanghai, 1300 km
SSW of Beijing, 270 km west of Zhengzhou the provincial capital and 130 km west
of Luoyang, the prefecture of the Luoning County. Access to the Jinjishan
Property is provided on a 120km large paved road which runs southwesterly to the
city of Luoning. From Luoning, a paved road leads southwesterly to the town of
Changshui and from that locality, a recently paved road leads northwesterly to
the Jinjishan village and then to the Jinjishan mining site. The distance from
Changshui to the property is approximately 10 km. This road also links Luoning
to Lushi, another important city to the southwest. In Chinese, Jinjishan means
the Golden Pheasant Mountain.




15
 Table of Contents


Shizhaigou
Property





The
Shizhaigou Property consists of a contiguous 9.51 sq km Exploration License of
which Asian Dragon has acquired 3.22 sq km. From the large city of Luoning (70
000 inhabitants), the property is easily accessible by an all weather paved road
to the village of Changshui (Hu Chih Kou) over a distance of 40 km. Then by a 19
km dirt narrow road.





Loning
Property





The
Loning Property consists of a 9.1 sq km Exploration Lease and is located 2 km
Southwest of Asian Dragon's Jinjishan Property.





Lingbao
Jinshan Property





The
Lingbao Jinshan Property is situated within the jurisdiction of Lingbao City.
Its Mining Permit has an area of 3.84 sq km, with a recently renewed the
validity period of 5 years. The Exploration license has an area of 20.74 sq km.
Several years ago the property was a state-owned but it is now
privatized.





Tiepuling
819# and 846# Mining Center Sections


The
Tiepuling 819# and 846# Mining Center Sections are located in located in the
Henan Province of China.





Information
on Henan Province





Topography





Henan Province
is in the transitional area between the second and third steps of China’s
fourstep terrain rising from east to west, with rolling mountains over
1000 metres above sea level in its western and plain areas and
100 metres or lower in its eastern region. Mountainous regions
comprise 44.3 percent of its total area, and the plains, 55.7
percent.  The highest summit of the Henan Province is the
Laoyacha mountain (2413.8m) in Lingbao City.  The province’s
lowest point is 23.2m and is found at the point where the Huaihe River
leaves the province. Henan Province is surrounded by four mountain ranges:
the Taihang, Funiu, Tongbai and Dabie, which stand in its north, west and south
areas, leaving subsidence basins in the intermittent area. In its middle and
eastern parts there is a vast fluvial plain created by the Yellow, Huaihe and
Huo He rivers.





Four
rivers run across Henan, the Yellow River, Huo He River, Weihe River and
Hanshui River, with the Huo He River valley covering up to 53 percent of
the province. The southwestern portion is part of the Yangtze River Basin
that flows to the west to the Yellow Sea. There are no significant lakes. In the
project area, the relief north of the Luo He (Blue river) basin is hilly and
shows relatively deep valleys running northwest with an elevation gradient
reaching 200m. The highest summit of the region is the Quanbao Shan culminating
at 2080 metres.





Infrastructure





Because
the population of Henan exceeds 92.5 million (2000 census), the province
requires good infrastructure and has strict laws concerning soil occupation
(agriculture) and urbanization extensions. Road, railway and telecommunication
networks are well developed in this area.





Major
road ways in Henan include the Kaifeng-Luoyang Expressway, the Zhengzhou-Luoyang
Expressway, the Anyang-Xinxiang Expressway, the Xuchang-Luohe Expressway, the
Luoyang-Sanmenxia Expressway and the Sanmenxia-Lingbao Expressway. This last
section is part of China’s longest expressway linking Lianyungang
(Jiangsu Province) in the east, with Horgos (Xinjiang Region) to
the




16
 Table of Contents


northwest.
This provides a connection to neighboring Shaanxi. Most of these expressways
have toll gates but the cost for traveling is reasonable. Zhengzhou is a major
rail transport centre in China, as well as the location of the main railway
manufacturers. The Beijing-Guangzhou line, the Jiaozuo-Zhicheng line and the
Beijing-Kowloon railways cross the province from north to south.





Other
railways include the Lanzhou-Lianyungang, the Jiaozuo-Xinxiang-Heze and the
Mengmiao-Baofeng/Luohe-Fuyang lines run through Henan from west to east. The
Euro-Asia Land Bridge (Lianyungang to Rotterdam) also passes through the city.
Traffic is heavy on these railways with the circulation of numerous passenger
trains but also with considerable number of trains transporting coal between the
Henan collieries and the numerous thermal power plants. With rich coal
resources, Henan acts as a centre for thermal power generation in China. In
1999, the installed generating capacity in Henan reached 14.8MWh, ranking the
ninth in the country. Power stations have been constructed at major cities in
Zhengzhou, Kaifeng, Luoyang, Pingdingshan, Anyang, Hebi, Xinxiang, Jiaozuo and
Sanmenxia. Major river transport is also easily accessible. Henan has airports
in Zhengzhou, Luoyang and Nanyang and international flight services are
available at Zhengzhou. Chartered flights to Hong Kong and Macau are also
available.





Three of
the nation’s first-class optical cables and three microwave trunk lines run
through the province, making it possible for Henan to have automatic
long-distance transmission, digital long-distance routes and program-controlled
telephone switchboards throughout the province. Its telephone exchange capacity
has reached 11.2 million circuits, with 9.38 million telephone users, 3.11
million mobile phone users and 1.1 million Internet users. Telecommunications
services are growing rapidly. In the first quarter of 2001, there were 1.7
million subscribers for mobile phone services, ranked ninth in the country.
Recently, Henan has opened a new broadband IP network that is among the largest
in China. Cellular phone communications are available in the most remote areas
of the Province. The Jinjishan mining property is covered by the cellular phone
network.





Henan has
water reserves of 4.84 Mkw, of which 3.23 Mkw can be exploited. By the end of
2000, there were 2394 reservoirs in the province and 4.6 Mha of land were
irrigated. In the Jinjishan area, water supply and sewage system, electric
service for residential and industrial use supply are presently available on
site. Manpower can easily be found in the area. Luoning, only 40 km from the
property, is large enough and with sufficient industry to have machine and
repair shops capable of major repairs.





Climate





Located
between the northern sub-tropical zone and warm temperate zone, Henan Province
has four distinctive seasons with complicated weather conditions. Luoning is
situated in the middle of a WSW trending valley in north-central China which has
an elevation of 300-1000 metres. Because it is surrounded by loess plains, and
upland areas and mountains exceeding 4000 metres to the south, the climate is
dominated by long intervals of light winds which tend to result in hazy and
rather dry atmospheric conditions. The climate is, on average, about 5°C warmer
than Beijing and slightly drier. January is the coldest time of year with
temperatures in the city dropping to - 5°C at night and rising only + 5°C during
the day. July is the hottest month with average temperatures of 27°C and a range
of 22° -33°C during the day. Luoning receives approximately 58 cm of
precipitation per year, with July through September being the wettest period
receiving nearly 30 cm of rain during this period. The period December through
January is quite dry receiving a total of 2.3 cm of precipitation during this
period. As a result of its climate, travelers to Luoning have a reduced risk of
contracting malaria, cholera, Japanese encephalitis or other diseases which may
be common in coastal regions.





Population
and Services





Henan Province
covers an area of 16,700 sq km and during the last census (2000), the population
was estimated to be 92.5 million. It has a large population with only a moderate
land area. As a consequence, the population density is relatively high, with 554
people per sq km. The provincial




17
 Table of Contents


capital
is Zhengzhou (pop. 6.3 million). Major centre are Nanyang (pop. 10.5 million),
Luoyang (pop. 6.1 million), Xinxiang (pop. 5.3 million), Jiaozuo (pop. 3.2
million) and Keifeng (pop. 4.6 million). The region is rich in land resources,
in mineral resources, in plant and animal resources, but much of the resources
per capita are lower than China’s average. The eastern part of the province is a
major grain and cotton producer. Other agricultural products include corn, soya
bean, beans, canola, potatoes and peanuts. Specialties include Lingbao dates,
Huiyang day lilies and common carp.


Major
industries include food processing, coal, metallurgy, machinery, chemicals,
petroleum refining, building materials, textiles and electronics. Zhengzhou is a
major distribution centre in central China. It is known for its array of
wholesale markets, including agricultural and a building materials wholesale
markets. There are many places of interest and historic sites in Henan so
tourism resources are also abundant. Well known tourist sites include a number
of Shang ruins in or near Zhengzhou, Yin Dynasty ruins (latter part of the Shang
era) in Anyang in the northeastern part of the province, the Shaolin Temple in
Dengfeng and the White Horse Temple in Luoyang.





Vegetation





Henan is
an important producer of the country’s wheat, corn, cotton, tobacco leaves and
oil plants. In the project region, the south of the Luohe basin, the forest is
clear and mostly composed of pine and deciduous trees.





Regional
geology





China is
subdivided into a number of geological domains which reflects current modeling
of China’s evolution over time. The model is largely based on continental
accretion with attendant tectonism and subduction. Movement by the Siberian
Plate to the North and the Pacific-Philippines plates to the Southeast were
major factors in China’s geological evolution. Henan is located on and near the
southern boundary of the North China Domain and the Kunlun-Qinling Domain which
represents an easterly trending structural corridor to the south of which lies
the South China Domain. The early development of the Kunlun-Qinling Domain was
as a shallow elongated basin separating the stable platforms to the North and
South. The Variscan tectonic phase saw the final closure of the Qinling-Kunlun
basin and was marked by weakening and southwards migrating volcanism, but also
witnessed the most active phase of acid (granitic) intrusive activity. During
the early to middle Mesozoic, volcanism was weak and intrusive activity was
generally restricted to the structural breaks and shear zones which defined the
margins of basins lying between mountain belts. This magmatism was predominately
reflected in the emplacement of associations composed of quartz monzonite,
monzogranite, syenite, granodiorite and syenogranite. During the late Mesozoic,
volcanism increased and was intense locally as the circum-west Pacific magmatic
belt developed. Most of this is represented by a rhyolite-dacite-andesite
association together with trachyandesite-trachyte associations and alkali
basalt-basaltic andesite associations. A few alkaline basic to ultrabasic rocks
are present locally. Syenogranite, monzogranite, quartz monzonite, tonalite and
granodiorite was emplaced at this time together locally with high level
(hypabyssal) porphyries. Volcanism continued during the Cenozoic, and a few
volcanoes have been active. The Axkol volcano in southern Yutian was active in
1951. These volcanic rocks generally comprise olivine basalt, alkali basalt,
pyroxene andesite, picritediabase, quartz monzonite, aegirine-augite-quartz
syenite and aegirine-albite granite. Gold mineralization in the Luoning area is
hosted within the Kunlun-Qinling Domain or mobile belt.





The
Kunlun-Qinling Domain





The
parent rocks with Proterozoic sequences in the Qinling-Kunlun mobile belt were
largely calc-alkaline volcano-sedimentary rocks. Having commonly undergone
moderate to high grade metamorphism, these sequences are now represented by
2-mica amphibole gneisses, amphibolite, granulite, migmatite, marble, and
phyllite. Some of these rocks have been dated at 2,820-2,160 Ma (zircon age ).
Most generally however, metamorphic grade ranges from lower greenschist to upper
amphibolite facies and lower greenschist grade metamorphism prevails in some
areas, notably in the North Qin Ling Mountains where mica schists
were derived from a thick volcano-flysch carbonate formation. The belt is
therefore a highly complex melange of juxtaposed stratigraphic
units.




18
 Table of Contents




The
magmatic geology of the mobile belt is also complex with nine magmatic stages
and five magmatic belts. Most of the magmas generated were anatectic
melts.  The earliest sets of rocks included basalt-dacite-rhyolite
bimodal associations, basalt-andesite calc-alkaline associations,
basalt-rhyolite associations and spilite-quartz keratophyre
associations. The middle Proterozoic saw a Sibaoan magmatism culminating in
widespread tholeiitic series (basalt-andesite-dacite) volcanism and spilite
rhyolite rift volcanism accompanied by calc-alkaline granitic plutonism.
Magmatism waned during the late Proterozoic.





The most
active period of intrusive and volcanic activity was during the middle to late
Paleozoic, when the Qinling-Kunlun Ocean was closing, and thus Caledonian
rocks are well developed in the mobile belt. Basalt-andesite-rhyolite,
basalt-rhyolite, alkali basalt-trachyte-pseudoleucite phonolite and spilitic
volcanic activity characterized most of the belt. Four granitic intrusive belts
were active at this time within which the intrusive associations included
granodiorite-monzogranite, tonaliteplagiogranite, diorite-tonalite-granodiorite,
monzogranite-syenogranite, diorite-tonalite and alkali granite-diabase and
syenite, as well as two-feldspar alaskite and Kfeldspar alaskite found locally
in the southern part of the belt.





The
tectonic history of the Qinling-Kunlun mobile belt is complex and a large part
of the reason why magmatism was so widespread and so protracted. The belt is
subdivided into four major units which developed at three different periods of
times. In addition to this, there are 20 second-order tectonic units. The
complexity of this mobile belt is partially  attributable to the
existence of an earlier fracture zone, the Jinningian Juncture Zone, which
formed during the late Proterozoic and along which the Qinling-Kunlun mobile
belt largely propagated during the late Paleozoic and the north and south China
blocks collided.  The four major units of the Qinling-Kunlun mobile
belt which were active during the Proterozoic are:





1) 
the southern margin of the North China Plate;


2) 
the Qinling-Qilian mobile belt;


3) 
the Paleo-Tethys mobile belt; and,


4)
 the northern margin of the South China plate.





During
the medial Proterozoic, the southern sub-domain of the North China Plate was the
northern sub-belt of the Jinningian Juncture. At this time, the northern
subdomain of the South China plate bordered the paleo Qinling- Kunlun ocean. The
subdomains on the north and south margins were complex structural zones
undergoing protracted deformation and containing the remnants of pre-existing
paleoblocks. The sub-domains are now divided into three second-order units on
the north margin and eight second-order units on the south which encompass areas
of localized uplift as well as localized sedimentary basins.





The
Qinling-Qilian mobile belt (subdomain) is traceable for 3,000 km along a
northwest trend, and is located in the east-central section of the
Qinling-Kunlun structural belt (Figure No 7). To the west it abuts the Altun
fracture zone and to the east it merges with the NE-trending Tancheng-Lujiang
Fracture Zone. From the late Proterozoic through the Silurian, this belt
underwent recurring extension and collision leading to rifting and closure. The
Paleo-Tethys Mobile Belt to the south of the Qinling-Qilian mobile belt is a
continental margin fold belt which contains a sea trough system of graben and
horst structures similar to the Qinling-Qilian mobile belt.





The area
is underlain by a series of rocks that are of upper greenschist to amphibolite
metamorphic grade. Based on the aforementioned structural hierarchy, it is
believed that the Jinjishan area falls into the Qilian-North Qinling Fold
System.  The fold system is superimposed on the area north of the
Qinling-Kunlun Juncture Zone. It is composed of a layered metamorphic basement
sequence of mobile-type sediments which, from base to top, is composed of early
Proterozoic upper greenschist to upper amphibolite grade geosynclinal
metasediments, medial to late Proterozoic arc-basin formations and late
Proterozoic to early Cambrian post-orogenic




19
 Table of Contents


epicontinental
formations composed of tillite and carbonate rocks, with localized volcanic
strata as well as phosphatic and Mn-bearing rocks. These rocks were deposited in
an expanding trough which reached culminated during the medial
Ordovician.





The
Silurian-Devonian was the main period of closing as NE-directed movement of the
South China Block resulted in subduction of the trough area during the
Carboniferous. Final closure of the Tethys basin occurred as a west to east
scissoring at the end of the Carboniferous.





Gold
mineralization





Gold has
been mined in China for more than 4,000 years. In the area, mining probably
began during the Tang Dynasty (618-907 AD). Local miners exploited visible gold
which was present on the weathering surface of veins exposed on the mountain
sides. This area was the marketing centre to which the Emperor’s men would be
sent to purchase gold from the local miners. Historical artifacts suggest that
the largest nuggets were 200-300 grams.





In
western Henan Province, Team One of the provincial Ministry of Land and
Resources (“MOLAR”) discovered gold mineralization during the 1960’s through
general geological mapping and regional geochemical sampling. This revelation
directly influenced mineral exploration policy and activities in Henan and
Shaanxi Provinces. Although, long recognized as a source for gold, the
depletion of easily non visible gold in the Luoning area tended to discourage
further activity until the 1960’s when modern exploration commenced with
regional scale geological mapping and geochemical sampling
programs.





The Xiao
Qinling gold province, located between Tongguan in Shaanxi and Lingbao in Henan
province is currently the second largest gold producing area in China. Annual
production is about 15 – 23 tonnes Au. The Xiao Qinling area is underlain by
gneiss, marble, quartzite, migmatite, and amphibolite of the Late Archean Taihua
Group. Indosinian alkalic porphyries and dykes (213 –202 My) and Yanshanian
granites are widespread. The Wenyu granite intruded the central part of the
gold- rich area, and is exposed over an area of about 20 sq km.





Regional
structures are dominated by the E –W-trending, north-dipping, >60-km-long
Maxundao deep fault zone (from Tongguan to Lingbao). It was originally a
compressional feature, but shows evidence for late extension. A series of large
gold deposits, with total resources of 300 – 450 t Au, occur at intersections of
second-order WNW – EW striking faults with NE and NW striking faults to the
north of the first-order Maxundao fault zone.





From west
to east in the Xiao Qinling gold province, gold deposits hosted in rocks of the
Taihua Group are concentrated in three goldfields within a 60 x15 km corridor, 2
– 15 km north of the Maxundao fault (the Tongyu and Yanzhihe deposits), Wenyu
(the Wenyu, Dongchuang, Sifangou and Yangzhaiyu deposits and Dahu (Dahu and
Linghu deposits ) goldfields.





A series
of 4 to 20 m wide and >4 km long quartz veins lie within second-order
faults.  Lesser amounts of gold occur in altered rocks along ductile –
brittle shear zones and in breccia bodies. More than 1,200 gold bearing quartz
veins have been discovered in this part of the Qinling gold province. Ores are
noted to contain pyrite, galena, sphalerite and minor magnetite,
scheelite, wolframite, molybdenite, stibnite, pyrrhotite and gold. The
gangue minerals comprise quartz,calcite, ankerite, minor rutile, barite,
siderite and fluorite. The alteration halos around quartz veins or shear zones
comprise mainly quartz, sulphide minerals,white mica and carbonate
minerals, with lesser chlorite, epidote and biotite.





A few
large gold deposits in areas of Proterozoic basement in the Xiao Qinling area,
such as Kangshan, Shanggong and Qiyugou, are controlled by a group of NE
striking faults and shear zones, which are the second-order structures to
another major E –W striking fault zone. The Shanggong(>30 t Au) and Kangshan
(>20 t Au) deposits are located in the 33km-long, NE trending Kangshan –
Qiliping ductile – brittle shear, south and parallel to the Huo He
valley.




20
 Table of Contents




Mineralization
is hosted in Mesoproterozoic felsic to intermediate volcanic rocks. The steeply
dipping ore bodies are 250 to 750 m long and 1 to 2.8 m wide veins filling
brittle structures, lenses in tension gashes, alteration bands along shear
zones and brecciated country rock. The ores commonly contain anomalous
Ag, Te, and Pb concentrations. Alteration halos around the
ore bodies are characterized by a 1 to 3 m wide proximal sulphide –ankerite
–muscovite zone, a 1 to 20 m wide pyrite – ankerite – muscovite – chlorite
transitional zone and a 50 m wide distal chlorite-calcite zone.





Report
on Form 10-Q/A Update:





The
financial statements included herein have been restated to reflect the
re-allocation of some expenses originally reported as occurring in Quarter Four
of the year ended August 31, 2007. This error occurred as the result of the
delayed submission of some documentation from parties in China and these
expenses should have been recorded in Quarters One, Two and Three of the same
year. There has also been: a re-allocation amongst expense categories for some
expenses to more appropriately represent the substance of these costs; the
addition of income statement data to carry forward the recording of discontinued
operations; and the addition of comparative income statement data for the prior
year.





Composite
expense totals for the year ended August 31, 2007 are not affected by these
corrections and these changes did not result in any prior period
adjustments.





The
expense line items affected by these corrections during the three month periods
ended November 30, 2006, February
28, 2007 and May 31, 2007 are as follows:





QUARTER
      ONE 2007
              (Three
      months ended November 30, 2006)
            
            Originally
      Reported
              Three
      Months
              Ended
              November
      30, 2006
            
            
            Adjustments
            
            
            Restated
              Three
      Months
              Ended
              November
      30, 2006Exploration
      expenses
            
            $
            1,000,000
            
            
            $
            13,733
            
            
            $
            1,013,733Administrative
      expenses
            
            
            486
            
            
            
            46,136
            
            
            
            46,622Interest
      expense
            
            
            2,095
            
            
            
            (16
            )
            
            
            2,079Total
            
            $
            1,002,581
            
            
            $
            59,853
            
            
            $
            1,062,434Net
      Loss
            
            $
            (1,004,090
            )
            
            $
            (59,853
            )
            
            $
            (1,063,943
            )Loss
      per common share, basic and diluted
            
            $
            (0.03
            )
            
            $
            -
            
            
            $
            (0.03
            )








QUARTER
      TWO 2007
              (Three
      months ended February 29, 2007)
            
            Originally
      Reported
              Three
      Months
              Ended
              February
      29, 2007
            
            
            Adjustments
            
            
            Restated
              Three
      Months
              Ended
              February
      29, 2007Exploration
      expenses
            
            $
            1,969,770
            
            
            $
            43,230
            
            
            $
            2,013,000Agent
      fees
            
            
            -
            
            
            
            30,000
            
            
            
            30,000Investor
      relations
            
            
            -
            
            
            
            25,001
            
            
            
            25,001Administrative
      expenses
            
            
            25,074
            
            
            
            (7,454
            )
            
            
            17,620Interest
      expense
            
            
            2,374
            
            
            
            16
            
            
            
            2,390Total
            
            $
            1,997,218
            
            
            $
            90,793
            
            
            $
            2,088,011Net
      Loss
            
            $
            (2,036,570
            )
            
            $
            (90,793
            )
            
            $
            (2,127,363
            )Loss
      per common share, basic and diluted
            
            $
            (0.06
            )
            
            $
            (0.01
            )
            
            $
            (0.07
            )







21
 Table of Contents




QUARTER
      THREE 2007
              (Three
      months ended May 31, 2007)
            
            Originally
      Reported
              Three
      Months
              Ended
              May
      31, 2007
            
            
            Adjustments
            
            
            Restated
              Three
      Months
              Ended
              May
      31, 2007Agent
      fees
            
            $
            -
            
            
            $
            15,000
            
            
            $
            15,000Professional
      and consultant fees
            
            
            61,272
            
            
            
            1,500
            
            
            
            62,772Investor
      relations
            
            
            22,769
            
            
            
            (2,248
            )
            
            
            20,521Administrative
      expenses
            
            
            5,794
            
            
            
            13,582
            
            
            
            19,376Interest
      expense
            
            
            2,748
            
            
            
            5
            
            
            
            2,753Total
            
            
            92,583
            
            
            
            27,839
            
            
            
            120,422Net
      Loss
            
            $
            (1,508,266
            )
            
            $
            (27,839
            )
            
            $
            (1,536,105
            )Loss
      per common share, basic and diluted
            
            $
            (0.05
            )
            
            $
            -
            
            
            $
            (0.05
            )





The
summary of the re-allocations is as follows:





Quarter
      One
              2007
            
            
            Quarter
      Two
              2007
            
            
            Quarter
      Three
              2007
            
            
            Quarter
      Four
              2007EXPENSES:Exploration
      expenses
            
            $
            13,733
            
            
            $
            43,230
            
            
            $
            -
            
            
            $
            (56,963
            )Agent
      fees
            
            
            -
            
            
            
            30,000
            
            
            
            15,000
            
            
            
            (45,000
            )Professional
      and consultant fees
            
            
            
            
            
            
            -
            
            
            
            1,500
            
            
            
            (1,500
            )Investor
      relations
            
            
            
            
            
            
            25,001
            
            
            
            (2,248
            )
            
            
            (22,753
            )Administrative
      expenses
            
            
            46,136
            
            
            
            (7,454
            )
            
            
            13,582
            
            
            
            (52,264
            )Interest
      expense
            
            
            (16
            )
            
            
            16
            
            
            
            5
            
            
            
            -Total
            
            $
            59,853
            
            
            $
            90,793
            
            
            $
            27,839
            
            
            $
            (178,480
            )





RESULTS
OF OPERATIONS





The
following discussion and analysis covers material changes in the financial
condition of ADG during the three and nine month periods ended May 31,
2007.





Revenues





ADG did
not earn revenues during the periods included in the financial statements in
this report.





Expenses





Our
operating expenses are classified into five categories:





-
Exploration Expenses


- Agent
Fees


-
Professional & Consultant Fees


-
Investor Relations


-
Administrative Expenses





Exploration Expenses.
Exploration Expenses for the three and nine month period ended May 31, 2007
totaled $1,415,683 and $4,442,416 respectively, the latter being comprised of
$42,416 for geological reports and aggregate deposits of $4,400,000 made by the
Company to World Fortune Enterprises Inc. (“WFEI”) for exploration of the
various properties over the nine month period.


22
 Table of Contents


Agent Fees. Agent Fees are
comprised of fees for work performed by our China Agent to research and source
mineral property opportunities in China. During the three and nine month periods
ended May 31, 2007, these fees totaled $15,000 and $45,000 respectively. We
anticipate Professional & Consultant Fees will remain at current levels in
the upcoming year as we implement our business plans.





Professional & Consultant
Fees. Professional & Consultant Fees are primarily comprised of fees
for work performed by accounting, audit and legal professionals. During the
three and nine month periods ended May 31, 2007, these fees totaled $62,772 and
$103,633 respectively and were primarily comprised of $70,368 in legal fees;
$21,256 and $10,500 in accounting and auditor fees respectively for the nine
month period. We anticipate Professional & Consultant Fees will increase
substantially in the upcoming year as we implement our business
plans.





Investor Relations.Investor
Relations expenses comprise costs for press releases, maintenance of the
Company’s website and other investor information initiatives. During previous
quarters, these expenses were included in the category of Administrative
expenses. Investor Relations expenses totaled $20,521 and $45,522 for the three
and nine month periods ended May 31, 2007. We anticipate Investor Relations
expenses will increase substantially as the Company continues its efforts to
raise further capital.





Administrative Expenses.
Administrative Expenses were $19,376 and $83,618 for the three and nine month
periods ended May 31, 2007 and were comprised of charges for Travel, Edgar agent
filing fees, stock transfer agent fees and general office expenses. We
anticipate Administrative Expenses will increase substantially in the upcoming
year as we implement our business plans.





Net Loss. We incurred net
losses from continuing operations of $(1,536,105), or $(0.05) per share, for the
three months ended May 31, 2007 and $(4,727,411), or $(0.15) per share, for the
nine month period ending May 31, 2007. For the Exploration Stage period between
August 15, 2006 and May 31, 2007, the Net Loss from continuing operations
totaled $(4,728,835). After taking into account discontinued operations prior to
August 15, 2006, the Exploration Stage loss totaled $(4,943,940).





Liquidity
and Capital Resources





Since its
inception, the Company has financed its cash requirements from sale of common
stock and shareholder loans. Uses of funds have included activities to establish
and develop our business.





The
Company’s principal sources of liquidity as of May 31, 2007, consisted of cash
resources of $12,971 and a shareholder loan from our President. Under the
shareholder loan, loan advances to or on behalf of ADG, bear interest at 5% per
annum, calculated and compounded annually, not in advance. ADG is required to
repay the outstanding principal and interest at any time on demand. Prepayment
of all or a portion of the outstanding principal and interest may be made by ADG
at any time without notice, bonus or penalty. The amount outstanding under the
shareholder loan was $226,722, as of May 31, 2007. From inception through May
31, 2007, we have raised $4,500,000 through private placements of our common
shares.





Material
Events and Uncertainties





Our
operating results are difficult to forecast. Our prospects should be evaluated
in light of the risks, expenses and difficulties commonly encountered by
comparable early stage companies in rapidly evolving markets. There can be no
assurance that we will successfully address such risks, expenses and
difficulties.





Our
financial statements are prepared in accordance with U.S. generally accepted
accounting principles. We have expensed all development costs related to our
establishment.




23
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Employees





As at May
31, 2007, we had no employees and used contracted services to perform geological
work, legal services and our bookkeeping. Going forward, the Company will use
consultants with specific skills to assist with various aspects of its project
evaluation, due diligence, acquisition initiatives, corporate governance and
property management.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





EXCHANGE
RATE FLUCTUATION RISK





Our
reporting currency is United States Dollars (“USD”).  Operations in China
use the Chinese Renminbi (“RMB”) which has been informally pegged to the
USD. However, China is under international pressure to adopt a more
flexible exchange rate system. If the RMB were no longer pegged to the USD, rate
fluctuations may have a material impact on the Company’s financial
reporting. In July 2005 the Renminbi was allowed to rise 2%. As
Renminbi is used for expenditures by the Company and its joint venture partner
in conducting their operations in China, the fluctuation of exchange rates of
Renminbi may have positive or negative impacts on the results of operations of
the Company.





We have
not entered into derivative contracts either to hedge existing risk or for
speculative purposes.





ITEM 4. CONTROLS AND PROCEDURES





Disclosure
controls and procedures





Subsequent
to the end of the period covered by this report (the “Evaluation Date”), the
Company carried out an evaluation, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer (the “Certifying Officers”) of the effectiveness of the design and
operation of the Company's disclosure controls and
procedures (as defined in rules 13a-15(e) and 15d-15(e)) under the Exchange Act.Based on that
evaluation, the Certifying Officers have concluded that, as of the Evaluation
Date, the disclosure controls and procedures in place were not adequate to
ensure that information required to be disclosed by us, including our
consolidated subsidiaries, in reports that we file or submit under the Exchange Act, is recorded,
processed, summarized and reported on a timely basis in accordance with
applicable rules and regulations.





The
Company's design and operation of controls with respect to the process of
preparing and reviewing the annual and interim financial statements are
ineffective. Deficiencies identified include the inadequate segregations of
duties, lack of controls over procedures used to enter transactions into the
general ledger, and lack of appropriate review of the reconciliations and
supporting workpapers used in the financial close and reporting process. Due to
the potential pervasive effect on the financial statement account balances and
disclosures and the importance of the annual and interim financial closing and
reporting process, in the aggregate, management has concluded that there is more
than a remote likelihood that a material misstatement in our annual or interim
financial statements could occur and would not be prevented or
detected.





Remediation
Plan





We are
including information with respect to our internal control over financial
reporting for the period subsequent to May 31, 2008, in order to provide readers
with a current understanding of the identified significant deficiencies, as well
as how they have been addressed as part of our remediation plan.







24
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Subsequent
to May 31, 2008, we have undertaken, extensive work to remediate the significant
deficiencies identified in our internal control over financial reporting
described above, including specific remediation initiatives described
below. We have begun implementing the actions described below with respect
to the identified significant deficiencies and plan to have these remedies in
place by the period ended August 31, 2008.





Insufficient
dedication of resources to administrative functions.We have focused
intensive efforts on re-aligning management duties to ensure a number of control
deficiencies related to the documentation of expenses relating to our
international activities are addressed in an effective and timely
manner.





Ineffective
Controls related to the Entering of Transactions into the General Ledger,
Preparation of Certain Account Analyses, Account Summaries, and Account
Reconciliations.As a result of the adjustments made with respect to
certain income statement accounts for the quarters ended November 30, 2006,
February 29, 2007, and May 31, 2007, we determined a more detailed review for
these accounts was necessary in connection with our quarterly and annual
financial reporting process.  The Company has developed a more
intensive financial close process to ensure a thorough review of entering
transactions into the general ledger is performed, supporting schedules are
adequately prepared and/or reviewed, and that they included adequate supporting
documentation.





Limitations
on the Effectiveness of Controls





The
Company has confidence in its revised regime of internal controls and
procedures. Nevertheless, the Company’s management (including the Chief
Executive Officer and Chief Financial Officer) believes that a control system,
no matter how well designed and operated can provide only reasonable assurance
and cannot provide absolute assurance that the objectives of the internal
control system are met, and no evaluation of internal controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected. Further, the design of an internal control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitation in all internal control systems, no evaluation of controls
can provide absolute assurance that all control issuers and instances of fraud,
if any, within the Company have been detected.






PART II – OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS




There is
no litigation pending or threatened by or against us.





ITEM 1A. RISK FACTORS





The
following risk factors should be considered in connection with an evaluation of
the business of the Company:





THE
COMPANY'S LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO JUDGE ITS
PROSPECTS.





The
Company has a limited operating history upon which an evaluation of the Company,
its current business and its prospects can be based. You should consider any
purchase of the Company's shares in light of the risks, expenses and problems
frequently encountered by all companies in the early stages of its corporate
development.







25
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LIQUIDITY
AND CAPITAL RESOURCES ARE UNCERTAIN.





For the
nine months ended May 31, 2007, the Company had an operating loss of
$(4,727,411) and a working capital deficiency of $(402,523). The Company may
need to raise additional capital by way of an offering of equity securities, an
offering of debt securities, or by obtaining financing through a bank or other
entity. The Company has not established a limit as to the amount of debt it may
incur nor has it adopted a ratio of its equity to debt allowance. If the Company
needs to obtain additional financing, there is no assurance that financing will
be available from any source, that it will be available on terms acceptable to
us, or that any future offering of securities will be successful. If additional
funds are raised through the issuance of equity securities, there may be a
significant dilution in the value of the Company’s outstanding common stock. The
Company could suffer adverse consequences if it is unable to obtain additional
capital which would cast substantial doubt on its ability to continue its
operations and growth.





THE
VALUE AND TRANSFERABILITY OF THE COMPANY'S SHARES MAY BE ADVERSELY IMPACTED BY
THE LIMITED TRADING MARKET FOR ITS SHARES AND THE PENNY STOCK
RULES.





There is
only a limited trading market for the Company's shares. The Company's common
stock is traded in the over-the-counter market and "bid" and "asked" quotations
regularly appear on the OTC Bulletin Board under the symbol "AADG" and the
Company is also listed on the Frankfurt Stock Exchange under the trading symbol
“P2J1”. There can be no assurance that the Company's common stock will trade at
prices at or above its present level, and an inactive or illiquid trading market
may have an adverse impact on the market price. In addition, holders of the
Company's common stock may experience substantial difficulty in selling their
securities as a result of the "penny stock rules," which restrict the ability of
brokers to sell certain securities of companies whose assets or revenues fall
below the thresholds established by those rules.





FUTURE
SALES OF SHARES MAY ADVERSELY IMPACT THE VALUE OF THE COMPANY'S
STOCK.





If
required, the Company may seek to raise additional capital through the sale of
common stock. Future sales of shares by the Company or its stockholders could
cause the market price of its common stock to decline.





MINERAL
EXPLORATION AND DEVELOPMENT ACTIVITIES ARE SPECULATIVE IN NATURE.





Resource
exploration and development is a speculative business, characterized by a number
of significant risks including, among other things, unprofitable efforts
resulting not only from the failure to discover mineral deposits but from
finding mineral deposits which, though present, are insufficient in quantity and
quality to return a profit from production. The marketability of minerals
acquired or discovered by the Company may be affected by numerous factors which
are beyond the control of the Company and which cannot be accurately predicted,
such as market fluctuations, the proximity and capacity of milling facilities,
mineral markets and processing equipment and such other factors as government
regulations, including regulations relating to royalties, allowable production,
importing and exporting of minerals and environmental protection, the
combination of which factors may result in the Company not receiving an adequate
return of investment capital.





Substantial
expenditures are required to establish ore reserves through drilling, to develop
metallurgical processes to extract the metal from the ore and, in the case of
new properties, to develop the mining and processing facilities and
infrastructure at any site chosen for mining. Although substantial benefits may
be derived from the discovery of a major mineralized deposit, no assurance can
be given that minerals will be discovered in sufficient quantities and grades to
justify commercial operations or that funds required for development can be
obtained on a timely basis. Estimates of reserves, mineral deposits and
production costs can also be affected by such factors as environmental
permitting regulations and requirements, weather,




26
 Table of Contents


environmental
factors, unforeseen technical difficulties, unusual or unexpected geological
formations and work interruptions. In addition, the grade of ore ultimately
mined may differ from that indicated by drilling results. Short term factors
relating to reserves, such as the need for orderly development of ore bodies or
the processing of new or different grades, may also have an adverse effect on
mining operations and on the results of operations. Material changes in ore
reserves, grades, stripping ratios or recovery rates may affect the economic
viability of any project.





THE
COMPANY WILL BE SUBJECT TO OPERATING HAZARDS AND RISKS WHICH MAY ADVERSELY
AFFECT THE COMPANY'S FINANCIAL CONDITION.





Mineral
exploration involves many risks, which even a combination of experience,
knowledge and careful evaluation may not be able to overcome. The Company's
operations will be subject to all the hazards and risks normally incidental to
exploration, development and production of metals, such as unusual or unexpected
formations, cave-ins or pollution, all of which could result in work stoppages,
damage to property and possible environmental damage. The Company does not have
general liability insurance covering its operations and does not presently
intend to obtain liability insurance as to such hazards and liabilities. Payment
of any liabilities as a result could have a materially adverse effect upon the
Company's financial condition





THE
COMPANY'S ACTIVITIES WILL BE SUBJECT TO ENVIRONMENTAL AND OTHER INDUSTRY
REGULATIONS WHICH COULD HAVE AN ADVERSE EFFECT ON THE FINANCIAL CONDITION OF THE
COMPANY.





The
Company's activities are subject to environmental regulations promulgated by
government agencies from time to time. Environmental legislation generally
provides for restrictions and prohibitions on spills, releases or emissions of
various substances produced in association with certain mining industry
operations, such as seepage from tailing disposal areas, which would result in
environmental pollution. A breach of such legislation may result in imposition
of fines and penalties. In addition, certain types of operations require the
submission and approval of environmental impact assessments. Environmental
legislation is evolving in a manner which means stricter standards and
enforcement, fines and penalties for non-compliance are more stringent.
Environmental assessments of proposed projects carry a heightened degree of
responsibility for companies and directors, officers and employees. The cost of
compliance with changes in governmental regulations could have an adverse effect
on the financial condition of the Company.





The
operations of the Company including exploration and development activities and
commencement of production on its properties, require permits from various
federal, state, provincial and local governmental authorities and such
operations are and will be governed by laws and regulations governing
prospecting, development, mining, production, exports, taxes, labor standards,
occupational health, waste disposal, toxic substances, land use, environmental
protection, mine safety and other matters. Companies engaged in the development
and operation of mines and related facilities generally experience increased
costs and delays in production and other schedules as a result of the need to
comply with applicable laws, regulations and permits.





Failure
to comply with applicable laws, regulations, and permitting requirements may
result in enforcement actions, including orders issued by regulatory or judicial
authorities causing operations to cease or be curtailed, and may include
corrective measures requiring capital expenditures, installation of additional
equipment, or remedial actions. Parties engaged in mining operations may be
required to compensate those suffering loss or damage by reason of the mining
activities and may have civil or criminal fines or penalties imposed for
violations of applicable laws or regulations and, in particular, environmental
laws.







27
 Table of Contents


THE
COMPANY IS SUBJECT TO A VARIETY OF APPROVAL REQUIREMENTS AT THE CHINESE CENTRAL,
PROVINCIAL AND LOCAL GOVERNMENT LEVELS AND, IN PRACTICE, THERE IS SOME
UNCERTAINTY SURROUNDING WHICH APPROVALS ARE ACTUALLY REQUIRED TO CONDUCT CERTAIN
MINING AND EXPLORATION ACTIVITIES IN VARIOUS PARTS OF CHINA.





In China,
two levels of government primarily deal with the approval of the establishment
of a foreign-invested joint venture in mineral exploration and mining (“Mining
JV”): the central and the local (e.g., provincial or municipal). China’s
Ministry of Commerce (“MOFCOM”) is the central-government-level ministry in
charge of reviewing and approving the establishment of Mining
JVs. Applications must be submitted to MOFCOM’s local-level counterparts
for upward submission to MOFCOM. However, in practice, many provincial bureaus
of commerce, such as those in Henan Province, claim final approval authority and
do not forward applications to MOFCOM. To our knowledge, MOFCOM is aware of
this practice but has not taken any steps to intervene or take action against
Mining JVs which have been approved only at the provincial level.





Once
MOFCOM, or its authorized local counterpart has issued its approval documents,
the Chinese partners to the joint venture would then apply to China’s State
Administration of Industry and Commerce or its authorized local counterpart for
a business license. The issuance of the business license marks the legal
establishment of a Mining JV and confirms the permitted scope of the Mining JV’s
activities. The business license is subject to annual review and
renewal.





The
Ministry of Land and Resources (“MOLAR”) is the central-government-level
ministry in charge of exploration and mining licenses. Generally speaking, MOLAR
holds the final authority to issue exploration and mining licenses to Mining
JVs; however, for projects in Henan province, it has delegated this authority to
the respective provincial-level bureaus of land and resources in those
provinces, for the Company’s current purposes, the Gold Bureau in
particular.





COMPETITION
MAY HAVE AN IMPACT ON THE COMPANY'S ABILITY TO ACQUIRE ATTRACTIVE PRECIOUS
METALS PROPERTIES, WHICH MAY HAVE AN ADVERSE IMPACT ON THE COMPANY'S
OPERATIONS.





Significant
and increasing competition exists for the limited number of precious metals
acquisition opportunities available. As a result of this competition, some of
which is with large established mining companies with substantial capabilities
and greater financial and technical resources than the Company, the Company may
be unable to acquire attractive precious metals properties on terms it considers
acceptable. Accordingly, there can be no assurance that any exploration program
intended by the Company on properties it intends to acquire will yield any
reserves or result in any commercial mining operation.





DOWNWARD
FLUCTUATIONS IN METAL PRICES MAY SEVERELY REDUCE THE VALUE OF THE
COMPANY.





The
Company has no control over the fluctuations in the prices of the metals for
which it is exploring.  A significant decline in such prices would severely
reduce the value of the Company.





THE
COMPANY CURRENTLY RELIES ON CERTAIN KEY INDIVIDUALS AND THE LOSS OF ONE OF THESE
CERTAIN KEY INDIVIDUALS COULD HAVE AN ADVERSE EFFECT ON THE
COMPANY.





The
Company's success depends to a certain degree upon certain key members of the
management. These individuals are a significant factor in the Company's growth
and success. The loss of the service of members of the management and advisory
board could have a material adverse effect on the Company. In particular, the
success of the Company is highly dependant upon the efforts of the President
& CEO, CFO, PFO, Treasurer & Secretary, and director of the Company,
John Karlsson, the loss of whose services would have a material adverse effect
on the success and development of the Company.




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 Table of Contents




THE
COMPANY DOES NOT MAINTAIN KEY MAN INSURANCE TO COMPENSATE THE COMPANY FOR THE
LOSS OF CERTAIN KEY INDIVIDUALS.





The
Company does not anticipate having key man insurance in place in respect of any
of its senior officers or personnel, although the Board has discussed and
investigated the prospect of obtaining key man insurance for John
Karlsson.





WE
ARE AN EXPLORATION STAGE COMPANY, AND THERE IS NO ASSURANCE THAT A COMMERCIALLY
VIABLE DEPOSIT OR "RESERVE" EXISTS ON ANY PROPERTIES FOR WHICH THE COMPANY HAS,
OR MIGHT OBTAIN, AN INTEREST.





The
Company is an exploration stage company and cannot give assurance that a
commercially viable deposit, or “reserve,” exists on any properties for which
the Company currently has (through an option) or may have (through potential
future joint venture agreements or acquisitions) an interest. Therefore,
determination of the existence of a reserve depends on appropriate and
sufficient exploration work and the evaluation of legal, economic, and
environmental factors. If the Company fails to find a commercially viable
deposit on any of its properties, its financial condition and results of
operations will be materially adversely affected.





WE
REQUIRE SUBSTANTIAL FUNDS MERELY TO DETERMINE WHETHER COMMERCIAL PRECIOUS METAL
DEPOSITS EXIST ON OUR PROPERTIES.





Any
potential development and production of the Company’s exploration properties
depends upon the results of exploration programs and/or feasibility studies and
the recommendations of duly qualified engineers and geologists. Such programs
require substantial additional funds. Any decision to further expand the
Company’s operations on these exploration properties is anticipated to involve
consideration and evaluation of several significant factors including, but not
limited to:





§
            Costs
      of bringing each property into production, including exploration work,
      preparation of production feasibility studies, and construction of
      production facilities;


§
            Availability
      and costs of financing;


§
            Ongoing
      costs of production;


§
            Market
      prices for the precious metals to be
produced;


§
            Environmental
      compliance regulations and restraints;
and


§
            Political
      climate and/or governmental regulation and
  control.





GENERAL
MINING RISKS





Factors
beyond our control may affect the marketability of any substances discovered
from any resource properties the Company may acquire. Metal prices, in
particular gold and silver prices, have fluctuated widely in recent years.
Government regulations relating to price, royalties, allowable production and
importing and exporting of precious metals can adversely affect the Company.
There can be no certainty that the Company will be able to obtain all necessary
licenses and permits that may be required to carry out exploration, development
and operations on any projects it may acquire and environmental concerns about
mining in general continue to be a significant challenge for all mining
companies.





ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





On
November 7, 2006, the Company accepted a subscription agreement (the
“Subscription Agreement”) with one entity for the purchase of 250,000 common
shares of the Company at a price of $4.00 per share for total proceeds of
$1,000,000. The Company believes that such issuance is




29
 Table of Contents


exempt
from registration under Regulation S promulgated under the Securities Act of
1933, as amended, as the securities were issued to the entities through an
offshore transaction which was negotiated and consummated outside of the United
States.





On
December 18, 2006, the Company accepted a subscription agreement (the
“Subscription Agreement”) with one entity for the purchase of 400,000 common
shares of the Company at a price of $5.00 per share for total proceeds of
$2,000,000. The Company believes that such issuance is exempt from registration
under Regulation S promulgated under the Securities Act of 1933, as amended, as
the securities were issued to the entities through an offshore transaction which
was negotiated and consummated outside of the United States.





On April
2, 2007, the Company accepted a subscription agreement (the “Subscription
Agreement”) with one entity for the purchase of 300,000 common shares of the
Company at a price of $5.00 per share for total proceeds of $1,500,000. The
Company believes that such issuance is exempt from registration under Regulation
S promulgated under the Securities Act of 1933, as amended, as the securities
were issued to the entities through an offshore transaction which was negotiated
and consummated outside of the United States.





The funds
received from the investors mentioned above have been and will be used primarily
for property exploration expenses.





ITEM 3. DEFAULTS UPON SENIOR SECURITIES





The
Company has no senior securities outstanding.





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





During
the quarter ended May 31, 2007, no matters were submitted to a vote of the
Company's security holders, through the solicitation of proxies or
otherwise.





ITEM 5. OTHER INFORMATION





There is
no other information to record under this Item.





ITEM 6. EXHIBITS




Number
            
            Exhibit
      Description3.1
            
            Articles
      of Incorporation*3.2
            
            Certificate
      of Amendment of Articles of Incorporation*3.3
            
            Bylaws*10.1
            
            Joint
      Venture Option Agreement with World Fortune Enterprises Inc. regarding the
      Jinjishan Property**10.2
            
            Agency
      and Cooperative Agreement with World Fortune Enterprise
    Inc.**10.3
            
            Joint
      Venture Option Agreement with World Fortune Enterprises Inc. regarding the
      Shizhaigou Property***






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 Table of Contents




10.4
            
            Joint
      Venture Option Agreement with World Fortune Enterprises Inc. regarding the
      Loning Property***10.5
            
            Joint
      Venture Option Agreement with World Fortune Enterprises Inc. regarding the
      Lingbao Jinshan Property***31.1
            
            Certificate of President (chief executive officer)
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2
            
            Certificate of Chief Financial Officer (principal
      financial officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 200232.1
            
            Certificate of President (chief executive officer)
      and Treasurer (principal financial officer) pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


____________________





*     
Filed as an exhibit to our registration statement on Form SB-2 filed March 22,
2005 and incorporated herein by this reference


**   
Filed as exhibits to our quarterly report for QI-07 on Form 10-Q filed January
22, 2007 and incorporated herein by this reference


*** Filed
as exhibits to our quarterly report for QII-07 on Form 10-Q filed April 16, 2007
and incorporated herein by this reference








SIGNATURES




In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.





ASIAN
DRAGON GROUP INC.





/s/ John
Karlsson


John
Karlsson


President
& CEO, CFO, PFO,


Secretary
& Treasurer, and Director




Dated:
October 2, 2008




















31