SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


____________________________





FORM
10-Q





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


EXCHANGE
ACT OF 1934





For
the Quarter Ended May 31, 2008





OR





o TRANSITION REPORT
PURSUANT TO 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 registrant as specified in its charter)




Nevada


(State or
other jurisdiction of incorporation or organization)




98-0418754


(IRS
Employer Identification Number)





#202
- 1028 Hamilton Street


Vancouver,
BC, Canada V6B 2R9


(Address
of principal executive offices) (Zip Code)





(604)
688-8127


(Registrant’s
telephone no., including area code)








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
            oNon-accelerated
      filer
            o
            Smaller
      reporting company
            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 38,775,000 shares of common stock issued and outstanding as of July
21, 2008








ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)







Table
of Contents




PagePART
      I. Financial InformationItem
      1. Financial Statements.Consolidated
      Balance Sheets at May 31, 2008 (unaudited) and August 31, 2007
      (audited)
            F-1Unaudited
      Consolidated Statements of Operations for the three and nine month periods
      ended May 31, 2008 and May 31, 2007 and the Exploration Stage Period of
      August 15, 2006 to May 31, 2008
            F-2Consolidated
      Statement of Stockholders’ Equity (audited, unless otherwise
      noted)
            F-3Unaudited
      Consolidated Statements of Cash Flows for the nine month periods ended May
      31, 2008 and May 31, 2007 and the Exploration Stage Period of August 15,
      2006 to May 31, 2008
            F-4Unaudited
      Consolidated Supplemental Disclosure of Non-cash Investing and Financing
      Activities
            F-4Notes
      to Consolidated Unaudited Financial Statements
            F-5
      to F-13Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            14Item
      3. Quantitative and Qualitative Disclosures about Market
    Risk
            29Item
      4. Controls and Procedures
            30PART
      II. Other InformationItem
      1. Legal Proceedings
            31Item
      1A. Risk Factors
            31Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            36Item
      3. Defaults Upon Senior Securities
            36Item
      4. Submission of Matters to a Vote of Security Holders
            36Item
      5. Other Information
            36Item
      6. Exhibits
            36Signatures
            37
















PART
I – FINANCIAL INFORMATION







ITEM
1.  FINANCIAL STATEMENTS (unaudited)







ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)








Consolidated
Balance Sheets


May
      31, 2008
              (Unaudited)
            
            
            Year
      ended
              August
      31, 2007
              (Note
      1)ASSETSCURRENT
      ASSETSCash
            
            $
            12,617
            
            
            $
            326,381Prepaid
      expenses
            
            
            21,395
            
            
            
            -Subscription
      receivable
            
            
            -
            
            
            
            1,000,000Total current
    assets
            
            
            34,012
            
            
            
            1,326,381Total assets
            
            $
            34,012
            
            
            $
            1,326,381LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)CURRENT
      LIABILITIESCommitments
      payable (Notes 4 and 8) – current portion
            
            $
            -
            
            
            $
            7,179,407Accounts payable
            
            
            1,328
            
            
            
            66,470Account payable - related
      party
            
            
            -
            
            
            
            75,000Accrued liabilities
            
            
            -
            
            
            
            40,000Shareholder loans (Notes 5 and 6)
            
            
            222,351
            
            
            
            237,840Total current
      liabilities
            
            $
            223,679
            
            
            $
            7,598,717LONG-TERM
      LIABILITIESCommitments
      payable (Note 4) – long-term portion
            
            $
            -
            
            
            $
            2,500,000Total long-term
      liabilities
            
            $
            -
            
            
            $
            2,500,000Total liabilities
            
            $
            223,679
            
            
            $
            10,098,717COMMITMENTS
      AND CONTINGENCIES (Notes 4,5,6 and 8)
            
            
            -
            
            
            
            -STOCKHOLDERS’
      EQUITY (DEFICIT)Common
      shares, 100,000,000 shares par value $0.001 authorized,
              38,775,000
      and 38,275,000 issued and outstanding at May 31,
              2008
      and August 31, 2007 respectively (Note 7)
            
            
            38,775
            
            
            
            38,275Paid-in
      Capital (Notes 7)
            
            
            22,984,342
            
            
            
            22,584,842Accumulated
      deficit in the exploration stage
            
            
            (23,212,510
            )
            
            
            (31,382,181
            )Accumulated
      other comprehensive income (loss)
            
            
            (274
            )
            
            
            (13,272
            )Total stockholders’
      (deficit)
            
            
            (189,667
            )
            
            
            (8,772,336
            )Total liabilities and
      stockholders’ equity
            
            $
            34,012
            
            
            $
            1,326,381





F-1


The
accompanying Notes to Consolidated Financial Statements are an integral part of
this statement


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)








Consolidated
Statements of Operations


(unaudited)





Three
      Months ending
              May
      31, 2008
            
            
            (Restated)
              Three
      Months ending
              May
      31, 2007
            
            
            Nine
      Months ending
              May
      31, 2008
            
            
            (Restated)
              Nine
              Months
      ending
              May
      31, 2007
            
            
            August
      15, 2006 (inception) through
              May
      31, 2008EXPENSES:Exploration
      licenses
            
            $
            -
            
            
            $
            1,415,683
            
            
            $
            1,200,000
            
            
            $
            4,442,416
            
            
            $
            23,052,000Exploration
      expenses
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            50,215Agent
      fees
            
            
            -
            
            
            
            15,000
            
            
            
            30,000
            
            
            
            45,000
            
            
            
            1,852,500Professional
      and consultant fees
            
            
            17,667
            
            
            
            62,772
            
            
            
            156,291
            
            
            
            103,633
            
            
            
            428,705Stock-based
      compensation
              –
      officers and directors
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,975,491Investor  relations
            
            
            3,828
            
            
            
            20,521
            
            
            
            61,536
            
            
            
            45,522
            
            
            
            134,939Administrative
      expenses
            
            
            21,443
            
            
            
            19,375
            
            
            
            54,921
            
            
            
            83,618
            
            
            
            166,307Total expenses
            
            $
            42,938
            
            
            $
            1,533,351
            
            
            $
            1,502,748
            
            
            $
            4,720,189
            
            
            $
            32,660,157Net
      loss from operations
            
            $
            (43,938
            )
            
            $
            (1,533,351
            )
            
            $
            (1,502,748
            )
            
            $
            (4,720,189
            )
            
            $
            (32,660,157
            )Interest
      expense
            
            
            (2,309
            )
            
            
            (2,753
            )
            
            
            (6,988
            )
            
            
            (7,222
            )
            
            
            (17,430
            )Net
      loss from continuing operations
            
            $
            (45,247
            )
            
            $
            (1,536,104
            )
            
            $
            (1,509,736
            )
            
            $
            (4,727,411
            )
            
            $
            (32,677,587
            )Net
      loss from discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (214,330
            )OTHER
      INCOME (EXPENSE):
              Cancelation
      of debt relating tocommitments
            
            
            -
            
            
            
            -
            
            
            
            9,679,407
            
            
            
            -
            
            
            
            9,679,407Net
      Income (Loss)
            
            $
            (45,247
            )
            
            $
            (1,536,104
            )
            
            $
            8,169,671
            
            
            $
            (4,727,411
            )
            
            $
            (23,212,510
            )Income
      (Loss) per common share, basic and diluted from continuing
      operations:
            
            $
            (0.00
            )
            
            $
            (0.05
            )
            
            $
            0.21
            
            
            $
            (0.15
            )Weighted
      average shares outstanding basic and diluted
            
            
            38,529,579
            
            
            
            32,555,638
            
            
            
            38,529,579
            
            
            
            32,555,638OTHER
      COMPREHENSIVE INCOME (LOSS):Net
      Income (Loss)
            
            $
            (45,247
            )
            
            $
            (1,536,104
            )
            
            $
            8,169,671
            
            
            $
            (4,727,411
            )
            
            $
            (23,212,510
            )Foreign
      currency translation adjustment
            
            
            (427
            )
            
            
            151
            
            
            
            12,998
            
            
            
            151
            
            
            
            (274
            )Total
      Other Comprehensive Income (Loss)
            
            $
            (45,674
            )
            
            $
            (1,535,953
            )
            
            $
            8,182,669
            
            
            $
            (4,727,260
            )
            
            $
            (23,212,784
            )





F-2 The
accompanying Notes to Consolidated Financial Statements are an integral part of
this statement


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)





Consolidated
Statements of Cash Flows


(unaudited)





Nine
      Months ending
              May
      31, 2008
            
            
            (Restated)
              Nine
      Months ending
              May
      31, 2007
            
            
            August
      15, 2006 (inception) through
              May
      31, 2008Cash
      flows from operating activities:Net Income (Loss) for the
      period
            
            $
            8,169,671
            
            
            $
            (4,727,411
            )
            
            $
            (23,212,510
            )Reconciling
      adjustments:Cancelation of debt relating to
      commitments
            
            
            (9,679,407
            )
            
            
            -
            
            
            
            (9,679,407
            )Adjustments to
      reconcile net loss to net cash
              used in operating activities:Net change in operating assets
      and liabilities:Accounts
      receivable
            
            
            1,000,000
            
            
            
            2,003
            
            
            
            -Prepaid
      expenses
            
            
            (21,395
            )
            
            
            (11,096
            )
            
            
            (11,895
            )Commitments
      payable
            
            
            -
            
            
            
            -
            
            
            
            9,679,407Accounts payable and
      accrued  liabilities
            
            
            (180,142
            )
            
            
            177,110
            
            
            
            1,328Net
      cash provided (used) by operating activities
            
            
            (711,273
            )
            
            
            (4,559,394
            )
            
            
            (23,223,077
            )Cash
      flows provided (used) by discontinued operating activities
            
            
            -
            
            
            
            -
            
            
            
            203,586Cash
      flows from financing activities:Common stock issued for
      cash
            
            
            400,000
            
            
            
            4,500,000
            
            
            
            7,193,860Common stock issued for
      compensation
            
            
            -
            
            
            
            -
            
            
            
            1,150,000Additional Paid-In Capital
      relating to Options
            
            
            -
            
            
            
            -
            
            
            
            5,825,491Common stock issued for license fee payments
            
            
            -
            
            
            
            -
            
            
            
            7,050,000Common stock issued for agent fee
      payments
            
            
            -
            
            
            
            -
            
            
            
            1,762,500Loans from
      shareholders
            
            
            (15,489
            )
            
            
            72,142
            
            
            
            50,459Net
      cash provided by financing activities
            
            
            384,511
            
            
            
            4,572,142
            
            
            
            23,032,310Effect
      of foreign currency translation
            
            
            12,998
            
            
            
            151
            
            
            
            (274
            )Net
      increase (decrease) in cash
            
            
            (313,764
            )
            
            
            12,899
            
            
            
            12,545Cash,
      beginning of period
            
            
            326,381
            
            
            
            72
            
            
            
            72Cash,
      end of period
            
            $
            12,617
            
            
            $
            12,971
            
            
            $
            12,617








Supplemental
Disclosure of Non-cash Investing and Financing Activities
(unaudited)





Nine
      Months ending
              May
      31, 2008
            
            
            Nine
      Months ending
              May
      31, 2007
            
            
            August
      15, 2006 (inception) through
              May
      31, 2008Cancelation
      of debt relating to commitments
            
            
            (9,679,407
            )
            
            
            -
            
            
            
            (9,679,407
            )











F-3


The
accompanying Notes to Consolidated Financial Statements are an integral part of
this statement


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)





Notes
to Consolidated Financial Statements








NOTE
1 – Nature of Business and Basis of Presentation





Asian
Dragon Group Inc. (“Asian Dragon”, “ADG”, “We”, the “Registrant”, or the
“Company”) was incorporated as a Nevada corporation on June 11, 2003. Asian
Dragon was established to develop projects which focus on China’s growing
precious and base metals reserves and markets. 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. On April
10, 2008 the Company incorporated a British Columbia company named Asian Dragon
Silver Inc. (“ADSI”) as a wholly owned subsidiary. The financial statements of
the Company are presented on a consolidated basis and include all accounts of
both the Company and its subsidiary. The consolidated unaudited financial
statements as of May 31, 2008 included herein have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange
Commission.  Certain information and footnote disclosures normally included
in financial statements prepared in accordance with United States generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations.  In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.  It is suggested that these financial
statements be read in conjunction with the August 31, 2007 audited financial
statements and notes thereto.





Exploration
Stage Activities





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





Reclassifications





Certain
account balances have been reclassified to conform to current period
presentation.





NOTE
2 – 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 an
operating loss from continuing operations for the nine month period ending May
31, 2008 of $(1,509,736) and has accumulated operating losses since its
inception in the amount of $(23,212,510). Additionally the Company has a deficit
in working capital and stockholders equity and has had limited business
operations, which raises substantial doubt about the Company’s ability to
continue as a going concern. The continuation of the Company is dependent on
many factors, many of which have a high degree of uncertainty.





During
the nine months ended May 31, 2008, we addressed the going concern issue by
completing a private placement of 500,000 common shares at $0.80 per share for
aggregate proceeds of $400,000. 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 is attempting to raise additional funds to





F-4


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)





Notes
to Consolidated Financial Statements








finance
the operating and capital requirements of the Company through a combination of
equity and debt financings. While the Company is making 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. The accompanying financial
statements do not include any adjustments that might result from the resolution
of these matters.





NOTE
3 – Exploration License Agreements





Jinjishan
Property and Concentration Plant





The
Jinjishan License consists of an Exploration License on a contiguous 28.3 sq km
property located in the Northwest part of the Luoning County, Henan Province,
China, in the Changshui community. The Jinjishan Plant is located in the same
area and we note that this formerly operating plant, and other infrastructure
and buildings acquired in each of our Exploration License purchases to date
entirely, and without exception, have no value from an accounting or operational
perspective due to age and state of repair.





Asian
Dragon entered into an agreement (the “Jinjishan Rights Agreement”) with World
Fortune Enterprise, Inc. (“WFEI”) effective August 29, 2007, to acquire a 70%
interest in The Jinjishan License (the “Jinjishan Rights”) and a 100% interest
in the Jinjishan Plant (collectively the “Jinjishan Interests”). Under the
Jinjishan Rights Agreement Asian Dragon assumed the payment responsibilities of
WFEI for the Jinjishan Interests.





WFEI does
not own the exploration license referenced in the Jinjishan Rights Agreement
with Asian Dragon. Rather, WFEI has an agreement with Luoyang Canadian United
Mining Ltd. (“LCUML”) for the Jinjishan Interests. LCUML owns the rights for the
Jinjishan Interests and WFEI has represented, pursuant to the Jinjishan Rights
Agreement, that once WFEI has acquired clear title to the Jinjishan Interests
from LCUML it will assign the rights to Asian Dragon and that those rights will
be free and clear of all transfer, assignment, liens, charges, or encumbrances
of any kind. WFEI has also represented that when it acquires clear title to the
Jinjishan Interests, it will have the right and authority to transfer those
rights to Asian Dragon.





Asian
Dragon is not a party to the agreement between WFEI and LCUML. Nor is it a party
to the agreement between LCUML and the party that previously owned the rights to
the Jinjishan Interests and may have little or no recourse on LCUML, or the
party from whom LCUML purchased the rights, in the event that the Jinjishan
Rights Agreement, or subsequent agreements between WFEI and Asian Dragon, do not
comply with the agreements between these third parties. However, Asian Dragon
has received an attorney’s letter stating that these third party agreements are
valid. Transfer of any rights in any of the above agreements will not be
complete until all payments are completed.





Asian
Dragon issued 250,000 shares of its common stock to WFEI on August 29, 2007 and
an additional 1,000,000 shares to WFEI nominees in regards to the Jinjishan
Rights Agreement.





The
Jinjishan Rights Agreement required payment of $2,500,000 for the Jinjishan
License and $800,000 for the Jinjishan Plant for total consideration of
$3,300,000. The Jinjishan Rights Agreement acknowledged Asian Dragon
provided





F-5


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)





Notes
to Consolidated Financial Statements








payments
totaling US$1,792,593 to August 29, 2007 (inclusive of a payment of US$600,000
toward the Jinjishan Plant) and required further investment by Asian Dragon as
follows: (i) US$507,407 by October 1, 2007; (ii) US$500,000 by March 1, 2008;
and (iii) US$500,000 by October 1, 2008.





The
Company did not make payment of installment one of the Jinjishan commitment to
WFEI due October 1, 2007 and was in default as to $507,407toward the Jinjishan
Agreement as of the end of the quarter ended November 30, 2007. A discussion was
held with WFEI and LCUML regarding this matter and WFEI agreed to extend the
payment schedule to accommodate this default. No damages were claimed by WFEI or
LCUML.





On
December 12, 2007, with the mutual consent of WFEI, the Jinjishan Rights
Agreement was replaced with the “Jinjishan Agreement” which clarified certain
terminology in the predecessor agreements but maintained the same payment terms.
This agreement was filed with our year-end Report on Form 10-K as Exhibit 10.1.
WFEI provided Asian Dragon with an undertaking that it extinguished all rights
to any payments under the predecessor agreements and has acknowledged that it
recorded all cash and share payments made under the predecessor agreements as
payments under the Jinjishan Agreement.





The
Company did not make payment of the $500,000 installment two of the Jinjishan
commitment to WFEI which was due March 1, 2008 and was in default as to a total
of $1,007,407 toward the Jinjishan Agreement. A discussion was held with WFEI
and LCUML regarding this matter and WFEI agreed to extend the payment terms to
accommodate this default. No damages were claimed by WFEI or LCUML.





On April
14, 2008 with the mutual consent of WFEI, the Jinjishan Agreement was replaced
with the “Jinjishan (Revised) Agreement” in which WFEI provided Asian Dragon
with certain indemnifications which allowed a reclassification to $nil of
certain short term and long term commitments payable, recorded as a total of
$1,499,407 at August 31, 2007. This agreement is attached to our quarterly
report on Form 10-Q for the period ending February 29, 2008 as Exhibit
10.1.





Loning
Property





The
Loning License consists of an Exploration License on a 9.1 sq km property
located in the Xiaoqinling Region, China, and is three km southwest of the
Jinjishan License.





Asian
Dragon entered into an agreement (the “Loning Rights Agreement”) with WFEI
effective August 29, 2007, to acquire a 70% interest in the Loning License (the
“Loning Rights”). Under the Loning Rights Agreement, Asian Dragon assumed the
payment responsibilities of WFEI for the Loning License.





WFEI does
not own the exploration license referenced in the Loning Rights Agreement with
Asian Dragon. Rather, WFEI has an agreement with Henan Yunfeng Resource of
Mining Development Co. (“Yunfeng”) for the Loning Rights. However, Yunfeng does
not own the Loning License, but has entered into a purchase agreement with a
third party for the Loning License. WFEI has represented, pursuant to the Loning
Rights Agreement, that once it has acquired clear title to the Loning Rights
from Yunfeng, it will assign those rights to Asian Dragon and that the rights
will be free and clear of all transfer, assignment, liens, charges,
or





F-6


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)





Notes
to Consolidated Financial Statements








encumbrances
of any kind. WFEI has also represented that when it has clear title to the
Loning Rights, it will have the right and authority to transfer those rights to
Asian Dragon.


Asian
Dragon is not a party to the agreement between WFEI and Yunfeng. Nor is it a
party to the agreement between Yunfeng and the party that previously owned the
Loning Rights and may have little or no recourse on Yunfeng or the party from
whom Yunfeng purchased the rights, in the event that the Loning Rights
Agreement, or subsequent agreements between WFEI and Asian Dragon, do not comply
with the agreements between these third parties. However, Asian Dragon has
received an attorney’s letter stating that these third party agreements are
valid. Transfer of any rights in any of the above agreements will not be
complete until all payments are completed.





Asian
Dragon issued 250,000 shares of its common stock to WFEI on August 29, 2007 and
an additional 1,000,000 shares to WFEI nominees in regards to the Loning Rights
Agreement.





The
Loning Rights Agreement required total payments by Asian Dragon of $1,510,000,
of which $1,000,000 was to be expended by Asian Dragon for exploration purposes.
The Loning Rights Agreement acknowledged Asian Dragon has provided payments
totaling US$400,000 to August 29, 2007 and required further investment by Asian
Dragon as follows: (i) US$110,000 by March 1, 2008; (ii) US$500,000 by September
30, 2008; and (iii) US$500,000 by September 30, 2009.





On August
29, 2007 the Company made a payment of $27,454 to WFEI toward Loning commitment
installment one which was due October 1, 2007. Subsequently the Company has not
completed full payment of installment one and is in default as to $82,546 toward
the Loning Agreement. A discussion was held with WFEI and Yunfeng regarding this
matter and WFEI agreed to extend the payment schedule to accommodate this
default. No damages were claimed by WFEI or Yunfeng.





On
December 12, 2007, with the mutual consent of WFEI, the Loning Rights Agreement
was replaced with the “Loning Agreement” which clarified certain terminology in
the predecessor agreements, but maintained the same payment terms. This
agreement was filed with our year-end Report on Form 10-K as Exhibit 10.2. WFEI
provided Asian Dragon with an undertaking that it extinguished all rights to any
payments under the predecessor agreements and has acknowledged that it recorded
all cash and share payments made under the predecessor agreements as payments
respectively under the Loning Agreement.





On April
14, 2008 with the mutual consent of WFEI, the Loning Agreement was replaced with
the “Loning (Revised) Agreement” in which WFEI provided Asian Dragon with
certain indemnifications which allowed a reclassification to $nil of certain
short term and long term commitments payable, recorded as a total of $1,076,822
at August 31, 2007. This agreement is attached to our quarterly report on Form
10-Q for the period ending February 29, 2008 as Exhibit 10.2. As of April 14,
2008, Asian Dragon was in default as to a total of $82,546 toward the Loning
(Revised) Agreement.




















F-7


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)





Notes
to Consolidated Financial Statements








Luanchuan
Mozigou Molybdenum Property


Lushi
Jiashapa Vanadium Property


Luoning
Xiayu Fanggelewan Silver-Lead Property


XWG
Silver-Lead Property





The MZG
License consists of an Exploration License on a 14.09 sq km property located in
the Jiaohe Village of Luanchuan County, Henan Province, China. The JSP License
consists of an Exploration License on an 8.3 sq km property located in the area
of Wenguxiang to Dashihe in Lushi County, Henan Province, China. The FGLW
License consists of a 1.75 sq km exploration license located approximately 240
km west of Zhengzhou and 80 km west of Luoyang. The XWG License consists of a
2.13 sq km exploration license located in the area of Xiayu, Henan Province,
China. (Collectively, these licenses are hereafter referenced as the “Fuding
Properties”).





Asian
Dragon entered into an agreement (the “Fuding Rights Agreement”) with WFEI
effective August 29, 2007, to acquire a 51% interest in the Fuding Properties
(the “Fuding Rights”). Under the Fuding Agreement, Asian Dragon assumed the
payment responsibilities of WFEI for the various rights and
interests.





WFEI does
not own the interests referenced in the Fuding Rights Agreement with Asian
Dragon. Rather, WFEI has an agreement with Luoning Fuding Mining Development,
Ltd. (“Fuding”) for those interests. However, Fuding does not own the rights,
but has entered into purchase agreements for the Fuding Properties with other
third parties. WFEI has represented, pursuant to the Fuding Rights Agreement
that once it has clear title to the Fuding Rights from Fuding it will assign the
rights to Asian Dragon and that those rights will be free and clear of all
transfer, assignment, liens, charges, or encumbrances of any kind. WFEI has also
represented that when it has clear title to the Fuding Rights, it will have the
right and authority to transfer those rights to Asian Dragon.





Asian
Dragon is not a party to the agreement between WFEI and Fuding. Nor is it a
party to the agreements between Fuding and the third parties who previously
owned the Fuding Rights and may have little or no recourse on Fuding, or the
other third parties with whom Funding has entered into purchase agreements, in
the event that the Fuding Rights Agreement, or subsequent agreements between
WFEI and Asian Dragon do not comply with the agreements between these third
parties. However, Asian Dragon has received an attorney’s letter stating that
these third party agreements are valid. Transfer of any rights in any of the
above agreements will not be complete until all payments are
completed.





Asian
Dragon issued 250,000 shares of its common stock to WFEI on August 29, 2007 and
an additional 1,000,000 shares to WFEI nominees in regards to the Fuding Rights
Agreement.





The
Fuding Agreement required total consideration of $10,000,000. The Fuding Rights
Agreement acknowledged Asian Dragon provided an initial payment of $2,730,000
and required further payments as follows: $1,270,000 on October 1, 2007;
$2,000,000 before March 1, 2008; $2,000,000 on June 1, 2008; and $2,000,000 on
October 1, 2008.

















F-8


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)





Notes
to Consolidated Financial Statements








On August
29, 2007 and September 14, 2007 the Company made payments of $172,546 and
$800,000 respectively toward Fuding commitment installment one which was due
October 1, 2007. These payments totaled $972,546 and were not sufficient to meet
the full amount of Fuding commitment installment one prior to October 1, 2007.
As such, the Company was in default as to $297,454 regarding the Fuding
Agreement at the end of the quarter ended November 30, 2007. A discussion was
held with WFEI and Fuding regarding this matter and WFEI agreed to extend the
payment schedule to accommodate this default. No damages were claimed by WFEI or
Fuding. During the quarter ended May 31, 2008, on January 14, 2008 the Company
completed payment of the remaining $297,454 regarding Fuding installment
one.





On
December 12, 2007, with the mutual consent of WFEI, the Fuding Rights Agreement
was replaced with the “Fuding Agreement” which clarified certain terminology in
the predecessor agreements, but maintained the same payment terms. This
agreement was filed with our year-end Report on Form 10-K as Exhibits 10.3. WFEI
provided Asian Dragon with an undertaking that it extinguished all rights to any
payments under the predecessor agreements and has acknowledged that it recorded
all cash and share payments made under the predecessor agreements as payments
under the Fuding Agreement.





On
January 14, 2008 the Company made a payment of $102,546 toward Fuding
installment two but the Company did not complete full payment of installment two
of the Fuding commitment prior to the deadline on March 1, 2008 and was in
default as to $1,897,454 toward the Fuding Agreement. A discussion was held with
WFEI and Fuding regarding this matter and WFEI agreed to extend the payment
schedule to accommodate this default. No damages were claimed by WFEI or
Fuding.





On April
14, 2008 with the mutual consent of WFEI, the Fuding Agreement was replaced with
the “Fuding (Revised) Agreement” in which WFEI provided Asian Dragon with
certain indemnifications which allowed a reclassification to $nil of certain
short term and long term commitments payable, recorded as a total of $7,103,178
at August 31, 2007. This agreement is attached to our quarterly report on Form
10-Q for the period ending February 29, 2008 as Exhibit 10.3. As of April 14,
2008, Asian Dragon was in default as to a total of $1,897,454 toward the Fuding
(Revised) Agreement.





On April
30, 2008 with the mutual consent of WFEI, the FGLW and XWG properties included
in Fuding (Revised) Agreement were assigned by the Company to its subsidiary
Asian Dragon Silver Inc. in return for a commitment from ADSI to issue the
Company 20,500,000 shares of the common stock of ADSI. The FGLW-XWG Transfer
Agreement which governed this transaction was filed as Exhibit 10.1 to a Form
8-K filed April 30, 2008.





Subsequent
to the end of the quarter ended May 31, 2008, neither the Company nor ADSI made
payment of installment three of the Fuding commitment prior to the deadline on
June 1, 2008 and were in default as to a total $3,897,454 toward the Fuding
(Revised) Agreement. A discussion was held with WFEI and Fuding regarding this
matter and WFEI agreed to extend the payment schedule to accommodate this
default. No damages were claimed by WFEI or Fuding.























F-9


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)





Notes
to Consolidated Financial Statements








NOTE
4 – Commitments and Contingencies





Exploration
License Transfers Contingencies





The
Company has secured an attorney’s review of the agreements which transfer the
Exploration Licenses of which it is in the process of acquiring, and to the best
of its knowledge, all of these Agreements are in good standing. However, the
Exploration Licenses may be subject to prior unregistered agreements or
transfers and title may be affected by undetected defects. There may be valid
challenges to the title of the Company’s Exploration Licenses, once acquired,
which, if successful, could impair development and/or operations. The Company
cannot give any assurance that title to its Exploration Licenses will not be
challenged.





In
addition the Company is relying on a series of agreements between Chinese
companies and entities to ultimately transfer title of the Exploration Licenses
to the Company. While the Company has relied on opinions provided by Chinese
counsel and to the best of its knowledge these agreements will effectively
transfer title, the agreements and the transfer may be affected by undetected
defects and the Company cannot give any assurance that the transfer of title to
the Company will not be challenged.





If a
material defect in the transfer of any Exploration Licenses for which the
Company is currently in the process of acquiring were to occur, the Company may
in the future be required to record an impairment to any future capitalized
amounts it had recorded relating to its Exploration Licenses or exploration
activities. Such would not be the case at present however, because the Company
has not yet capitalized any amounts with respect to its exploration
activities.





License Issuance
Contingencies





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 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 and is
subject to the risk of non-renewal. To date all Joint Venture business licenses
have been issued to the Mining JVs formed by WFEI and its Chinese
partners.














F-10


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)





Notes
to Consolidated Financial Statements








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. To
date, all exploration licenses which have been granted regarding properties for
which Asian Dragon has entered purchase agreements have been issued at the
local-level. This raises the contingency that MOLAR may deem these licenses lack
validity, or require further applications be submitted to it regarding these
properties.





Once the
Company has performed sufficient work on a property to determine that it has
value it must develop and submit a Development Report to the Chinese Government.
This report forms a part of the application for a mining permit. There is no
assurance that any applicant will be granted a mining license and therefore this
represents a contingency risk for the Company’s future operations.





Financial
Commitments





The
Company’s remaining commitments under its Agreements referenced in NOTE 3 are as
follows:





PART ONE – Monetary
Commitments:








Commitment
      Item
            
            Installments
              Required
            
            
            Payments
              Made
            
            
            Balance
      Due
            
            DeadlinesJinjishan
      (Revised) Agreement:-
      initial payment
            
            $
            1,792,593
            
            
            $
            1,792,593
            
            
            $
      Nil
            
            August
      29, 2007-
      installment one (1)
            
            
            507,407
            
            
            
            -
            
            
            
            507,407
            
            October
      1, 2007-
      installment two (1)
            
            
            500,000
            
            
            
            -
            
            
            
            500,000
            
            March
      1, 2008-
      installment three
            
            
            500,000
            
            
            
            -
            
            
            
            500,000
            
            October
      1, 2008Sub-total
            
            $
            3,300,000
            
            
            $
            1,792,593
            
            
            $
            1,507,407Loning
      (Revised) Agreement:-
      initial payment
            
            $
            400,000
            
            
            $
            400,000
            
            
            $
      Nil
            
            August
      29, 2007-
      installment one (2)
            
            
            110,000
            
            
            
            27,454
            
            
            
            82,546
            
            March
      1, 2008-
      installment two (3)
            
            
            500,000
            
            
            
            -
            
            
            
            500,000
            
            September
      30, 2008-
      installment three (3)
            
            
            500,000
            
            
            
            -
            
            
            
            500,000
            
            September
      30, 2009Sub-total
            
            $
            1,510,000
            
            
            $
            427,454
            
            
            $
            1,082,546(continued)




















F-11


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)




Notes
to Consolidated Financial Statements








PART ONE – Monetary
Commitments (continued):





Fuding (Revised) Agreement:-
      initial payment
            
            $
            2,730,000
            
            
            $
            2,730,000
            
            
            $
      Nil
            
            August
      29, 2007-
      installment one (4)
            
            
            1,270,000
            
            
            
            1,270,000
            
            
            Nil
            
            October
      1, 2007-
      installment two (4)
            
            
            2,000,000
            
            
            
            102,546
            
            
            
            1,897,454
            
            March
      1, 2008-
      installment three (4)
            
            
            2,000,000
            
            
            
            -
            
            
            
            2,000,000
            
            June
      1, 2008-
      installment four
            
            
            2,000,000
            
            
            
            -
            
            
            
            2,000,000
            
            October
      1, 2008Sub
      –total
            
            $
            10,000,000
            
            
            $
            4,102,546
            
            
            $
            5,897,454Grand
      Totals
            
            
            
            
            
            $
            6,322,593
            
            
            $
            8,487,407NOTES:(1)
            The
      Company is presently in default regarding the Jinjishan (Revised)
      Agreement as to $1,007,407.(2)
            The
      Company is presently in default regarding the Loning (Revised) Agreement
      as to $82,546.(3)
            The
      final two payments included in the Loning Agreement of $500,000 are not
      due to WFEI, but are instead agreed to be spentby
      ADG for exploration expenses to develop the Loning Property.(4)
            The
      Company is presently in default regarding the Fuding (Revised) Agreement
      in the amount of $3,897,454.








NOTE
5 – Shareholder Loan





At May
31, 2008, the Company had two shareholder loans outstanding from related parties
totaling $222,351 which included $6,988 of accrued interest for the nine month
period. These loans are uncollateralized and have no fixed repayment dates.
During the nine months ending May 31, 2008 a repayment of $52,937 was made
toward one shareholder loan.





NOTE
6 – Related Party Transactions





During
the three months ending May 31, 2008 related party transactions included the
shareholder loan activity recorded in Note 5 and the provision of office
facilities by our CEO for no charge.





NOTE
7 – Common Stock





At August
31, 2007 a $1,000,000 subscription receivable was recorded regarding a private
placement completed during fiscal 2007. This was collected in full on September
13, 2007.








F-12


ASIAN
DRAGON GROUP INC.


(an
Exploration Stage Company)




Notes
to Consolidated Financial Statements








On
January 14, 2008, the Company completed a private placement sale of 500,000
shares of its common stock at $0.80 per share for aggregate proceeds of
$400,000.





NOTE
8 – Subsequent Events




Subsequent
to the May 31, 2008 quarter end, the Company did not fulfill its Fuding
(Revised) Agreement installment three payment of $2,000,000 which was due June
1, 2008 and was in default in the amount of $3,897,454. A discussion was held
with WFEI and Fuding and WFEI agreed to extend the payment schedule. No damages
were claimed by WFEI or Fuding.





















































F-13


ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS




Certain
information included herein contains forward-looking statements that involve
risks and uncertainties within the meaning of Sections 27A of the Securities
Act, as amended; Section 21E of the Securities Exchange Act of 1934. These
sections provide that the safe harbor for forward looking statements does not
apply to statements made in initial public offerings. The words, such as "may,"
"would," "could," "anticipate," "estimate," "plans," "potential," "projects,"
"continuing," "ongoing," "expects," "believe," "intend" and similar expressions
and variations thereof are intended to identify forward-looking statements.
These statements appear in a number of places in this Form 10-Q and include all
statements that are not statements of historical fact regarding intent, belief
or current expectations of the Company, our directors or our officers, with
respect to, among other things: (i) our liquidity and capital resources; (ii)
our financing opportunities and plans; (iii) continued development of business
opportunities; (iv) market and other trends affecting our future financial
condition; (v) our growth and operating strategy. Investors and prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. The factors that might cause such
differences include, among others, the following: (i) we have incurred
significant losses since our inception; (ii) any material inability to
successfully develop our business plans; (iii) any adverse effect or limitations
caused by government regulations; (iv) any adverse effect on our ability to
obtain acceptable financing; (v) competitive factors; and (vi) other risks
including those identified in our other filings with the Securities and Exchange
Commission.





General





Asian
Dragon was established to develop projects which focus on China’s growing
precious and base metals reserves and markets.





Asian
Dragon Group Inc. (“Asian Dragon”, “ADG”, “we”, the “Registrant”, or the
“Company”) was incorporated in Nevada on June 11, 2003 and on August 10, 2006
filed Articles of Amendment with the Nevada Secretary of State to change its
name to Asian Dragon Group Inc. Our fiscal year end is August 31st.





On April
10, 2008 the Company incorporated a British Columbia company named Asian Dragon
Silver Inc. (“ADSI”) as a wholly owned subsidiary. The financial statements of
the Company are presented on a consolidated basis and include all accounts of
both the Company and its 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”.





Business
Development





Asian
Dragon has developed it business by using World Fortune Enterprise Inc. (“WFEI”)
as its Agent. The nature of the business arrangement between Asian Dragon and
WFEI is based upon: (i) WFEI acting as Asian Dragon’s Agent in China to source
exploration opportunities; (ii) WFEI executing contracts with partners in China
which provide access to certain exploration opportunities based upon certain
payment schedules; and (iii) WFEI entering agreements with Asian Dragon to sell
to Asian Dragon, based on certain payment schedules, the exploration licenses
which WFEI has contracted to acquire. Under its current agreements, Asian Dragon
has no recourse on WFEI in the event that WFEI were to fail to meet its
contractual obligations to flow funds WFEI receives from Asian Dragon through to
WFEI’s Chinese Partners, or if WFEI were to fail to meet any other non-monetary
obligations.





14


At
present Asian Dragon has not acquired any of the Exploration Licenses which are
referenced in its agreements. Such acquisitions will occur upon Asian Dragon
completing all payments under its agreements with WFEI; and WFEI fulfilling all
requirements under WFEI’s agreements with it Chinese Partners.





Exploration
Licenses





General





We note
the Company has acquired along with certain licenses infrastructure including
buildings and a formerly operating concentration mill. This entire
infrastructure, without exception, has no value from an accounting or
operational perspective due to its age and state of repair.





At
present the Exploration Licenses described below have no carrying value for
accounting purposes because Asian Dragon does not yet have full title to each.
The information which follows is meant to provide the reader of this Report with
full information regarding the Company’s initiatives.





Jinjishan
Property and Concentration Plant





The
Jinjishan License consists of an Exploration License on a contiguous 28.3 sq km
property located in the Northwest part of the Luoning County, Henan Province,
China, in the Changshui community. The Jinjishan Plant is located in the same
area and we note that this formerly operating plant, and other infrastructure
and buildings acquired in each of our Exploration License purchases to date
entirely, and without exception, have no value from an accounting or operational
perspective due to age and state of repair.





Asian
Dragon entered into an agreement (the “Jinjishan Rights Agreement”) with World
Fortune Enterprise, Inc. (“WFEI”) effective August 29, 2007, to acquire a 70%
interest in The Jinjishan License (the “Jinjishan Rights”) and a 100% interest
in the Jinjishan Plant (collectively the “Jinjishan Interests”). Under the
Jinjishan Rights Agreement Asian Dragon assumed the payment responsibilities of
WFEI for the Jinjishan Interests.





WFEI does
not own the exploration license referenced in the Jinjishan Rights Agreement
with Asian Dragon. Rather, WFEI has an agreement with Luoyang Canadian United
Mining Ltd. (“LCUML”) for the Jinjishan Interests. LCUML owns the rights for the
Jinjishan Interests and WFEI has represented, pursuant to the Jinjishan Rights
Agreement, that once WFEI has acquired clear title to the Jinjishan Interests
from LCUML it will assign the rights to Asian Dragon and that those rights will
be free and clear of all transfer, assignment, liens, charges, or encumbrances
of any kind. WFEI has also represented that when it acquires clear title to the
Jinjishan Interests, it will have the right and authority to transfer those
rights to Asian Dragon.





Asian
Dragon is not a party to the agreement between WFEI and LCUML. Nor is it a party
to the agreement between LCUML and the party that previously owned the rights to
the Jinjishan Interests and may have little or no recourse on LCUML, or the
party from whom LCUML purchased the rights, in the event that the Jinjishan
Rights Agreement, or subsequent agreements between WFEI and Asian Dragon do not
comply with the agreements between these third parties. However, Asian Dragon
has received an attorney’s letter stating that these third party agreements are
valid. Transfer of any rights in any of the above agreements will not be
complete until all payments are completed.





Asian
Dragon issued 250,000 shares of its common stock to WFEI on August 29, 2007 and
an additional 1,000,000 shares to WFEI nominees in regards to the Jinjishan
Rights Agreement.








15


The terms
of the Jinjishan Rights Agreement required payments of $2,500,000 for the
Jinjishan License and $800,000 for the Jinjishan Plant, for total consideration
of $3,300,000. The Jinjishan Rights Agreement acknowledged Asian Dragon provided
payments totaling US$1,792,593 to August 29, 2007 (inclusive of a payment of
US$600,000 toward the Jinjishan Plant) and required further investment by Asian
Dragon as follows: (i) US$507,407 by October 1, 2007; (ii) US$500,000 by March
1, 2008; and (iii) US$500,000 by October 1, 2008.





The
Company did not make payment of installment one of the Jinjishan commitment to
WFEI due October 1, 2007 and was in default as to $507,407toward the Jinjishan
Agreement as of the end of the quarter ended November 30, 2007. A discussion was
held with WFEI and LCUML regarding this matter and WFEI agreed to extend the
payment schedule to accommodate this default. No damages were claimed by WFEI or
LCUML.





On
December 12, 2007, with the mutual consent of WFEI, the Jinjishan Rights
Agreement was replaced with the “Jinjishan Agreement” which clarified certain
terminology in the predecessor agreements but maintained the same payment terms.
This agreement was filed with our year-end Report on Form 10-K as Exhibit 10.1.
WFEI provided Asian Dragon with an undertaking that it extinguished all rights
to any payments under the predecessor agreements and has acknowledged that it
recorded all cash and share payments made under the predecessor agreements as
payments under the Jinjishan Agreement.





The
Company did not make payment of the $500,000 installment two of the Jinjishan
commitment to WFEI which was due March 1, 2008 and was in default as to a total
of $1,007,407 toward the Jinjishan Agreement. A discussion was held with WFEI
and LCUML regarding this matter and WFEI agreed to extend the payment terms to
accommodate this default. No damages were claimed by WFEI or LCUML.





On April
14, 2008 with the mutual consent of WFEI, the Jinjishan Agreement was replaced
with the “Jinjishan (Revised) Agreement” in which WFEI provided Asian Dragon
with certain indemnifications which allowed a reclassification to $nil of
certain short term and long term commitments payable, recorded as a total of
$1,499,407 at August 31, 2007. This agreement is attached to our quarterly
report on Form 10-Q for the period ending February 29, 2008 as Exhibit
10.1.





Loning
Property





The
Loning License consists of an Exploration License on a 9.1 sq km property
located in the Xiaoqinling Region, China, and is three km southwest of the
Jinjishan License. Asian Dragon entered into an agreement (the “Loning Rights
Agreement”) with WFEI effective August 29, 2007, to acquire a 70% interest in
the Loning License (the “Loning Rights”). Under the Loning Rights Agreement,
Asian Dragon assumed the payment responsibilities of WFEI for the Loning
License.





WFEI does
not own the exploration license referenced in the Loning Rights Agreement with
Asian Dragon. Rather, WFEI has an agreement with Henan Yunfeng Resource of
Mining Development Co. (“Yunfeng”) for the Loning Rights. However, Yunfeng does
not own the Loning License, but has entered into a purchase agreement with a
third party for the Loning License. WFEI has represented, pursuant to the Loning
Rights Agreement, that once it has acquired clear title to the Loning Rights
from Yunfeng, it will assign those rights to Asian Dragon and that the rights
will be free and clear of all transfer, assignment, liens, charges, or
encumbrances of any kind. WFEI has also represented that when it has clear title
to the Loning Rights, it will have the right and authority to transfer those
rights to Asian Dragon.








16


Asian
Dragon is not a party to the agreement between WFEI and Yunfeng. Nor is it a
party to the agreement between Yunfeng and the party that previously owned the
Loning Rights and may have little or no recourse on Yunfeng or the party from
whom Yunfeng purchased the rights, in the event that the Loning Rights
Agreement, or subsequent agreements between WFEI and Asian Dragon, do not comply
with the agreements between these third parties. However, Asian Dragon has
received an attorney’s letter stating that these third party agreements are
valid. Transfer of any rights in any of the above agreements will not be
complete until all payments are completed.





Asian
Dragon issued 250,000 shares of its common stock to WFEI on August 29, 2007 and
an additional 1,000,000 shares to WFEI nominees in regards to the Loning Rights
Agreement.





The
Loning Rights Agreement required total payments by Asian Dragon of $1,510,000,
of which $1,000,000 is to be expended by Asian Dragon for exploration purposes.
The Loning Rights Agreement acknowledged Asian Dragon has provided payments
totaling US$400,000 to August 29, 2007 and required further investment by Asian
Dragon as follows: (i) US$110,000 by March 1, 2008; (ii) US$500,000 by September
30, 2008; and (iii) US$500,000 by September 30, 2009.





On August
29, 2007 the Company made a payment of $27,454 to WFEI toward Loning commitment
installment one which was due October 1, 2007. Subsequently the Company has not
completed full payment of installment one and is currently in default as to
$82,546 toward the Loning Agreement. A discussion was held with WFEI and Yunfeng
regarding this matter and WFEI agreed to extend the payment schedule to
accommodate this default. No damages were claimed by WFEI or
Yunfeng.





On
December 12, 2007, with the mutual consent of WFEI, the Loning Rights Agreement
was replaced with the “Loning Agreement” which clarified certain terminology in
the predecessor agreements, but maintained the same payment terms. This
agreement was filed with our year-end Report on Form 10-K as Exhibit 10.2. WFEI
provided Asian Dragon with an undertaking that it extinguished all rights to any
payments under the predecessor agreements and has acknowledged that it recorded
all cash and share payments made under the predecessor agreements as payments
respectively under the Loning Agreement.





On April
14, 2008 with the mutual consent of WFEI, the Loning Agreement was replaced with
the “Loning (Revised) Agreement” in which WFEI provided Asian Dragon with
certain indemnifications which allowed a reclassification to $nil of certain
short term and long term commitments payable, recorded as a total of $1,076,822
at August 31, 2007. This agreement is attached to our quarterly report on Form
10-Q for the period ending February 29, 2008 as Exhibit 10.2. As of April 14,
2008, Asian Dragon was in default as to a total of $82,546 toward the Loning
(Revised) Agreement.





Luanchuan
Mozigou Molybdenum Property


Lushi
Jiashapa Vanadium Property


Luoning
Xiayu Fanggelewan Silver-Lead Property


XWG
Silver-Lead Property





The MZG
License consists of an Exploration License on a 14.09 sq km property located in
the Jiaohe Village of Luanchuan County, Henan Province, China. The JSP License
consists of an Exploration License on an 8.3 sq km property located in the area
of Wenguxiang to Dashihe in Lushi County, Henan Province, China. The FGLW
License consists of a 1.75 sq km exploration license located approximately 240
km west of Zhengzhou and 80 km west of Luoyang. The XWG License consists of a
2.13 sq km exploration license located in the area of Xiayu, Henan Province,
China. (Collectively, these licenses are hereafter referenced as the “Fuding
Properties”).











17


Asian
Dragon entered into an agreement (the “Fuding Rights Agreement”) with WFEI
effective August 29, 2007, to acquire a 51% interest in the Fuding Properties
(the “Fuding Rights”). Under the Fuding Agreement, Asian Dragon will assume the
payment responsibilities of WFEI for the various rights and
interests.





WFEI does
not own the interests referenced in the Fuding Rights Agreement with Asian
Dragon. Rather, WFEI has an agreement with Luoning Fuding Mining Development,
Ltd. (“Fuding”) for those interests. However, Fuding does not own the rights,
but has entered into purchase agreements for the Fuding Properties with other
third parties. WFEI has represented, pursuant to the Fuding Rights Agreement,
that once it has clear title to the Fuding Rights from Fuding it will assign the
rights to Asian Dragon and that those rights will be free and clear of all
transfer, assignment, liens, charges, or encumbrances of any kind. WFEI has also
represented that when it has clear title to the Fuding Rights, it will have the
right and authority to transfer those rights to Asian Dragon.





Asian
Dragon is not a party to the agreement between WFEI and Fuding. Nor is it a
party to the agreements between Fuding and the third parties who previously
owned the Fuding Rights and may have little or no recourse on Fuding, or the
other third parties with whom Funding has entered into purchase agreements, in
the event that the Fuding Rights Agreement, or subsequent agreements between
WFEI and Asian Dragon, do not comply with the agreements between these third
parties. However, Asian Dragon has received an attorney’s letter stating that
these third party agreements are valid. Transfer of any rights in any of the
above agreements will not be complete until all payments are
completed.





Asian
Dragon issued 250,000 shares of its common stock to WFEI on August 29, 2007 and
an additional 1,000,000 shares to WFEI nominees in regards to the Fuding Rights
Agreement.





The
Fuding Agreement required total consideration of $10,000,000. The Fuding Rights
Agreement acknowledged Asian Dragon provided an initial payment of $2,730,000
and required further payments as follows: $1,270,000 on October 1, 2007;
$2,000,000 before March 1, 2008; $2,000,000 on June 1, 2008; and $2,000,000 on
October 1, 2008.





On August
29, 2007 and September 14, 2007 the Company made payments of $172,546 and
$800,000 respectively toward Fuding commitment installment one which was due
October 1, 2007. These payments totaled $972,546 and were not sufficient to meet
the full amount of Fuding commitment installment one prior to October 1, 2007.
As such, the Company was in default as to $297,454 regarding the Fuding
Agreement at the end of the quarter ended November 30, 2007. A discussion was
held with WFEI and Fuding regarding this matter and WFEI agreed to extend the
payment schedule to accommodate this default. No damages were claimed by WFEI or
Fuding. During the quarter ended May 31, 2008, on January 14, 2008 the Company
completed payment of the remaining $297,454 regarding Fuding installment
one.





On
December 12, 2007, with the mutual consent of WFEI, the Fuding Rights Agreement
was replaced with the “Fuding Agreement” which clarified certain terminology in
the predecessor agreements, but maintained the same payment terms. This
agreement was filed with our year-end Report on Form 10-K as Exhibits 10.3. WFEI
provided Asian Dragon with an undertaking that it extinguished all rights to any
payments under the predecessor agreements and has acknowledged that it recorded
all cash and share payments made under the predecessor agreements as payments
under the Fuding Agreement.





On
January 14, 2008 the Company made a payment of $102,546 toward Fuding
installment two but the Company did not complete full payment of installment two
of the Fuding commitment prior to the deadline on March 1, 2008 and was in
default as to $1,897,454 toward the Fuding Agreement. A discussion was held with
WFEI and Fuding regarding this matter and WFEI agreed to extend the payment
schedule to accommodate this default. No damages were claimed by WFEI or
Fuding.





18


On April
14, 2008 with the mutual consent of WFEI, the Fuding Agreement was replaced with
the “Fuding (Revised) Agreement” in which WFEI provided Asian Dragon with
certain indemnifications which allowed a reclassification to $nil of certain
short term and long term commitments payable, recorded as a total of $7,103,178
at August 31, 2007. This agreement is attached to our quarterly report on Form
10-Q for the period ending February 29, 2008 as Exhibit 10.3. As of April 14,
2008, Asian Dragon was in default as to a total of $1,897,454 toward the Fuding
(Revised) Agreement.





On April
30, 2008 with the mutual consent of WFEI, the FGLW and XWG properties included
in Fuding (Revised) Agreement were assigned by the Company to its subsidiary
Asian Dragon Silver Inc. in return for a commitment from ADSI to issue the
Company 20,500,000 shares of the common stock of ADSI. The FGLW-XWG Transfer
Agreement which governed this transaction was filed as Exhibit 10.1 to a Form
8-K filed April 30, 2008.





Subsequent
to the end of the quarter ended May 31, 2008, neither the Company nor ADSI made
payment of installment three of the Fuding commitment prior to the deadline on
June 1, 2008 and were in default as to a total $3,897,454 toward the Fuding
(Revised) Agreement. A discussion was held with WFEI and Fuding regarding this
matter and WFEI agreed to extend the payment schedule to accommodate this
default. No damages were claimed by WFEI or Fuding.





Property
Descriptions





Jinjishan
Property





The
Jinjishan Property is an exploration property located in the Luoning County,
Henan Province, People’s Republic of China. The exploration 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 120 km 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 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.





Loning
Property





The
Loning Property consists of a 9.1 sq km Exploration License  and is
located 2 km Southwest of Asian Dragon's Jinjishan Property with easy access via
the paved highway that runs East/West of the North side of Luoning
County.





Fuding
Properties:





Luanchuan Mozigou (MZG)
Molybdenum Property





The
Luanchuan Mozigou Molybdenum Property (“MZG”) is located in Jiaohe Village of
Luanchuan County, Henan Province, China. MZG contains an Exploration
License comprised of 14.09 sq km with a 4 sq km aspect of the property running
the same northwest-southeast trend as China Molybdenum, all aspects of this ore
body trend which extend over a 60 km “saddle” bordering Luanchuan and Lushi
County.











19


Lushi Jiashapa (JSP)
Vanadium Property





The Lushi
Jiashapa Vanadium Property (“JSP”) is located in the area of Wenguxiang to
Dashihe of Lushi County, Henan Province, China. JSP contains an Exploration
License comprised of 8.3 sq km with an approximate 1 km wide by 8 km long
covered east-west trend ore body which extends over a 42 km area that sometimes
widens up to 3 km.





Luoning Xiayu Fanggelewan
(FGLW) Silver-Lead Property





The
Luoning Xiayu Fanggelewan Property (“FGLW”) is located in the area of Xiayu,
Henan Province, China. FGLW holds an Exploration License on an area of 1.75
sq km covering a series of long veins in a northeast-southwest trend. The
property is located approximately 240 km west of Zhengzhou, the provincial
capital, and 80 km west of Luoyang, the Prefecture of Luoning
County.





Xiaowagou (XWG) Silver-Lead
Property





The
Xiaowagou Silver Lead Property ("XWG") is located in the area of Xiayu, Henan
Province, China. XWG holds a 2.13 sq km Exploration License. The
property is located approximately 240 km west of Zhengzhou, the provincial
capital, and 80 km west of Luoyang, the prefecture of Luoning
County.





Information
about 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
northwest. This provides








20


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. As of March 31, 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.











21


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 capital is Zhengzhou (pop. 6.3 million). Major
centres 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.














22


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.





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.














23


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 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.

















24


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.





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.





Map
of Locations













25


OPERATIONAL
DEVELOPMENTS DURING QUARTER THREE





On March
3, 2008, we engaged Madsen & Associates CPA’s Inc. as the Company’s new
principal independent accountant and accordingly dismissed Schumacher &
Associates, Inc. CPAs that same day. This information was recorded on a Current
Report on Form 8-K filed March 8, 2008.





On March
14, 2008 Mr. Daniel Hachey resigned as a member of the board of directors of the
Company for personal reasons and there was no disagreement with the Company
relating to its operations, policies or practices.  This information was
recorded on a Current Report on Form 8-K filed March 18, 2008.





On April
10, 2008 the Company incorporated a British Columbia company named Asian Dragon
Silver Inc. (“ADSI”) as a wholly owned subsidiary. The financial statements of
the Company are presented on a consolidated basis and include all accounts of
both the Company and its subsidiary.





On April
14, 2008 with the mutual consent of WFEI, the Jinjishan Agreement, Loning
Agreement, and Fuding Agreement were replaced with the “Jinjishan (Revised)
Agreement”, “Loning (Revised) Agreement”, and “Fuding (Revised) Agreement”,
respectively.  In these revised agreements, WFEI provided Asian Dragon
with certain indemnifications which allowed a reclassification to $nil of
certain short term and long term commitments payable, which had been recorded as
a total of $9,679,407 at August 31, 2007.





On April
30, 2008 with the mutual consent of WFEI, the FGLW and XWG properties included
in Fuding (Revised) Agreement were assigned by the Company to its subsidiary
Asian Dragon Silver Inc. in return for a commitment from ADSI to issue the
Company 20,500,000 shares of the common stock of ADSI. The FGLW-XWG Transfer
Agreement which governed this transaction was filed as Exhibit 10.1 to a Form
8-K filed April 30, 2008.





Subsequent
to the end of the quarter ended May 31, 2008, neither the Company nor ADSI made
payment of installment three of the Fuding commitment prior to the deadline on
June 1, 2008 and were in default as to a total $3,897,454 toward the Fuding
(Revised) Agreement. A discussion was held with WFEI and Fuding regarding this
matter and WFEI agreed to extend the payment schedule to accommodate this
default. No damages were claimed by WFEI or Fuding.





RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED MAY 31, 2008 AND 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 seven categories:





-
Exploration Licenses


-
Exploration Expenses


- Agent
Fees


-
Professional and Consultant Fees


- Stock
Based Compensation – officers and directors


-
Investor Relations


-
Administrative Expenses








26


Exploration
Licenses





Expenditures
recorded for Exploration Licenses were $nil and $1,200,000 respectively for the
three and nine month periods ended May 31, 2008 compared to $1,415,683 and
$4,442,416 for the comparable periods ending May 31, 2007. For the period of
August 15, 2006 (inception) to May 31, 2008 (the “Exploration Stage”) costs for
Exploration Licenses totaled $23,052,000. These costs included cash payments
made to World Fortune Enterprises Inc. (“WFEI”), and WFEI and its nominees in
the case of share based payments, toward the purchase of exploration licenses
for certain properties in China described in Notes 3 and 4 of the financial
statements included in this Report. We anticipate these expenses will increase
over the next twelve months as we implement our business plans.





We also
note that within the area of expected exploration there is infrastructure
including buildings and a formerly operating concentration mill. This
entire infrastructure, without exception, has no value from an accounting or
operational perspective due to its age and state of repair.





Exploration
Expenses





Exploration
Expenses were $nil and $nil respectively for the three and nine month periods
ended May 31, 2008 versus $nil and $nil for the comparable periods ended May 31,
2007. Expenses for the Exploration Stage totaled $50,215. We anticipate these
expenses will increase during the next twelve months.





Agent
Fees





Agent
Fees were $nil and $30,000 respectively for the three and nine month periods
ended May 31, 2008 versus $15,000 and $45,000 for the comparable prior year
periods. Agent Fees for the Exploration Stage totaled $1,852,500, which are
composed of cash payments of $90,000 and stock issuances expensed as $1,762,500.
These payments were made to WFEI for the sourcing of exploration property
opportunities in China. We anticipate these expenses may increase over the next
twelve months as we implement plans to acquire further exploration
properties.





Professional and Consultant
Fees





Professional
& Consultant Fees are comprised of consulting fees charged by our CEO and
directors and fees for accounting, audit, legal and other professionals. During
the three and nine month periods ended May 31, 2008, these fees were $17,667 and
$156,291 respectively versus $62,772 and 103,633 for the comparable prior year
periods. For the Exploration Stage, these costs totaled $428,705. We anticipate
Professional & Consultant Fees will remain at current levels in the upcoming
twelve months.





Stock Based Compensation –
officers and directors





Stock
Based Compensation expenses totaled $nil and $nil for the three and nine month
periods ended May 31, 2008 versus $nil and $nil for the comparable prior year
periods. During the Exploration Stage these costs totaled $6,975,491. Past
expenses have related to stock and option issuances to our officers and
directors. We do not anticipate incurring stock based compensation expenses
during the remaining quarter of fiscal 2008.

















27


Investor
Relations





Investor
Relations expenses comprise costs for press releases, maintenance of the
Company’s website and other investor information initiatives. During the three
and nine month periods ended May 31, 2008, these expenses totaled $3,828 and
$61,536 versus $20,521 and $45,522 for the comparable prior year periods. For
the Exploration Stage, Investor Relations expenses totaled $134,939. We
anticipate Investor Relations expenses will increase substantially during the
next twelve months as we continue our efforts to raise further capital and keep
current investors informed of Company developments.





Administrative
Expenses





Administrative
Expenses were $21,443 and $54,921 for the three and nine month periods ended May
31, 2008 versus $19,375 and $83,618 for the comparable prior year periods. For
the Exploration Stage, Administrative Expenses totaled $166,307. These expenses
are composed of travel, Edgar agent filing fees, stock transfer agent fees and
general office expenses. We anticipate Administrative Expenses will increase
moderately in the upcoming year as we implement our business plans.





Net
Income (Loss)





We
incurred net operating losses from continuing operations, before taking into
account Other Income, for the three and nine month periods ended May 31, 2008 of
$(45,247) and $(1,509,736) versus $(1,536,104) and $(4,727,411) for the
comparable prior year periods. The Net Loss from continuing operations for the
Exploration Stage, before taking into account Other Income, was
$(32,677,587).





After
taking into account Other Income generated by the cancellation of debt relating
to commitments, we recorded a Net Loss for the three month period ended May 31,
2008 in the amount of $(45,247), Net Income for the nine month period ended May
31, 2008 in the amount of $8,169,671, and recorded a Net Loss for the
Exploration Stage of $(23,212,510). These adjusted numbers translated to
earnings per share, basic and fully diluted, of $nil and $0.21 for the three and
nine month periods ended May 31, 2008 versus net losses per share, basic and
fully diluted, of $(0.05) and $(0.15) for the comparative prior year
periods.





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, 2008, consisted of cash resources of $12,617, prepaid expenses of $21,395
and shareholder loans from related parties. Under the shareholder loans, loan
advances to or on behalf of ADG or ADSI, bear interest at 5% per annum,
calculated and compounded annually, not in advance. ADG or ADSI are 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
or ADSI at any time without notice, bonus or penalty. The amount outstanding
under the shareholder loans were $222,351 including accrued interest as of May
31, 2008.  Since Exploration Stage inception through to and including
May 31, 2008, we have executed cash sales of our common shares totaling
$7,193,860 through private placements.





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.








28


Employees





As of May
31, 2008, we had no employees and used contracted services to perform geological
work, legal services and our bookkeeping. Additionally our CEO was engaged on a
consulting basis. 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.





Critical
Accounting Policies




Asian
Dragon’s financial statements are prepared on a consolidated basis which
includes the accounts of both the Company and its subsidiary and include related
public financial information based on the application of accounting principles
generally accepted in the United States (“GAAP”). GAAP requires the use of
estimates; assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenues and expense
amounts reported. These estimates can also affect supplemental information
contained in our external disclosures including information regarding
contingencies, risk and financial condition. We believe our use if estimates and
underlying accounting assumptions adhere to GAAP and are consistently and
conservatively applied. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ materially from these estimates under
different assumptions or conditions. We continue to monitor significant
estimates made during the preparation of our financial statements.





Our
significant accounting policies are summarized in NOTE 2 of the financial
statements included with our Report on Form 10-K for fiscal 2007. While all
these significant accounting policies impact its financial condition and results
of operations, Asian Dragon views certain of these policies as critical.
Policies determined to be critical are those policies that have the most
significant impact on Asian Dragon’s financial statements and require management
to use a greater degree of judgment and estimates. Actual results may differ
from those estimates. We have expensed all development costs related to our
establishment.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





EXCHANGE
RATE FLUCTUATION RISK





Our
reporting currency is United States Dollars (“USD”). Our transactions 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. 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.




















29


ITEM
4. CONTROLS AND PROCEDURES





Disclosure
controls and procedures




As of 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 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.





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, 2007,
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.

















30


Internal
control over financial reporting





The
Certifying Officers reviewed our internal control over financial
reporting (as defined in rules 13a-15(f) and 15d-15(f)) under the Exchange Actas of the
Evaluation Date and concluded that no changes occurred in such control or in
other factors during the quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.








PART
II – OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS




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
our business:





THE
COMPANY CANNOT GIVE ASSURANCE THAT TRANSFER OF TITLE TO EXPLORATION LICENSES
DOES NOT CONTAIN UNDETECTED MATERIAL DEFECTS





The
Company has investigated title to all of the Exploration Licenses of which it is
in the process of acquiring, and to the best of its knowledge, title to all of
these Exploration Licenses are in good standing. However, the Exploration
Licenses may be subject to prior unregistered agreements or transfers and title
may be affected by undetected defects. There may be valid challenges to the
title of the Company’s Exploration Licenses, once acquired, which, if
successful, could impair development and/or operations. The Company cannot give
any assurance that title to its Exploration Licenses will not be
challenged.





In
addition the Company is relying on a series of agreements between Chinese
companies and entities to ultimately transfer title of the Exploration Licenses
to the Company. While the Company has relied on opinions provided by Chinese
counsel and to the best of its knowledge these agreements will effectively
transfer title, the agreements and the transfer may be affected by undetected
defects and the Company cannot give any assurance that the transfer of title to
the Company will not be challenged.





If a
material defect in the transfer of any Exploration Licenses for which the
Company is currently in the process of acquiring were to occur, the Company may
in the future be required to record an impairment to any future capitalized
amounts it had recorded relating to its Exploration Licenses or exploration
activities. Such would not be the case at present however, because the Company
has not yet capitalized any amounts with respect to its exploration
activities.





THE
COMPANY DOES NOT HAVE RECOURSE CLAUSES IN ITS EXPLORATION AGREEMENTS WITH WORLD
FORTUNE ENTERPRISE INC.





In the
event that WFEI were to fail to meet its payment obligations under
its  Agreements with various Chinese Partners, the benefits of which
flow through to Asian Dragon through the Jinjishan Agreement, the Loning
Agreement, and the Fuding Agreement, , Asian Dragon would have no way to reclaim
funds already transferred to WFEI.







31


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.





LIQUIDITY
AND CAPITAL RESOURCES ARE UNCERTAIN.





For the
nine months ended May 31, 2008, the Company had an operating loss from
continuing operations of $(1,509,736). 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





32


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, 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 include 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








33


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.





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.








34


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 dependent upon the efforts of the President
& CEO, CFO, PAO, Treasurer & Secretary, Chair & 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.





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 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.








35


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, and 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
January 14, 2008, the Company accepted a subscription agreement with one entity
for the purchase of 500,000 common shares of the Company at $0.80 per share for
aggregate proceeds of $400,000. There were no finder’s fees or commissions paid,
nor warrants issued, regarding this sale. 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 used for exploration
license installment payments.





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, 2008, 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
      Description31.1
            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






36





SIGNATURES




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




ASIAN
DRAGON GROUP INC.





/s/ John
Karlsson


John
Karlsson


President
and CEO, CFO, Principal Accounting Officer,


Secretary
and Treasurer, Director and Board
Chair




Dated:
July 21, 2008




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





NAME
            
            TITLE
            DATE/s/ John KarlssonJohn
      Karlsson
            
            President
      & CEO, CFO, Principal Accounting Officer,
              Secretary,
      Treasurer, Director and Board Chair
            July
      21, 2008/s/ Jacques TrottierJacques
      Trottier
            
            Director
            July
      21, 2008





































37