**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      quarterly period ended: September 25, 2007




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 Number: 001-15046




**NEW
      DRAGON ASIA CORP.**


(Exact
      name of Registrant as specified in its charter)





FLORIDA
            
            88-0404114(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification Number)





Suite
                2808, International Chamber of Commerce Tower
              Fuhua
                Three Road, Shenzhen, PRC
            
            518048(Address
                of Principal Executive Offices)
            
            (Zip
                Code)





(86
      755)
      8831 2115


(Registrant's
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports) and (2) has been subject to such filing requirements
      for
      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 filer. (See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act):





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x





The
      number of shares of Class A Common Stock outstanding as of October 31, 2007
      was
      54,995,385.










**NEW
      DRAGON ASIA CORP.**





**FORM
      10-Q**





**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 2007**





**TABLE
      OF CONTENTS**




Page**PART
                I:**
            
            **FINANCIAL
                INFORMATION**ITEM
                1.
            
            Consolidated
                Financial Statements:Consolidated
                Balance Sheets as ofSeptember
                25, 2007(unaudited) and December 25, 2006
            
            3Consolidated
                Statements of Operations (unaudited) for the three months and nine
                months
                ended September 25, 2007 and 2006
            
            4Consolidated
                Statements of Stockholders’ Equity and Comprehensive Income (unaudited)
                for the nine months ended September 25, 2007 and the year ended December
                25, 2006
            
            5Consolidated
                Statements of Cash Flows (unaudited) for the nine months ended September
                25, 2007 and 2006
            
            6Notes
                to Consolidated Financial Statements (unaudited)
            
            7ITEM
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            17ITEM
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            31ITEM
                4.
            
            Controls
                and Procedures
            
            31**PART
                II:**
            
            **OTHER
                INFORMATION**ITEM
                1.
            
            Legal
                Proceedings
            
            32ITEM
                1A.
            
            Risk
                Factors
            
            32ITEM
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            32ITEM
                3.
            
            Defaults
                upon Senior Securities
            
            32ITEM
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            32ITEM
                5.
            
            Other
                Information
            
            32ITEM
                6.
            
            Exhibits
            
            32**SIGNATURES**
            
            33**EXHIBITS**


2




**PART
      I: FINANCIAL INFORMATION**





**** **Item
      1. Consolidated Financial Statements.**





**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**(Amounts
      in thousands, except share data)**




**September
                25,**
              **2007**
            
            **December
                25,**
              **2006**(Unaudited)**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            3,740
            
            $
            10,276Accounts
                receivable, net
            
            
            8,634
            
            
            8,835Deposits
                and prepayments, net
            
            
            11,665
            
            
            6,586Inventories,
                net
            
            
            19,937
            
            
            11,598Due
                from related companies
            
            
            893
            
            
            857Total
                current assets
            
            
            44,869
            
            
            38,152Property,
                machinery and equipment, net
            
            
            25,496
            
            
            24,248Land
                use rights, net
            
            
            7,143
            
            
            6,983Goodwill
            
            
            125
            
            
            125Total
                assets
            
            $
            77,633
            
            $
            69,508**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            4,063
            
            $
            2,723Other
                payables and accruals
            
            
            3,055
            
            
            3,255Taxes
                payable
            
            
            2,638
            
            
            3,453Embedded
                derivatives, at fair value
            
            
            3,596
            
            
            11,138Due
                to related companies
            
            
            —
            
            
            28Total
                current liabilities
            
            
            13,352
            
            
            20,597Due
                to New Dragon Asia Food Limited
            
            
            1,069
            
            
            317Due
                to joint venture partners
            
            
            162
            
            
            102Total
                liabilities
            
            
            14,583
            
            
            21,016Minority
                interests
            
            
            287
            
            
            276Series
                A and B Redeemable Convertible Preferred Stock, $0.0001 par
                value:
              Authorized
                shares - 50,000,000
              Issued
                and outstanding - 10,162,000 shares at September 25, 2007 and December
                25,
                2006
            
            
            5,337
            
            
            4,204CommitmentsStockholders’
                equity:Class
                A Common Stock, $0.0001 par value:
              Authorized
                shares - 102,000,000
              Issued
                and outstanding - 54,248,830 at September 25, 2007 and 53,614,723
                at
                December 25, 2006
            
            
            5
            
            
            5Class
                B Common Stock, $0.0001 par value:
              Authorized
                shares - 2,000,000
              Issued
                and outstanding - none
            
            
            —
            
            
            —Additional
                paid-in capital
            
            
            29,180
            
            
            28,411Retained
                earnings
            
            
            22,467
            
            
            12,668Accumulated
                other comprehensive income
            
            
            5,774
            
            
            2,928Total
                stockholders’ equity
            
            
            57,426
            
            
            44,012Total
                liabilities and stockholders’ equity
            
            $
            77,633
            
            $
            69,508





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


3




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**(Amounts
      in thousands, except per share data; unaudited)**




**Three
                months ended**
              **September
                25,**
            
            **Nine
                months ended**
              **September
                25,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                revenue
            
            $
            13,955
            
            $
            12,964
            
            $
            38,150
            
            $
            35,604Cost
                of goods sold
            
            
            (11,148
            )
            
            (10,442
            )
            
            (30,865
            )
            
            (29,056
            )Gross
                profit
            
            
            2,807
            
            
            2,522
            
            
            7,285
            
            
            6,548Selling
                and distribution expenses
            
            
            (302
            )
            
            (263
            )
            
            (825
            )
            
            (709
            )General
                and administrative expenses
            
            
            (731
            )
            
            (711
            )
            
            (2,025
            )
            
            (4,020
            )Income
                from operations
            
            
            1,774
            
            
            1,548
            
            
            4,435
            
            
            1,819Other
                income (expense):Interest
                income
            
            
            3
            
            
            26
            
            
            18
            
            
            49Other
                income (expense)
            
            
            15
            
            
            14
            
            
            143
            
            
            18Gain
                on fair value adjustments toembedded
                derivatives
            
            
            1,903
            
            
            2,593
            
            
            7,541
            
            
            3,198VAT
                refund
            
            
            —
            
            
            1,036
            
            
            540
            
            
            2,135Income
                (loss) before income taxes and minority interests
            
            
            3,695
            
            
            5,217
            
            
            12,677
            
            
            7,219Provision
                for income taxes
            
            
            (491
            )
            
            (427
            )
            
            (1,211
            )
            
            (1,061
            )Income
                (loss) before minority interests
            
            
            3,204
            
            
            4,790
            
            
            11,466
            
            
            6,158Minority
                interests
            
            
            —
            
            
            —
            
            
            —
            
            
            (133
            )Net
                income (loss)
            
            $
            3,204
            
            $
            4,790
            
            $
            11,466
            
            $
            6,025Accretion
                of Redeemable Preferred Stock
            
            
            (377
            )
            
            (470
            )
            
            (1,133
            )
            
            (1,456
            )Preferred
                Stock Dividends
            
            
            (178
            )
            
            (214
            )
            
            (534
            )
            
            (679
            )Income
                available to common stockholders
            
            $
            2,649
            
            $
            4,106
            
            $
            9,799
            
            $
            3,890Earnings
                per common shareBasic
            
            $
            0.05
            
            $
            0.08
            
            $
            0.18
            
            $
            0.08Diluted
            
            $
            0.05
            
            $
            0.08
            
            $
            0.18
            
            $
            0.07Weighted
                average number of common shares outstandingBasic
            
            
            54,073
            
            
            51,936
            
            
            53,858
            
            
            51,101Diluted
            
            
            54,950
            
            
            61,618
            
            
            54,735
            
            
            52,450





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


4





**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





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





**(Amounts
      in thousands, unaudited)**




**Class
                A Common Stock**
            
            **Additional**
              **Paid-in**
              **Capital**
            
            **Receivable
                from**
              **Stockholder**
            
            **Retained**
              **Earnings**
            
            **Accumulated
                Other Comprehensive**
              **Income**
            
            **Total
                Stockholders'**
              **Equity**
            
            **Comprehensive**
              **Income****Shares**
            
            **Amount**Balance
                at December 25, 2005
            
            
            49,322
            
            $
            5
            
            $
            15,216
            
            $
            (49
            )
            $
            18,029
            
            $
            798
            
            $
            33,999
            
            $
            2,545Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,604
            )
            
            
            
            
            (2,604
            )
            
            (2,604
            )Write
                off receivable from stockholder
            
            
            
            
            
            
            
            
            
            
            
            49
            
            
            
            
            
            
            
            
            49Accretion
                of Redeemable Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,882
            )
            
            
            
            
            (1,882
            )Preferred
                Stock Dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (875
            )
            
            
            
            
            (875
            )Stock-based
                compensation expense
            
            
            
            
            
            
            
            
            8,140
            
            
            
            
            
            
            
            
            
            
            
            8,140Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,130
            
            
            2,130
            
            
            2,130Conversion
                of Preferred Stock, related dividend payments made, and cashless
                exercise
                of warrants in shares of Class A Common Stock
            
            
            3,292
            
            
            
            
            
            3,935
            
            
            
            
            
            
            
            
            
            
            
            3,935Exercise
                of stock options
            
            
            1,000
            
            
            
            
            
            1,120
            
            
            
            
            
            
            
            
            
            
            
            1,120Balance
                at December 25, 2006
            
            
            53,614
            
            $
            5
            
            $
            28,411
            
            $
            —
            
            $
            12,668
            
            $
            2,928
            
            $
            44,012
            
            $
            (474
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            11,466
            
            
            
            
            
            11,466
            
            
            11,466Accretion
                of Redeemable Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,133
            )
            
            
            
            
            (1,133
            )Preferred
                Stock Dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (534
            )
            
            
            
            
            (534
            )Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,846
            
            
            2,846
            
            
            2,846Conversion
                of Preferred Stock / dividend in shares of Class A Common
                Stock
            
            
            634
            
            
            
            
            
            769
            
            
            
            
            
            
            
            
            
            
            
            769Balance
                at September 25, 2007
            
            
            54,248
            
            $
            5
            
            $
            29,180
            
            $
            —
            
            $
            22,467
            
            $
            5,774
            
            $
            57,426
            
            $
            14,312





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


5




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**(Amounts
      in thousands, unaudited)**




**Nine
                months ended**
              **September
                25,****2007**
            
            **2006****Cash
                flows from operating activities:**Net
                income (loss)
            
            $
            11,466
            
            $
            6,025Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Allowance
                for doubtful accounts
            
            
            299
            
            
            (124
            )Provision
                for inventory reserve
            
            
            4
            
            
            11Depreciation
                and amortization of property, machinery, equipment and land use
                rights
            
            
            1,213
            
            
            1,
                639(Gain)
                loss on fair value adjustments to embedded derivatives
            
            
            (7,541
            )
            
            (3,198
            )Minority
                interests
            
            
            —
            
            
            7Stock-based
                expense for services received
            
            
            269
            
            
            2,320Changes
                in operating assets and liabilities:
              (Increase)
                decrease in:Accounts
                receivable
            
            
            (98
            )
            
            (602
            )Deposits
                and prepayments
            
            
            (5,079
            )
            
            588Inventories
            
            
            (8,343
            )
            
            (372
            )Due
                from related companies
            
            
            (36
            )
            
            (167
            )Increase
                (decrease) in:Accounts
                payable
            
            
            1,340
            
            
            1,061Other
                payables and accruals
            
            
            (213
            )
            
            (813
            )Taxes
                payable
            
            
            (815
            )
            
            985Due
                to related companies
            
            
            —
            
            
            (200
            )Net
                cash provided by (used in) operating activities
            
            
            (7,534
            )
            
            7,160**Cash
                flows from investing activities:**Acquisition
                of Chengdu plant
            
            
            —
            
            
            (2,300
            )Purchases
                of property, machinery and equipment
            
            
            (1,237
            )
            
            (4,720
            )Purchases
                of land use rights
            
            
            —
            
            
            (2,024
            )Minority
                interests
            
            
            —
            
            
            266Net
                cash used in investing activities
            
            
            (1,237
            )
            
            (8,778
            )**Cash
                flows from financing activities:**Payments
                of issuance costs related to preferred stock
            
            
            —
            
            
            (60
            )Preferred
                stock dividend
            
            
            (49
            )
            
            (277
            )Proceed
                from (repayments to) parent company
            
            
            752
            
            
            (14
            )Proceeds
                from (repayment to) joint venture partners
            
            
            60
            
            
            249Proceeds
                from issuance of common stock upon exercise of stock
                options
            
            
            —
            
            
            1,120Net
                cash provided by financing activities
            
            
            763
            
            
            1,018Foreign
                currency translation adjustment
            
            
            1,472
            
            
            832Net
                increase (decrease) in cash and cash equivalents
            
            
            (6,536
            )
            
            232Cash
                and cash equivalents at beginning of period
            
            
            10,276
            
            
            14,332Cash
                and cash equivalents at end of period
            
            $
            3,740
            
            $
            14,564**Non-Cash
                Investing and Financing Activities**Conversion
                of preferred stock into common stock
            
            $
            —
            
            $
            1,800Dividend
                payments on preferred stock in form of common stock
            
            $
            500
            
            $
            267





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





6




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





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





**NOTE
      2. BASIS OF PRESENTATION**





The
      consolidated financial statements include the financial statements of New Dragon
      Asia Corp. and all of its subsidiaries required to be consolidated in accordance
      with accounting principles generally accepted in the United States of America
      (“U.S. GAAP”). Intercompany balances and transactions have been eliminated in
      consolidation.





Investments
      in companies in which the Company has significant influence, or ownership
      between 20% and 50% of the investee, are accounted for using the equity method.
      Under the equity method, the investment is originally recorded at cost and
      adjusted to recognize the Company’s share of net earnings or losses of the
      investee. The adjustment is limited to the extent of the Company’s investment in
      and advances to the investee and financial guarantees made on behalf of the
      investee. The Company’s investments in other entities are accounted for using
      the cost method. The Company is not the primary beneficiary of any Variable
      Interest Entities.





These
      consolidated financial statements for interim periods are unaudited. In the
      opinion of management, the consolidated financial statements include all
      adjustments, consisting of only normal, recurring accruals, necessary for their
      fair presentation. Interim results are not necessarily indicative of results
      to
      be expected for a full year. The accompanying consolidated financial statements
      have been prepared in accordance with the rules and regulations of the
      Securities and Exchange Commission and do not include all information and
      footnotes necessary for a complete presentation of financial statements in
      conformity with accounting principles generally accepted in the United States.
      These statements should be read in conjunction with the Company’s Annual Report
      on Form 10-K for the fiscal year ended December 25, 2006.





FIN
      46,
“Consolidation of Variable Interest Entities” requires an investor with a
      majority of the variable interests (primary beneficiary) in a variable interest
      entity (“VIE”) to consolidate the entity. A VIE is an entity in which the voting
      equity investors do not have a controlling financial interest or the equity
      investment at risk is insufficient to finance the entity’s activities without
      receiving additional subordinated financial support from the other parties.
      VIEs
      are required to be consolidated by their primary beneficiaries if they do not
      effectively disperse risks among the parties involved. The primary beneficiary
      of a VIE is the party that absorbs a majority of the entity’s expected losses or
      receives a majority of its expected residual returns. The Company has completed
      a review of its investments in both non-marketable and marketable equity
      interests as well as other arrangements to determine whether it is the primary
      beneficiary of any VIEs. The review did not identify any VIEs.





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





***Accounting
      for Derivative Instruments***





Statement
      of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” as amended, requires all derivatives to be
      recorded on the Company’s balance sheet at fair value. These derivatives,
      including embedded derivatives in the Company’s Series A and B Redeemable
      Convertible Preferred Stock are separately valued and accounted for on the
      Company’s balance sheet.





The
      pricing models the Company uses for determining fair values of its derivatives
      are a combination of the Black Scholes and Binomial Pricing Models. Valuations
      derived from this model are subject to ongoing internal and external review.
      The
      model uses market-sourced inputs such as interest rates and option volatilities.
      Selection of these inputs involves management's judgment and may impact net
      income (loss). The Company has obtained a valuation report from a valuation
      firm
      to support its estimates.




7




In
      September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
      "Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
      contracts that are settled in a company's own stock, including common stock
      warrants, to be designated as an equity instrument, asset or a liability. Under
      the provisions of EITF 00-19, a contract designated as an asset or a liability
      must be carried at fair value on a company's balance sheet, with any changes
      in
      fair value recorded in the company's results of operations. A contract
      designated as an equity instrument must be included within equity, and no fair
      value adjustments are required.




The
      Company has determined that the conversion features of its redeemable
      convertible preferred stock and warrants to purchase common stock are
      derivatives that the Company is required to account for as if they were
      free-standing instruments under GAAP. The Company has also determined that
      it is
      required to designate these derivatives as liabilities in its financial
      statements. As a result, the Company reports the value of these embedded
      derivatives as current liabilities on its balance sheet and reports changes
      in
      the value of these derivatives as non-operating gains or losses on its statement
      of operations. The value of the derivatives is required to be recalculated
      (and
      resulting non-operating gains or losses reflected in the statement of operations
      and resulting adjustments to the associated liability amounts reflected on
      the
      balance sheet) on a quarterly basis, and is based on the market value of the
      Company’s common stock. Due to the nature of the required calculations and the
      large number of shares of the Company’s common stock involved in such
      calculations, changes in the Company’s common stock price may result in
      significant changes in the value of the derivatives and resulting gains and
      losses on the Company’s statement of operations.





The
      consolidated financial statements also reflect additional non-operating gains
      and losses related to the classification of and accounting for: (1) the
      conversion features of the Series A and B Preferred Stock and associated
      warrants, (2) the amortization associated with the discount recorded with
      respect to the Series A and B Preferred Stock as a preferred stock dividend,
      and
      (3) the conversion features associated with the preferred stock issued by
      the Company and associated warrants.





**NOTE
      3. RECENT ACCOUNTING PRONOUNCEMENTS**




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines
      fair value, establishes a framework for measuring fair value, and expands
      disclosures about fair value instruments. SFAS 157 does not require any new
      fair value measurements, but applies other accounting pronouncements that
      require or permit fair value measurements. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007 (the Company’s fiscal 2008). The Company believes that implementation of
      SFAS 157 will have little or no impact on its consolidated financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities including an amendment of FASB
      Statement No. 115” (SFAS 159). This statement allows all entities a one-time
      election to measure many financial instruments and certain other items at fair
      value that are not currently required to be measured at fair value (the “fair
      value option”). SFAS 159 is effective for fiscal years beginning after November
      15, 2007. The Company is currently evaluating the impact, if any, of SFAS 159
      on
      the Company’s consolidated financial statements.





**NOTE
      4. CONDENSED BALANCE SHEET INFORMATION**





Condensed
      balance sheet information as of September 25, 2007 consisted of the following
      (in thousands):





Inside
                China
            
            Outside
                China
            
            TotalAssets-
                Cash and cash equivalents
            
            $
            3,487
            
            $
            253
            
            $
            3,740-
                Others
            
            
            73,830
            
            
            63
            
            
            73,893Total
                assets
            
            
            77,317
            
            
            316
            
            
            77,633Liabilities
            
            
            9,429
            
            
            5,154
            
            
            14,583Minority
                interests
            
            
            287
            
            
            —
            
            
            287Intercompany
            
            
            12,871
            
            
            (12,871
            )
            
            —Equity
            
            
            48,707
            
            
            8,719
            
            
            57,426





Assets
      located outside of China consist primarily of cash and cash equivalents.
      Liabilities located outside of China consist primarily of embedded derivatives,
      net of the related beneficial conversion feature and fair value of the warrants.





Condensed
      statement of operation information for the nine months ended September 25,
      2007
      consisted of the following (in thousands):





Inside
                China
            
            Outside
                China
            
            TotalNet
                revenue
            
            $
            38,150
            
            $
            —
            
            $
            38,150Cost
                of goods sold
            
            
            (30,865
            )
            
            —
            
            
            (30,865
            )General
                and administrative expenses
            
            
            (916
            )
            
            (1,109
            )
            
            (2,025
            )Income
                (loss) from operations
            
            
            5,544
            
            
            (1,109
            )
            
            4,435Provision
                for income taxes
            
            
            (1,211
            )
            
            —
            
            
            (1,211
            )Other
                income
            
            
            710
            
            
            7,532
            
            
            8,242Net
                income
            
            
            5,043
            
            
            6,423
            
            
            11,466




8




The
      Company does not believe that providing additional information regarding cash
      flows is meaningful to the reader, in light of the nature of the assets and
      operations located inside China and outside China, respectively.





**NOTE
      5. EARNINGS PER SHARE**





The
      Company computes earnings per share (“EPS’) in accordance with Statement of
      Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
      and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128
      requires companies with complex capital structures to present basic and diluted
      EPS. Basic EPS is measured as the income or loss available to common
      shareholders divided by the weighted average common shares outstanding for
      the
      period. Diluted EPS is similar to basic EPS but presents the dilutive
      effect on a per share basis of potential common shares (e.g., convertible
      securities, options and warrants) as if they had been converted at the beginning
      of the periods presented, or issuance date, if later. Potential common
      shares that have an anti-dilutive effect (i.e., those that increase income
      per
      share or decrease loss per share) are excluded from the calculation of diluted
      EPS. Approximately 7,254 million dilutive shares on an “as converted” basis for
      the Redeemable Convertible Preferred stock were excluded from the calculation
      of
      diluted EPS for the three and nine months ended September 25, 2007 since their
      effect would have been anti-dilutive.





The
      calculation of diluted weighted average common shares outstanding for the three
      months ended September 25, 2007 and 2006 and for the nine months ended September
      25, 2007 and 2006 is based on the average of the closing price of the Company’s
      common stock during such periods applied to warrants and options using the
      treasury stock method to determine if they are dilutive. The Redeemable
      Preferred stock is included on an “as converted” basis when these shares are
      dilutive.





The
      following table is a reconciliation of the weighted average shares used in
      the
      computation of basic and diluted earnings per share for the periods presented
      (amounts in thousands, except per share data):




**Three
                Months Ended September 25,****2007**
            
            **2006****Income**
            
            **Weighted****Average****Shares**
            
            **Per-Share**
            
            **Income**
            
            **Weighted****Average****Shares**
            
            **Per-Share**Earnings
                per share - basicIncome
                available to common stockholders
            
            $
            2,
                649
            
            
            54,073
            
            $
            0.05
            
            $
            4,106
            
            
            51,936
            
            $
            0.08Effect
                of dilutive securitiesRedeemable
                convertible preferred stock
            
            
            —
            
            
            —
            
            
            
            
            
            684
            
            
            8,846Options
                and warrants
            
            
            —
            
            
            877
            
            
            
            
            
            —
            
            
            836Earnings
                per share - dilutedNet
                income
            
            $
            2,649
            
            
            54,950
            
            $
            0.05
            
            $
            4,790
            
            
            61,618
            
            $
            0.08





**Nine Months Ended September
                25,****2007**
            
            **2006****Weighted**
            
            
            
            
            
            **Weighted****Average**
            
            
            
            
            
            **Average****Income**
            
            **Shares**
            
            **Per-Share**
            
            **Income**
            
            **Shares**
            
            **Per-Share**Earnings
                per share - basicIncome
                available to common stockholders
            
            $
            9,799
            
            
            53,858
            
            $
            0.18
            
            $
            3,890
            
            
            51,101
            
            $
            0.08Effect
                of dilutive securitiesRedeemable
                convertible preferred stock
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            —Options
                and warrants
            
            
            —
            
            
            877
            
            
            
            
            
            —
            
            
            1,349Earnings
                per share - dilutedNet
                income
            
            $
            9,799
            
            
            54,735
            
            $
            0.18
            
            $
            3,890
            
            
            52,450
            
            $
            0.07




9




**NOTE
      6. ACCOUNTS RECEIVABLE**





Accounts
      receivable consisted of the following (in thousands):




**September
                25, 2007**
            
            **December
                25, 2006****(Unaudited)**Accounts
                receivable
            
            $
            9,568
            
            $
            9,554Less:
                Allowance for doubtful accounts
            
            
            (934
            )
            
            (719
            )$
            8,634
            
            $
            8,835





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





**September
                25, 2007**
            
            **December
                25, 2006****(Unaudited)**Balance
                at the beginning of the period
            
            $
            719
            
            $
            893Add:
                provision during the period
            
            
            299
            
            
            83Less:
                write-offs during the period
            
            
            (84
            )
            
            (257
            )Balance
                at the end of the period
            
            $
            934
            
            $
            719





**NOTE
      7. DEPOSITS AND PREPAYMENTS**





Deposits
      and prepayments consisted of the following (in thousands):




**September
                25, 2007**
            
            **December
                25, 2006****(Unaudited)**Deposits
                for raw materials
            
            $
            11,640
            
            $
            6,394Prepayments
                and advances
            
            
            25
            
            
            192$
            11,665
            
            $
            6,586




**NOTE
      8. INVENTORIES**





Inventories
      consisted of the following (in thousands):




**September
                25, 2007**
            
            **December
                25, 2006****(Unaudited)**Raw
                materials (including packing materials)
            
            $
            18,562
            
            $
            9,807Finished
                goods
            
            
            1,453
            
            
            1,89520,015
            
            
            11,702Less:
                Inventory reserve
            
            
            (78
            )
            
            (104
            )$
            19,937
            
            $
            11,598





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




**September
                25, 2007**
            
            **December
                25, 2006****(Unaudited)**Balance
                at the beginning of the period
            
            $
            104
            
            $
            134Add:
                provision during the period
            
            
            4
            
            
            —Less:
                write-offs during the period
            
            
            (30
            )
            
            (30
            )Balance
                at the end of the period
            
            $
            78
            
            $
            104





**NOTE
      9. DUE FROM RELATED COMPANIES**





Due
      from
      related companies consisted of the following (in thousands):




**September
                25, 2007**
            
            **December
                25, 2006****(Unaudited)**Due
                from related companies for sales
            
            $
            893
            
            $
            857




10




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





Property,
      machinery and equipment consisted of following (in thousands):




Useful
                Life
            
            **September
                25, 2007**
            
            **December
                25, 2006**(In
                years)
            
            **(Unaudited)**Buildings
            
            
            40
            
            $
            14,530
            
            $
            12,935Machinery
                and equipment
            
            
            5
                - 12
            
            
            19,767
            
            
            19,06734,297
            
            
            32,002Less:
                Accumulated depreciation and amortization
            
            
            
            
            
            (8,801
            )
            
            (7,754
            )$
            25,496
            
            $
            24,248





**NOTE
      11. LAND USE RIGHTS**





Land
      use
      rights consisted of the following (in thousands):




**September
                25, 2007**
            
            **December
                25, 2006****(Unaudited)**Land
                use rights
            
            $
            8,208
            
            $
            7,882Less:
                Accumulated amortization
            
            
            (1,065
            )
            
            (899
            )$
            7,143
            
            $
            6,983




**NOTE
      12. OTHER PAYABLES AND ACCRUALS**





Other
      payables and accruals consisted of the following (in thousands):




**September
                25, 2007**
            
            **December
                25, 2006****(Unaudited)**Deposits
                from customers
            
            $
            961
            
            $
            1,094Accruals
                for payroll, bonus and benefits
            
            
            222
            
            
            290Utilities
                and accrued expenses
            
            
            1,872
            
            
            1,871$
            3,055
            
            $
            3,255





**NOTE
      13. REDEEMABLE CONVERTIBLE PREFERRED STOCK**





On
      July
      11, 2005, the Company issued 6,000 shares of Series A Preferred Stock, initially
      convertible into an aggregate of 6,315,789 shares of Class A Common Stock at
      a
      conversion price of $0.95 per share, raising $6 million in gross proceeds.
      Six-year warrants to purchase an aggregate of 3,157,895 shares of Class A Common
      Stock at an exercise price of $1.04 per share were also issued to the investors.
      As part of the compensation to the placement agent, five-year warrants to
      purchase an aggregate of 378,947 shares of Class A Common Stock at an exercise
      price of $1.04 share were also issued. As of September 25, 2007, all of the
      five-year warrants had been exercised, and 3,888 shares of Series A Preferred
      Stock were converted into 4,092,633 shares of Class A Common Stock.




On
      December 22, 2005, the Company issued 9,500 shares of Series B Preferred Stock,
      initially convertible into an aggregate of 5,937,500 shares of Class A Common
      Stock at a conversion price of $1.60 per share, raising $9.5 million in gross
      proceeds. Six-year warrants to purchase an aggregate of 2,968,750 shares of
      Class A Common Stock at an exercise price of $1.76 per share were also issued
      to
      the investors. As part of the compensation to the placement agent, five-year
      warrants to purchase an aggregate of 356,250 shares of Class A Common Stock
      at
      an exercise price of $1.76 per share were also issued. As of September 25,
      2007,
      1,450 shares of Series B Preferred Stock had been converted into 906,250 shares
      of Class A Common Stock, and no warrants were exercised.





11




In
      connection with the issuance of the Redeemable Convertible Series A Preferred
      Stock and Series B Preferred Stock, the Company paid professional fees,
      placement agent fees and associated expenses amounting to $1,827,000. The
      Company also identified freestanding financial instruments included in the
      issuances that were required to be recorded as liabilities. These included
      the
      embedded conversion feature and warrants included in the Series A and B
      Preferred Stock issuances. The Company has evaluated the fair value of these
      liabilities using a combination of the Black Scholes and Binomial Pricing
      Models. The summary of activity in the Series A and B Preferred Stock is as
      follows (in thousands):





**Redeemable
                Convertible Preferred
                Stock**




**Number
                of shares**
            
            **Series
                A**
            
            **Series
                B**
            
            **Combined**Sale
                of Series A Preferred Stock
            
            
            6,000
            
            $
            6,000
            
            
            
            
            $
            6,000Sale
                of Series B Preferred Stock
            
            
            9,500
            
            
            
            
            $
            9,500
            
            
            9,500Expenses
                of Offering
            
            
            
            
            
            (685
            )
            
            (1,142
            )
            
            (1,827
            )Effect
                of Allocation to Derivative Liabilities
            
            
            
            
            
            (1,648
            )
            
            (4,830
            )
            
            (6,478
            )Conversion
                of Series A Preferred Stock to common stocks
            
            
            (5,338
            )
            
            (3,888
            )
            
            (1,450
            )
            
            (5,338
            )Accretion
                of discount
            
            
            
            
            
            1,295
            
            
            2,185
            
            
            3,48010,162
            
            $
            1,074
            
            $
            4,263
            
            $
            5,337





The
      pricing model the Company used for determining fair values of the derivatives
      is
      a combination of the Black Scholes and Binomial Pricing Models. Valuations
      derived from this model are subject to ongoing internal and external review.
      The
      model uses market-sourced inputs such as interest rates, and option
      volatilities. Selection of these inputs involves management's judgment and
      may
      impact net income (loss). The Company has obtained a valuation report from
      a
      valuation firm to support its estimates. The principal assumptions used to
      value
      these complex freestanding financial instruments were as follows:





**Warrants**
            
            **Embedded
                Conversion Feature**Expected
                life (in years)
            
            Remaining
                term at valuation date
            
            Remaining
                Term to conversion or redemption date at each valuation
                dateExpected
                volatility
            
            50%
            
            50%Risk-free
                interest rate
            
            4.16%
            
            3.83%
                to 4.11%Dividend
                yield
            
            0
            
            0





The
      Company considered all of the other minor features of the conversion option
      associated with the Company’s Preferred Stock, including adjustments for: (i)
      stock dividends and splits, (ii) the sale of the Company’s securities, (iii) the
      subsequent issuance of rights, options, or warrants to Common shareholders,
      and
      (iv) forced conversion and redemption features. The Company ultimately
      determined that these features were insignificant and did not have a material
      impact on the concluded values of the Series A and Series B Preferred
      Stock.





The
      changes in the derivative liabilities from issuance are as follows:





Fair
                value at issuances
            
            $
            10,259Change
                in value of derivatives during 2005
            
            
            4,064Conversion
                of 1,900 shares of Series A Preferred Stock to common stock during
                2005
            
            
            (2,188
            )Fair
                Value at December 25, 2005
            
            
            12,135Change
                in value of derivatives during the period
            
            
            1,434Conversion
                of 3,438 shares of Series A and B Preferred Stock to common stock
                during
                2006
            
            
            (2,431
            )Fair
                value at December 25, 2006
            
            
            11,138Change
                in value of derivatives during the period
            
            
            (7,542
            )Fair
                Value at September 25, 2007
            
            $
            3,596





**NOTE
      14. COMMON STOCK**





On
      September 4, 2003, the Company issued 3,300,000 shares of Class A Common Stock
      for an aggregate purchase amount of $1,650,000 or $0.50 per share. The shares
      were issued pursuant to an exemption provided by Section 4(2) of the Securities
      Act. The purchasers were also issued warrants to purchase 1,650,000 shares
      of
      the Company’s Class A Common Stock, which have a term of 5 years at an exercise
      price of $0.99 per share. As of September 25, 2007, all such warrants had been
      exercised.





On
      October 7, 2003, the Company issued 850,000 shares of Class A Common Stock
      for
      an aggregate purchase amount of $425,000 or $0.50 per share. The shares were
      issued pursuant to an exemption provided by Section 4(2) of the Securities
      Act.
      The purchasers were also issued warrants to purchase 425,000 shares of the
      Company’s Class A Common Stock, which have a term of 5 years and an exercise
      price of $0.979 per share. As of September 25, 2007, warrants to purchase 25,000
      shares of Class A Common Shares were outstanding.





12




**NOTE
      15. WARRANTS**





The
      following table summarizes activity regarding the Company’s outstanding
      warrants:




**Shares**
            
            **Weighted
                Average Exercise Price**Outstanding
                at December 25, 2005
            
            
            6,609,474
            
            $
            1.4020Issued
            
            
            —
            
            
            —Exercised
            
            
            (101,579
            )
            
            1.0400Forfeited/Cancelled
            
            
            —
            
            
            —Outstanding
                at December 25, 2006 and September 25, 2007
            
            
            6,507,895
            
            
            1.4093Warrants
                exercisable at December 25, 2005
            
            
            6,609,474
            
            
            1.4020Warrants
                exercisable at December 25, 2006
            
            
            6,507,895
            
            
            1.4093Warrants
                exercisable at September 25, 2007
            
            
            6,507,895
            
            
            1.4093





The
      number of shares of Class A Common Stock issuable under warrants related to
      the
      private placements and the respective exercise prices as of September 25, 2007
      are summarized as follows:




**Shares
                of**
              **Class
                A**
              **Common
                Stock**
              **Issuable**
              **Under
                Warrants**
            
            **Exercise**
              **Price**October
                2003 private placement
            
            
            25,000
            
            $
            0.979July
                2005 private placement6-year
                warrants
            
            
            3,157,895
            
            
            1.04December
                2005 private placement6-year
                warrants
            
            
            2,968,750
            
            
            1.765-year
                warrants
            
            
            356,250
            
            
            1.76Warrants
                exercisable at September 25, 2007
            
            
            6,507,895




**NOTE
      16. STOCK-BASED COMPENSATION**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123R, “Share-Based Payment,” which established standards for transactions in
      which an entity exchanges its equity instruments for goods or services. This
      standard requires a public entity to measure the cost of services received
      in
      exchange for an award of equity instruments based on the grant-date fair value
      of the award. The Company adopted the requirements of SFAS No.123R for the
      fiscal year 2006. Because all stock options granted before December 25, 2004
      were fully vested and exercised or expired, no compensation charges were
      recorded in fiscal 2006 for these options. For stock options granted after
      December 25, 2004, the Company used the Black-Scholes option-pricing model
      to
      estimate the fair value of the options at the date of grant.





In
      November 2004, options to purchase 400,000 shares of Class A Common Stock were
      issued to an officer at an exercise price of $1.00 per share with a term of
      10
      years. The market price of the Class A Common Stock as of the grant date was
      $0.64 per share. As of September 25, 2007, all of these options had been
      exercised.





On
      June
      22, 2005, options to purchase an additional 600,000 shares of Class A Common
      Stock were issued to the same officer at an exercise price of $1.20 per share
      with a term of 10 years. The market price of the Class A Common Stock as of
      the
      grant date was $1.00 per share. As of September 25, 2007, all of these options
      had been exercised.





13




On
      January 20, 2006, options to purchase an additional 2,000,000 shares of Class
      A
      Common Stock were issued to the same officer at an exercise price of $1.60
      per
      share with a term of 6 years. The market price of the Class A Common Stock
      as of
      the grant date was $1.54 per share. As of September 25, 2007, none of these
      options were exercised. The Company recorded compensation expense of $2,320,000
      based on an estimated fair value of the options of $1.16 per share on January
      20, 2006. The per share fair value of the stock options granted has been
      estimated using the Black-Scholes option-pricing model with the following
      assumptions:




**January
                20, 2006**Life
                (years)
            
            
            6Dividend
                yield
            
            
            NoneRisk
                - free interest rate
            
            
            4.36
            %Volatility
            
            
            89
            %





On
      December 13, 2006, options to purchase an additional 6,000,000 shares of Class
      A
      Common Stock were granted to the same officer at an exercise price of $1.82
      per
      share with a term of 10 years. The options were fully vested upon grant but
      became exercisable on April 3, 2007.





The
      market price of the Class A Common Stock as of the grant date was $1.82 per
      share. As of December 25, 2006, these options were fully vested but not
      exercisable. The Company recorded compensation expense of $5,820,000 based
      on an
      estimated fair value of the options of $0.97 per share on December 13, 2006,
      the
      grant date. The per share, fair value of the stock options granted has been
      estimated using the Black-Scholes option-pricing model with the following
      assumptions:




**December
                13, 2006**Life
                (years)
            
            
            6Dividend
                yield
            
            
            NoneRisk
                - free interest rate
            
            
            4.55
            %Volatility
            
            
            50
            %





The
      following table summarizes outstanding options as at September 25, 2007, related
      weighted average fair value and life information:





Options
                Outstanding
            
            Options
                ExercisableRange
                of ExercisePrice
                Per Share
            
            Number
                Outstanding
              at
                September 25, 2007
            
            Weighted
                Average
              Fair
                Value
            
            Weighted
                Average
              Remaining
                Life (Years)
            
            Number
                Exercisable
              at
                September 25, 2007
            
            Weighted
                Average
              Exercise
                Price$
                1.60-1.82
            
            
            8,000,000
            
            $
            1.02
            
            
            7.95
            
            
            8,000,000
            
            $
            1.7650





The
      Company recorded compensation expense of $8,140,000 based on the fair value
      of
      the options granted during the year of 2006. Any exercise of such options
      granted on December 13, 2006 was contingent upon the effectiveness of a
      shareholder consent, which occurred on April 3, 2007. The Company has no future
      compensation expense to record from this option outstanding at December 25,
      2006
      because they were fully vested upon grant and compensation cost was recorded
      as
      of that date.





**NOTE
      17. RELATED PARTY TRANSACTIONS**





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





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




**Three
                months ended**
              **September
                25,**
            
            **Nine
                months ended**
              **September
                25,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**Pre-determined
                annual fee charged by joint venture partners:Shandong
                Longfeng Group Company (a)
            
            $
            21
            
            $
            19
            
            $
            61
            
            $
            57Shandong
                Longfeng Flour Company Limited (b)
            
            
            10
            
            
            9
            
            
            28
            
            
            27$
            31
            
            $
            28
            
            
            89
            
            
            84





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




14


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




**NOTE
      18. TAXATION**





The
      PRC
      subsidiaries within the Company are subject to PRC income taxes on an entity
      basis on income arising in or derived from the tax jurisdiction in which they
      operate. The group companies that are incorporated under the International
      Business Companies Act of the British Virgin Islands are exempt from payment
      of
      the British Virgin Islands income tax. Substantially all of the Company’s income
      was generated in the PRC, which is subject to PRC income taxes at rates ranging
      from 24% to a statutory rate of 33%. Four of the PRC subsidiaries of the Company
      are eligible to be exempt from income taxes for a two-year period commencing
      with the year in which their operations are profitable and then subject to
      a 50%
      reduction in income taxes for the next three years, starting from their first
      profitable year. Several PRC subsidiaries receive preferential tax rates in
      regions in which they operated and are also entitled to partial tax refunds
      from
      those tax bureaus.





New
      Dragon Asia Corp. is a Florida corporation with wholly-owned operating
      subsidiaries. As a result, the Company is not subject to PRC tax for the
      activities at the Florida company level. Costs or expenses incurred at the
      Florida company level, such as the stock-based compensation and the amortization
      of financing costs and derivative accounting related to Series A Preferred
      Stock
      and Series B Preferred Stock, cannot be used to offset any income derived in
      the
      PRC when measuring the PRC income tax liabilities. As of September 25, 2007
      and
      December 25, 2006, there were no material deferred tax assets or deferred tax
      liabilities. The expenses of the United States Company are not recoverable
      against future taxable income in the United States or the PRC and meet the
      definition of permanent differences for tax accounting purposes. The Company
      has
      never been audited by the taxing authority in the United States or the PRC.
      The
      Company believes that it has filed properly in all required jurisdictions.







In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement 109” FIN
      48. This
      statement clarifies the criteria that an individual tax position must satisfy
      for some or all of the benefits of that position to be recognized in a company’s
      financial statements. FIN
      48prescribes
      a recognition threshold of more-likely-than-not, and a measurement attribute
      for
      all tax positions taken or expected to be taken on a tax return, in order for
      those tax positions to be recognized in the financial statements. Effective
      January 1, 2007, the Company has adopted the provisions of FIN
      48and
      there
      was no material effect on the financial statements. As a result, there was
      no
      cumulative effect related to adopting FIN
      48.





**NOTE
      19. BUSINESS COMBINATION AND SIGNIFICANT ESTABLISHMENT**





Delta
      Link Limited and Chengdu Plant





On
      February 24, 2006, the Company acquired 100% of the equity interest shares
      of
      Delta Link Ltd. (“Delta Link”) for a cash consideration of $3,300,000. Delta
      Link is a holding company, which owns a 90% equity interest in a noodle
      manufacturing facility in Chengdu, Sichuan Province. The Chengdu Plant serves
      the western China market.





This
      acquisition has been accounted for using the purchase method pursuant to SFAS
      No. 141, “Business Combinations.” The consolidated financial statements include
      the results of operations of the acquired company commencing as of the
      acquisition date. No pro forma information is presented due to the immaterial
      effect of this acquisition on the consolidated result of
      operations.





In
      connection with the acquisition, the assets acquired and the liabilities assumed
      from Delta Link and the Chengdu Plant were recorded at their fair values on
      the
      consolidated balance sheet. Based on the initial purchase price allocation,
      the
      Company recorded goodwill in the amount of approximately $125,000.





The
      long-lived assets and goodwill are subject to periodic review to determine
      if
      impairment has occurred and, if so, the amount of such impairment. If the
      Company determines that impairment exists, the Company will be required to
      reduce the carrying value of the impaired assets by the amount of impairment
      and
      to record a corresponding charge to operations in the period of
      impairment.





The
      allocation of initial purchase consideration was as follows (in
      thousands):





Acquisition
                consideration
            
            $
            3,300Accounts
                receivable
            
            
            62Property,
                machinery and equipment
            
            
            2,167Land
                use rights
            
            
            1,056Accounts
                payable
            
            
            (13
            )Other
                payable and accruals
            
            
            (97
            )Net
                assets value
            
            
            3,175Goodwill
            
            $
            125





15




Longyuan
      Packaging Plant





On
      January 10, 2006, the Company established New Dragon Asia (Long Kou) Packing
      Materials Company Limited, a wholly-owned subsidiary in Longkou, Shandong
      Province. NDAPM is principally engaged in the manufacturing and sale of packing
      materials, with a registered capital of $3,600,000.





**NOTE
      20. SEGMENT INFORMATION**





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





**For
                the three months ended**
              **September
                25,**
            
            **For
                the nine months ended**
              **September
                25,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(US$'000)**
            
            **(US$'000)**
            
            **(US$'000)**
            
            **(US$'000)**Net
                revenueInstant
                noodles
            
            
            3,853
            
            
            4,030
            
            
            10,866
            
            
            11,691Flour
            
            
            7,805
            
            
            7,613
            
            
            20,754
            
            
            20,044Soybean
            
            
            2,297
            
            
            1,321
            
            
            6,530
            
            
            3,86913,955
            
            
            12,964
            
            
            38,150
            
            
            35,604Income
                (loss) from operationInstant
                noodles
            
            
            360
            
            
            240
            
            
            828
            
            
            1,117Flour
            
            
            1,648
            
            
            1,447
            
            
            4,004
            
            
            3,487Soybean
            
            
            (234
            )
            
            (139
            )
            
            (397
            )
            
            (2,785
            )1,774
            
            
            1,548
            
            
            4,435
            
            
            1,819Depreciation
                and amortizationInstant
                noodles
            
            
            338
            
            
            257
            
            
            583
            
            
            563Flour
            
            
            164
            
            
            156
            
            
            467
            
            
            392Soybean
            
            
            55
            
            
            44
            
            
            163
            
            
            205557
            
            
            457
            
            
            1,213
            
            
            1,160





**September
                25,**
            
            **December
                25,****2007**
            
            **2006****(US$'000)**
            
            **(US$'000)**Identifiable
                long-term assetsInstant
                noodles
            
            
            22,153
            
            
            20,864Flour
            
            
            7,370
            
            
            7,377Soybean
            
            
            3,116
            
            
            2,99032,639
            
            
            31,231





**NOTE
      21. OTHER EVENTS**




On
      August
      15, 2007, the Company entered into the Settlement Agreement and General Release
      (the “Agreement”) dated August 15, 2007 by and between the Company and Berry
      Shino Securities, Inc. (“Berry Shino”) pursuant to which the parties agreed to
      resolve a dispute relating to the alleged failure of the Company to pay in
      full
      for services rendered by Berry Shino in connection with a private placement
      of
      the Company’s securities in 2003 (the “Dispute”). The parties entered into the
      Agreement to resolve the Dispute without litigation and its attendant costs
      and
      without admission of liability by the Company. In accordance with the terms
      of
      the Agreement, the Company agreed to issue to Berry Shino, 275,000 shares of
      restricted Class A Common Stock in full satisfaction of the Dispute.


16





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.**





In
      addition to historical information, the matters discussed in this Form 10-Q
      contain forward-looking statements that involve risks or uncertainties.
      Generally, the words "believes," "anticipates," "may," "will," "should,"
      "expect," "intend," "estimate," "continue," and similar expressions or the
      negative thereof or comparable terminology are intended to identify
      forward-looking statements. Such statements are subject to certain risks and
      uncertainties, including the matters set forth in this report or other reports
      or documents we file with the Securities and Exchange Commission from time
      to
      time, which could cause actual results or outcomes to differ materially from
      those projected. Undue reliance should not be placed on these forward-looking
      statements, which speak only as of the date hereof. We undertake no obligation
      to update these forward-looking statements. Readers should carefully review
      the
      risks described in other documents we file from time to time with the Securities
      and Exchange Commission, including the Annual Report on Form 10-K for the fiscal
      year ended December 25, 2006, the Quarterly Reports on Form 10-Q filed by the
      Company and Current Reports on Form 8-K (including any amendments to such
      reports). References in this filing to the “Company”, “Group”, “we”, “us”, and
“our” refer to New Dragon Asia Corp. and its subsidiaries.





***Critical
      Accounting Policies***





Our
      discussion and analysis of financial condition and results of operations is
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these consolidated financial statements requires us to make
      estimates, judgments, and assumptions that affect the reported amounts of
      assets, liabilities, revenues, and expenses, and the related disclosure of
      contingent assets and liabilities. We base our estimates on historical
      experience and on various other assumptions that we believe are reasonable
      under
      the circumstances, the results of which form the basis for making judgments
      about the carrying values of assets and liabilities that are not readily
      apparent from other sources. Actual results may differ from these
      estimates.





An
      accounting policy is considered to be critical if it requires an accounting
      estimate to be made based on assumptions about matters that are highly uncertain
      at the time the estimates are made, and if different estimates that are
      reasonable could have been used, or changes in the accounting estimates that
      are
      reasonably likely to occur, could materially impact the consolidated financial
      statements. We believe the following critical accounting policies reflect the
      more significant estimates and assumptions used in the preparation of the
      consolidated financial statements.





**Contractual
      Joint Ventures**





A
      contractual joint venture is an entity established between us and another joint
      venture partner, with the rights and obligations of each party governed by
      a
      contract. Currently, we have established four contractual joint ventures with
      two Chinese partners in China - Shandong Longfeng Flour Co. Ltd. and Shandong
      Longfeng Group Co., with percentage of ownership of 90%, 79.64%, 90% and 90%
      respectively. Pursuant to each Chinese joint venture agreement, each Chinese
      joint venture partner is entitled to receive a pre-determined annual fee and
      is
      not entitled to receive any profits and is not responsible for any losses,
      regardless of the ownership in the contractual joint venture. In view of such
      contracted profit sharing arrangement, the contractual joint ventures are
      accounted for as wholly-owned by the Company. Accordingly, the Company’s
      consolidated financial statements include the financial statements of the
      contractual joint ventures.





**Revenue
      Recognition**





Our
      revenues are generated from sales of flour, instant noodle and soybean products.
      All of our revenue transactions contain standard business terms and conditions.
      We determine the appropriate accounting for these transactions after considering
      (1) whether a contract exists; (2) when to recognize revenue on the
      deliverables; and (3) whether all elements of the contract have been fulfilled
      and delivered. In addition, our revenue recognition policy requires an
      assessment as to whether collection is reasonably assured, which inherently
      requires us to evaluate the creditworthiness of our customers. Changes in
      judgments on these assumptions and estimates could materially impact the timing
      or amount of revenue recognition.





**Accounting
      for Derivative Instruments**





Statement
      of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” as amended, requires all derivatives to be
      recorded on the balance sheet at fair value. These derivatives, including
      embedded derivatives in our Series A and B Preferred Stock, are separately
      valued and accounted for on our balance sheet. Where market prices are not
      readily available, fair values are determined using market based pricing models
      incorporating readily observable market data and requiring judgment and
      estimates.





The
      pricing model we use for determining fair values of our derivatives is a
      combination of the Black Scholes and Binomial Pricing Models. Valuations derived
      from this model are subject to ongoing internal and external review. The model
      uses market-sourced inputs such as interest rates, exchange rates, and option
      volatilities. Selection of these inputs involves management's judgment and
      may
      impact net income. The Company has obtained a valuation report from a valuation
      firm to support its estimates.





17




In
      September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
      "Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
      contracts that are settled in a company's own stock, including common stock
      warrants, to be designated as an equity instrument, asset or a liability. Under
      the provisions of EITF 00-19, a contract designated as an asset or a liability
      must be carried at fair value on a company's balance sheet, with any changes
      in
      fair value recorded in the company's results of operations. A contract
      designated as an equity instrument must be included within equity, and no fair
      value adjustments are required. In accordance with EITF 00-19, in August 2006,
      we determined that several of the outstanding warrants to purchase our common
      stock and the embedded conversion feature of our financial instruments, should
      be separately accounted for as liabilities. We have recorded the fair value
      of
      these warrants and conversion features on our balance sheets and record
      unrealized changes in the values of these derivatives in our consolidated
      statements of operations as “Gain (loss) on fair value adjustments to embedded
      derivatives.”





**Share-Based
      Payment**





On
      December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based
      Payment,” which replaces SFAS No. 123, “Accounting for Stock-Based
      Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock
      Issued to Employees.” SFAS No. 123R requires all share-based payments to
      employees, including grants of employee stock options, to be recognized in
      the
      financial statements based on the grant date fair value of the award. We adopted
      the requirements of SFAS No. 123R for the fiscal year beginning on December
      26,
      2005, and recorded the compensation expense for all unvested stock
      options.




**Allowance
      for Doubtful Accounts**





Management
      provides for an allowance for doubtful accounts for those third party trade
      accounts that are not collected within one year. We base our estimate (one
      year)
      on historical experience and on continuous monitoring of customers’ credit and
      settlement. We believe we have reasonable basis for making judgments on the
      allowance for doubtful accounts.





We
      normally grant up to 90 days credit to our customers. We monitor our allowance
      for doubtful accounts on a monthly basis.





**Inventories
      Valuation**





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





***Recent
      Accounting Pronouncements***





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines
      fair value, establishes a framework for measuring fair value, and expands
      disclosures about fair value instruments. SFAS 157 does not require any new
      fair value measurements, but applies under other accounting pronouncements
      that
      require or permit fair value measurements. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007 (our fiscal 2008). We believe that implementation of SFAS 157 will
      have little or no impact on our consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities including an amendment of FASB
      Statement No. 115” (SFAS 159). This Statement allows all entities a one-time
      election to measure many financial instruments and certain other items at fair
      value that are not currently required to be measured at fair value (the “fair
      value option”). SFAS 159 is effective for fiscal years beginning after November
      15, 2007. We are currently evaluating the impact, if any, of SFAS 159 on our
      consolidated financial statements.





***Overview***





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





***Operations***





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





18




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





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





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





Our
      products are regionally marketed and distributed throughout China. Our sales
      and
      marketing strategy focuses on maintaining strong distribution relationships
      by
      holding annual sales order meetings, regular distributor conferences and an
      excellent quality/price dynamic.





We
      believe our distribution system is the key to our continued success in
      developing the “Long Feng” brand as one of the leading domestic brands in China.
      We have more than 200 points of distribution in China, which are owned and
      managed by distributors. Most of our distributors have long-term relationships
      with us.





Our
      primary domestic customer base for both our flour products and instant noodles
      consists of small retail stores in the rural areas throughout China where we
      believe that our brand has long been recognized as the highest quality available
      for the price. The rural market is rapidly growing, benefiting from increases
      in
      rural consumer income. We believe that brand loyalty by our customers is very
      strong in this sector. In addition to the small retail sector, we sell to larger
      supermarkets located in urban areas.





In
      addition to domestic sales, we export noodles to other countries such as South
      Korea, Australia, Malaysia, and Indonesia. We also have obtained HACCP (Hazard
      Analysis Critical Control Point) certification from CCIC Conformity Assessment
      Services Co. Ltd., a Chinese quality assurance examination authority, enabling
      us to begin exports of instant noodles and soybean powder to Europe. From the
      second quarter of the year 2006, we began export sales to Sweden and Greece.





We
      also
      receive orders for flour from certain KFC Corporation locations in China and
      KFC’s intermediary suppliers for flour. KFC requires rigorous quality control
      standards for its flour of at least the ISO9002 level. We believe that KFC’s
      orders reflect the brand reputation and quality of the Long Feng brand, as
      well
      as our commitment to international quality standards.




***Strategy***





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





·
            Acquire
                additional locations to increase our production
                capacity·
            Build
                strategic alliances with multinational food groups to enhance product
                range and capitalize on our China distribution
                network





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





***Competition***





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





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





***Employees***





On
      September 25, 2007, we had approximately 1,500 employees. All of our employees
      are located in the eight plants and the Shenzhen executive office. We believe
      we
      have good relationships with our employees and no major disputes or work
      stoppages have occurred since our inception.





19




***Currency
      Conversion and Exchange***





Although
      the Chinese government regulations now allow convertibility of Renminbi (“RMB”)
      for current account transactions, significant restrictions still remain. Hence,
      such translations should not be construed as representations that RMB could
      be
      converted into U.S. dollars at that rate or any other rate.





Substantially
      all our revenue and expenses are denominated in RMB. Our RMB cash inflows are
      sufficient to service our RMB expenditures. For financial reporting purposes,
      we
      use U.S. dollars. The value of RMB against U.S. dollars and other currencies
      may
      fluctuate and is affected by, among other things, changes in China’s political
      and economic conditions. Any significant revaluation of RMB may materially
      affect our financial condition in terms of U.S. dollar reporting. To date,
      we
      have not engaged in any currency hedging transactions in connection with our
      operations.





***Results
      of Operations***





The
      following table sets forth, for the periods indicated, certain operating
      information expressed in U.S. dollars (in thousands):




**Three
                months ended**
              **September****25,**
            
            **Nine
                months ended**
              **September
                25,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                revenue
            
            $
            13,955
            
            $
            12,964
            
            $
            38,150
            
            $
            35,604Cost
                of goods sold
            
            
            (11,148
            )
            
            (10,442
            )
            
            (30,865
            )
            
            (29,056
            )Gross
                profit
            
            
            2,807
            
            
            2,522
            
            
            7,285
            
            
            6,548Selling
                and distribution expenses
            
            
            (302
            )
            
            (263
            )
            
            (825
            )
            
            (709
            )General
                and administrative expenses
            
            
            (731
            )
            
            (711
            )
            
            (2,025
            )
            
            (4,020
            )Gain
                (loss) on fair value adjustments to embedded derivatives
            
            
            1,903
            
            
            2,593
            
            
            7,541
            
            
            3,198Income
                (loss) before income taxes and minority interest
            
            
            3,695
            
            
            5,217
            
            
            12,677
            
            
            7,219Provision
                for income taxes
            
            
            (491
            )
            
            (427
            )
            
            (1,211
            )
            
            (1,061
            )Net
                income (loss)
            
            
            3,204
            
            
            4,790
            
            
            11,466
            
            
            6,025EBITDA*
            
            
            2,346
            
            
            3,093
            
            
            6,331
            
            
            7,798EBITDA
                margin on revenue
            
            
            17
            %
            
            24
            %
            
            17
            %
            
            22
            %





*
      The
      Company uses EBITDA as an operating performance measure. EBITDA is defined
      as
      net earnings (loss) before interest, taxes, depreciation and amortization
      expense, non-cash stock-based compensation and in our case (loss) gain on fair
      value adjustments to embedded derivatives. EBITDA is not a measure of operating
      performance under U.S. generally accepted accounting principles (“GAAP”) and
      should not be considered as an alternative or substitute for GAAP profitability
      measures such as operating earnings (loss) and net earnings (loss). EBITDA
      as an operating performance measure has material limitations since it excludes,
      among other things, the statement of operations impact of depreciation and
      amortization expense, interest expense and the provision (benefit) for income
      taxes and (loss) gain on fair value adjustments to embedded derivatives and
      therefore does not necessarily represent an accurate measure of profitability,
      particularly in situations where a company is highly leveraged or has a
      disadvantageous tax structure. The Company uses a significant amount of capital
      assets and depreciation and amortization expense is a necessary element of
      the
      Company’s costs and ability to generate revenue and therefore its exclusion from
      EBITDA is a material limitation. The Company generally incurs significant income
      taxes each year and the provision (benefit) for income taxes is a necessary
      element of the Company’s costs and therefore its exclusion from EBITDA is a
      material limitation. As a result, EBITDA should be evaluated in conjunction
      with
      net earnings (loss) for a more complete analysis of the Company’s profitability,
      as net earnings (loss) includes the financial statement impact of these items
      and is the most directly comparable GAAP operating performance measure to
      EBITDA. As EBITDA is not defined by GAAP, the Company’s definition of EBITDA may
      differ from and therefore may not be comparable to similarly titled measures
      used by other companies, thereby limiting its usefulness as a comparative
      measure. Because of the limitations that EBITDA has as an analytical tool,
      investors should not consider it in isolation, or as a substitute for analysis
      of the Company’s operating results as reported under GAAP.




The
      following table presents reconciliation from net earnings, which is the most
      directly comparable GAAP operating performance measure, to EBITDA for the third
      quarters of 2007 and 2006, respectively.




**Three
                months ended**
              **September
                25,**
            
            **Nine
                months ended**
              **September
                25,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                income
            
            $
            3,204
            
            $
            4,790
            
            $
            11,466
            
            $
            6,025Income
                tax
            
            
            491
            
            
            427
            
            
            1,211
            
            
            1,061Interest
                income
            
            
            (3
            )
            
            (26
            )
            
            (18
            )
            
            (49
            )Depreciation
                and amortization
            
            
            557
            
            
            495
            
            
            1,213
            
            
            1,639Loss
                (gain) on fair value adjustments to embedded derivatives
            
            
            (1,903
            )
            
            (2,593
            )
            
            (7,541
            )
            
            (3,198
            )Non-cash
                stock-based compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            2,320EBITDA
            
            $
            2,346
            
            $
            3,093
            
            $
            6,331
            
            $
            7,798





20





***Nine
      Months Ended September 25, 2007 Compared to Nine Months Ended September 25,
      2006***





***Net
      Revenue***





Net
      revenue for the nine months ended September 25, 2007 was $38,150,000,
      representing an increase of $2,546,000, or 7%, from $35,604,000 for the nine
      months ended September 25, 2006. The increase was primarily due to the
      introduction of our soybean protein powder product,
      which accounted for approximately $ 2.4 million of the increase .





***Gross
      Profit***





As
      a
      percentage of net revenue, gross profit increased to 19% for the nine months
      ended September 25, 2007 from 18% for the nine months ended September 25, 2006.
      The increase was primarily due to the growth of export sales, which generate
      higher margins.





***Selling
      and Distribution Expenses***





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





Selling
      and distribution expenses were $825,000 for the nine months ended September
      25,
      2007, representing an increase of $116,000 from $709,000 for the corresponding
      period of 2006. The increase was primarily due to the expansion of marketing
      activities.





As
      a
      percentage of net revenue, selling and distribution expenses remained constant
      at 2% for the nine months ended September 25, 2007 as compared with the
      corresponding period in 2006. These results were primarily because we made
      no
      major change to our selling and distribution channels and as a result our costs
      were stabilized.





***General
      and Administrative Expenses***





General
      and administrative expenses decreased $1,995,000, or 50%, to $2,025,000 for
      the
      nine months ended September 25, 2007 as compared to $4,020,000 for the nine
      months ended September 25, 2006. The decrease was primarily due to the fact
      that
      no stock-based compensation expense was incurred in the year 2007.





***Income
      from Operations***





Income
      from operations increased $2,616,000, or 144%, to $4,435,000 for the nine months
      ended September 25, 2007 as compared to $1,819,000 for the nine months ended
      September 25, 2006. The increase was primarily due to the fact that no
      stock-based compensation expense was incurred in the year 2007 and the increase
      in the number of high margin export sales during 2007.





***Gain
      on Fair Value Adjustments to Embedded Derivatives***





The
      Company issued Series A Preferred Stock in July 2005, together with 3,157,896
      warrants to purchase Class A Common Stock resulting in aggregate proceeds of
      $6
      million. The Company also issued Series B Preferred Stock in December 2005,
      together with 2,968,750 warrants to purchase Class A Common Stock resulting
      in
      aggregate proceeds of $9.5 million. T he
      fair
      value of each instrument was recorded as a derivative liability on our balance
      sheet. The corresponding gain or loss, which was non-cash in nature, from
      changes in the fair values of these instruments was recorded in our statement
      of
      operation. For the nine months ended September 25, 2007, the gain from variation
      of the fair value of these instruments was $7,541,000.





For
      the
      nine months
      ended September 25, 2006 ,
      the
      gain from changes in the fair value of these instruments was $3,198,000. The
      increase was primarily due to the adjustments in the price used to calculate
      the
      fair value of the derivatives as a result of the change of the trading price
      of
      our common stock on September 25, 2007 and 2006, the valuation dates used to
      calculate such fair value for the respective periods.





***VAT
      Refunds***





VAT
      refunds remained at $540,000 for the nine months ended September 25, 2007 as
      compared to $2,135,000 for the nine months ended September 25, 2006. During
      the
      three months ended September 30, 2007, there were no additional tax refunds
      received from the municipal government of China.





21




***Net
      Income***





Net
      income was $11,466,000 for the nine months ended September 25, 2007 as compared
      to $6,025,000 for the nine months ended September 25, 2006. Such increase was
      primarily due to (i) the fact that there was no stock-based compensation expense
      incurred in the year 2007 and (ii) the gain derived from changes in the fair
      value of derivative instruments.





***Three
      Months Ended September 25, 2007 Compared to Three Months Ended September 25,
      2006***





***Net
      Revenue***





Net
      revenue for the quarter ended September 25, 2007 was $13,955,000, representing
      an increase of $991,000, or 8%, from $12,964,000 for the quarter ended September
      25, 2006. The increase was primarily due to the introduction of our soybean
      protein powder product, which accounted for approximately $900,000of the
      increase.





***Gross
      Profit***





As
      a
      percentage of net revenue, gross profit increased to 20% for the three months
      ended September 25, 2007 from 19% for the three months ended September 25,
      2006.
      The increase was primarily due to the growth of export sales, which generate
      higher margins.





***Selling
      and Distribution Expenses***





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





Selling
      and distribution expenses were $302,000 for the quarter ended September 25,
      2007, representing an increase of $39,000 or 15% from $263,000 for the
      corresponding quarter of 2006. The increase was primarily due to the expansion
      of marketing activities.





As
      a
      percentage of net revenue, selling and distribution expenses remained constant
      at 2% in the quarter ended September 25, 2007 as compared with the corresponding
      period in 2006. These results were primarily because we made no major change
      to
      our selling and distribution channels and as a result our costs were
      stabilized.





***General
      and Administrative Expenses***





General
      and administrative expenses increased $20,000, or 3%, to $731,000 for the
      quarter ended September 25, 2007 as compared to $711,000 for the quarter ended
      September 25, 2006. The increase was primarily due to the increase in
      professional fees on services including fees for investor relations, legal
      and
      accounting advice.





***Income
      (Loss) from Operations***





Income
      from operations was $1,774,000 for the three months ended September 25, 2007
      as
      compared to $1,548,000 for the three months ended September 25, 2006. The
      increase was primarily due to the increase in the number of export sales, which
      generate higher margins.





***Gain
      (Loss) on Fair Value Adjustments to Embedded
      Derivatives***





The
      Company issued Series A Preferred Stock in July 2005, together with 3,157,896
      warrants to purchase Class A Common Stock resulting in aggregate proceeds of
      $6
      million. The Company also issued Series B Preferred Stock in December 2005,
      together with 2,968,750 warrants to purchase Class A Common Stock resulting
      in
      aggregate proceeds of $9.5 million. The fair value of each instrument was
      recorded as a derivative liability on our balance sheet. The corresponding
      gain
      or loss, which is non-cash in nature, resulting from changes in the fair values
      of these instruments is subsequently recorded in our statements of operations.
      For the three months ended September 25, 2007, the gain from changes in the
      fair
      value of these instruments was $1,903,000.





For
      the
      three months ended September 25, 2006, the gain from changes in the fair value
      of these instruments was $2,593,000. The change was primarily due to the
      adjustments in the price used to calculate the fair value of the derivatives
      as
      a result of the change of the trading price of our common stock on September
      25,
      2007 and 2006, the valuation dates used to calculate such fair value for the
      respective periods.





***VAT
      Refunds***





VAT
      refund was $0 for the quarter ended September 25, 2007 as compared to $1,036,000
      for the quarter ended September 25, 2006. During the three months ended
      September 30, 2007, there were no additional tax refunds received from the
      municipal government of China.




22




***Net
      Income (Loss)***





Net
      income was $3,204,000 for the quarter ended September 25, 2007 as compared
      to
      $4,790,000 for the quarter ended September 25, 2006. Such decrease was primarily
      due to fact that (i) the gain derived from changes in the fair value of
      derivative instruments was lower and (ii) no VAT refund occurred during the
      quarter ended September 25, 2007.





***Financial
      Condition, Liquidity and Capital Resources***





Our
      primary liquidity needs are to purchase inventories and fund accounts receivable
      and capital expenditures. We have financed our working capital requirements
      through collections from customers and advances from related companies, together
      with proceeds received from financing transactions. We started a receivable
      collection campaign in late June with an objective of improving the debtor
      turnover period by 20% resulting in additional cash resources for the additional
      payment of deposits for wheat and soybean. This should enhance our supply chain
      management by averaging out the effect of the expected continued price increase
      in these crops.





Our
      working capital increased $13,962,000 to $31,517,000 at September 25, 2007
      as
      compared to $17,555,000 at December 25, 2006, which was primarily due to (i)
      the
      increased inventory and (ii) the change in the fair value of derivative
      instruments.





Cash
      and
      cash equivalents were $3,740,000 as of September 25, 2007, a decrease of
      $6,536,000 from December 25, 2006. Net cash used in operating activities for
      the
      nine months ended September 25, 2007 was $7,534,000, which was primarily due
      to
      (i) additional deposits and prepayments of $5,079,000 paid to suppliers for
      wheat and soybean in order to secure additional supplies in anticipation of
      prices increase; (ii) increase in inventories of $8,343,000 for the growth
      of
      business.





***Off-Balance
      Sheet Arrangements***





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





***Contractual
      Obligations and Commercial Commitments***





On
      July
      11, 2005, we issued 6,000 shares of Series A Preferred Stock, convertible into
      an aggregate of 6,315,789 shares of Class A Common Stock at a conversion price
      of $0.95 per share (subject to anti-dilution adjustments and interest payments),
      raising $6.0 million in gross proceeds.





On
      December 22, 2005, we issued 9,500 shares of Series B Preferred Stock,
      convertible into an aggregate of 5,937,500 shares of Class A Common Stock at
      a
      conversion price of $1.60 per share (subject to anti-dilution adjustments and
      interest payments), raising $9.5 million in gross proceeds.





23




The
      key
      terms of the Series A Preferred Stock and Series B Preferred Stock are as
      follows:





Series
                A Preferred Stock
            
            Series
                B Preferred StockPreferred
                Dividend
            
            7%
                per annum, payable quarterly in arrears in cash or, at the Company’s
                option subject to satisfaction of certain conditions, shares of Class
                A
                Common Stock valued at 95% of the volume-weighted current market
                price.
            
            7%
                per annum, payable quarterly in arrears in cash or, at the Company’s
                option subject to satisfaction of certain conditions, shares of Class
                A
                Common Stock valued at 95% of the volume-weighted current market
                price.Redemption
            
            July
                11, 2010
              
              Beginning
                on the 24th month following closing and each month thereafter, the
                Company
                shall redeem 1/37th of the face value of the Preferred Stock in either
                cash or Class A Common Stock valued at 90% of the volume-weighted
                current
                market price.
            
            December
                22, 2010
              
              Beginning
                at the end of the 24th month following closing and on each third
                monthly
                anniversary of that date (quarterly) thereafter, the Company shall
                redeem
                1/13th of the face value of the Preferred Stock in either cash or
                Class A
                Common Stock valued at 90% of the volume-weighted current market
                price.Mandatory
                Conversion
            
            The
                Company may at any time force the conversion of the Preferred Stock
                if the
                volume-weighted current market price of the Class A Common Stock
                exceeds
                300% of the then applicable conversion price.
            
            The
                Company may at any time force the conversion of the Preferred Stock
                if the
                volume-weighted current market price of the Class A Common Stock
                exceeds
                200% of its price at issuance of the Preferred Stock.Registration
            
            The
                Company shall file to register the underlying Class A common shares
                within
                30 days of the closing date and make its best efforts to have the
                Registration declared effective at the earliest date. In the event
                such
                Registration is not continuously effective during the period such
                shares
                are subject to transfer restrictions under the U.S. federal securities
                laws, then (subject to certain exceptions) the holders are entitled
                to
                receive liquidated damages equal to 2.0% of the purchase price of
                the
                Preferred Stock per month.
            
            The
                Company shall file to register the underlying Class A common shares
                with
                30 days of the closing date and make its best efforts to have the
                Registration declared effective at the earliest date. In the event
                such
                Registration is not continuously effective during the period such
                shares
                are subject to transfer restrictions under the U.S. federal securities
                laws, then (subject to certain exceptions) the holders are entitled
                to
                receive liquidated damages equal to 2.0% of the purchase price of
                the
                Preferred Stock per month.Anti-dilution
            
            In
                the event the Company issues at any time while Preferred Stock are
                still
                outstanding Common Stock or any type of securities giving rights
                to Common
                Stock at a price below the Issue Price, the Company agrees to extend
                full-ratchet anti-dilution protection to the investors.
            
            In
                the event the Company issues at any time while Preferred Stock are
                still
                outstanding Common Stock or any type of securities giving rights
                to Common
                Stock at a price below the Issue Price, the Company agrees to extend
                full-ratchet anti-dilution protection to the
                investors.





As
      of
      September 25, 2007, the Company had long-term debt obligations that resulted
      from the redeemable convertible preferred stock and the pre-determined annual
      fee charged by joint venture partners through February 2009 and other
      commitments and long-term liabilities through August 2049 as
      follows:





Payment
                Obligations By Period2007
            
            2008
            
            2009
            
            2010
            
            2011
            
            Thereafter
            
            Total(In
                thousands)Redeemable
                convertible preferred stock
            
            $
            400
            
            $
            3,162
            
            $
            3,162
            
            $
            3,438
            
            $
            —
            
            $
            —
            
            $
            10,162Pre-determined
                annual fee charged by joint venture partners
            
            
            28
            
            
            113
            
            
            113
            
            
            113
            
            
            113
            
            
            3,823
            
            
            4,303Total
            
            $
            428
            
            $
            3,275
            
            $
            3,275
            
            $
            3,551
            
            $
            113
            
            $
            3,823
            
            $
            14,465





Reconciliation
      of the outstanding payment obligations of redeemable convertible preferred
      stock:




(In
                thousands)Aggregated
                balance as of the issue date
            
            $
            15,500Partial
                redemption of Series A Preferred Stock in 2005
            
            
            (1,900
            )Partial
                redemption of Series A and B Preferred Stock in 2006
            
            
            (3,438
            )$
            10,162





**RISK
      FACTORS**





The
      risks
      and uncertainties described below are not the only ones the Company faces.
      Additional risks and uncertainties not presently known to the Company or that
      the Company currently deemed immaterial also may impair the Company’s business
      operations. If any of the following risks occur, the Company’s business
      prospects, financial condition, operating results and cash flows could be
      adversely affected in amounts that could be material.





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





***We
      have never paid dividends on our Class A Common
      Stock.***





We
      have
      never declared or paid any dividends on our Class A Common Stock. The
      declaration and payment in the future of any cash or stock dividends on the
      Class A Common Stock will be at the discretion of our Board of Directors and
      will depend upon a variety of factors, including our ability to service our
      outstanding indebtedness, if any, and to pay dividends on securities ranking
      senior to the Class A Common Stock, including the shares of our outstanding
      preferred stock, our future earnings, if any, capital requirements, financial
      condition and such other factors as our Board of Directors may consider to
      be
      relevant from time to time. Factors including, but not limited to, outstanding
      indebtedness, payment of dividends on securities ranking senior to the Class
      A
      Common Stock, decreases in our future earnings, increases in capital
      requirements, and negative results of our financial conditions may restrict
      our
      ability to declare or pay any dividends on our Class A Common Stock in the
      future. We currently intend to retain our future earnings to support operations
      and therefore do not expect to declare or pay any dividends on our Class A
      Common Stock in the foreseeable future.




24




***We
      are controlled by our majority shareholder, which is controlled by our
      Chairman.***




We
      are
      controlled by our major shareholder, which is controlled by our Chairman, Mr.
      Lu. Mr. Lu owns 100% of the equity interests of New Dragon Asia Food Ltd, which
      is our majority shareholder. As a result, Mr. Lu through his equity ownership
      effectively exercises control over all matters requiring shareholder approval,
      including the election of directors and approval of significant corporate
      transactions. This concentration of ownership might also have the effect of
      delaying or preventing a change in control of us that may not be viewed as
      beneficial by other shareholders.





***Our
      primary source of funds for dividends and other distributions from our operating
      subsidiary in China is subject to various legal and contractual restrictions
      and
      uncertainties, and our ability to pay dividends or make other distributions
      to
      our shareholders are negatively affected by those restrictions and
      uncertainties.***





We
      are a
      holding company established in the state of Florida and conduct our core
      business operations through our operating subsidiaries, Mix Creation Ltd.,
      Rich
      Delta Ltd. and Keen General Ltd. and their respective subsidiaries in China
      (collectively, the “Subsidiaries”). As a result, our profits available for
      distribution to our shareholders are dependent on the profits available for
      distribution from the Subsidiaries. If the Subsidiaries incur debt on their
      own
      behalf, the debt instruments may restrict their ability to pay dividends or
      make
      other distributions, which in turn would limit our ability to pay dividends
      on
      our shares. Under the current PRC laws, because we are incorporated in the
      State
      of Florida, our PRC subsidiaries are each regarded as a wholly foreign-owned
      enterprise in China. Although dividends paid by foreign invested enterprises,
      such as wholly foreign-owned enterprises and Sino-foreign joint ventures, are
      not subject to any PRC corporate withholding tax, the PRC laws permit payment
      of
      dividends only out of net income as determined in accordance with PRC accounting
      standards and regulations. Determination of net income under PRC accounting
      standards and regulations may differ from the determination under U.S. GAAP
      in
      significant aspects, such as the use of different principles for recognition
      of
      revenues and expenses. In addition, distribution of additional equity interests
      by any of our PRC subsidiaries to us (which is credited as fully paid through
      capitalization of the PRC subsidiaries’ undistributed profits) requires
      additional approval of the PRC government due to an increase in our registered
      capital and total investment in the subsidiary. Under the current PRC laws,
      each
      of our subsidiaries is required to set aside a portion of its net income each
      year to fund designated statutory reserve funds. These reserves are not
      distributable as cash dividends. As a result, our primary internal source of
      funds for dividend payments from the Subsidiaries are subject to these and
      other
      legal and contractual restrictions and uncertainties, which in turn may limit
      or
      impair our ability to pay dividends to our shareholders. Moreover, any transfer
      of funds from us to the Subsidiaries, either as a shareholder loan or as an
      increase in registered capital, is subject to registration with or approval
      by
      PRC governmental authorities. These limitations on the flow of funds between
      us
      and the Subsidiaries could restrict our ability to act in response to changing
      market conditions.





***Recent
      regulations relating to offshore investment activities by PRC residents may
      adversely affect our business and prospects.***





On
      September 8, 2006, several agencies of the PRC government issued a new
      regulation concerning restrictions on investments in China through special
      purpose companies incorporated overseas and the listing of the shares of those
      companies in overseas markets. The regulation contains a number of provisions
      relating to the acquisition of Chinese domestic companies which involve
“important industries” and may affect the national economic safety or result in
      the transfer of actual control rights of any company having “famous brands” or
      any “old established Chinese brands,” and require that the parties to any such
      transaction report to the Ministry of Commerce for approval. Additionally,
      any
      foreign company directly or indirectly controlled by Chinese companies or
      individuals used as a vehicle for public listing in an overseas stock market
      will need China Securities Regulatory Commission approval in connection with
      such listing. As it is uncertain how this new regulation will be interpreted
      or
      implemented, we cannot predict how this regulation will affect our business
      operations or future strategies. For example, we may be subject to a more
      stringent review and approval process with respect to our acquisition
      activities, which may adversely affect our business and prospects.





**RISKS
      RELATED TO OUR BUSINESS**





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





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




·
            establishing
                favorable brand recognition;·
            developing
                products sought by consumers;·
            implementing
                appropriate pricing;·
            providing
                strong marketing support; and




25




·
            obtaining
                access to retain outlets and sufficient shelf
                space.




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





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





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





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





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





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





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




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





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





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





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





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





26





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





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




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





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





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





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





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





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





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





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





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





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





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





27




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





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





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





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





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





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





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





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





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





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





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





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





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





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





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




28




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





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





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





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





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





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





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





·
            Government
                involvement·
            Level
                of development·
            Growth
                rate·
            Control
                of foreign exchange; and·
            Allocation
                of resource





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





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





·
            Changes
                in the rate or method of taxation·
            Imposition
                of additional restrictions on currency conversion and remittances
                abroad·
            Reduction
                in tariff or quota protection and other import restrictions;
                and·
            Changes
                in the usage and costs of state-controlled transportation
                services





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





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





29




***The
      discontinuation of any preferential tax treatments or other incentives currently
      available to us in the PRC could materially and adversely affect our business,
      financial condition and results of operations***





Four
      of
      our PRC subsidiaries enjoy certain special or preferential tax treatments
      regarding enterprise income tax in accordance with the “Income Tax Law of the
      PRC for Enterprises with Foreign Investment and Foreign Enterprises.”
Accordingly, they are entitled to tax concessions whereby the profit for the
      first two financial years beginning with the first profit-making year (after
      setting off tax losses carried forward from prior years) is exempt from income
      tax in the PRC and the profit for each of the subsequent three financial years
      is taxed at 50% of the prevailing tax rates set by the relevant tax authorities.
      On March 16, 2007, the National People’s Congress of the PRC passed the
      Enterprise Income Tax Law of the People’s Republic of China, which law will take
      effect as of January 1, 2008. In accordance with the new law, a unified
      enterprise income tax rate of 25% and unified tax deduction standards will
      be
      applied equally to both domestic-invested enterprises and foreign-invested
      enterprises such as our PRC subsidiaries. Enterprises established prior to
      March
      16, 2007, eligible for preferential tax treatment in accordance with the
      currently prevailing tax laws and administrative regulations shall, under the
      regulations of the State Council, gradually become subject to the new tax rate
      over a five-year transition period starting from the date of effectiveness
      of
      the new law. We expect details of the transitional arrangement for the five-year
      period from January 1, 2008 to December 31, 2012 applicable to enterprises
      approved for establishment prior to March 16, 2007, such as our PRC
      subsidiaries, to be set out in more detailed implementing rules to be adopted
      in
      the future. Accordingly, our PRC subsidiaries’ applicable tax rate may gradually
      increase to the unified tax rate of 25% by January 1, 2013 under the new tax
      law
      and in accordance with more detailed implementing rules to be adopted in the
      future. Any increase in our effective tax rate as a result of the above may
      adversely affect our operating results. However, details regarding
      implementation of this new law are expected to be provided in the form of one
      or
      more implementing regulations to be promulgated by the PRC government and the
      timing of the issuance of such implementing regulations is currently
      unclear.





The
      tax
      laws and regulations in the PRC may be further reformed by the PRC government,
      and we cannot assure you that our subsidiaries in the PRC will continue to
      enjoy
      any of these special or preferential tax treatments or other incentives in
      future. The discontinuation of any such special or preferential tax treatment
      or
      other incentives could materially and adversely affect our business, financial
      condition and results of operations.




30




**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk.**





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





***Currency
      Fluctuations and Foreign Currency Risk***





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





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





***Interest
      Rate Risk***





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





***Credit
      Risk***





We
      have
      not experienced significant credit risk as most of our customers are long-term
      customers with good payment records. Our receivables are regularly monitored
      by
      our credit manager.





**Item
      4. Controls and Procedures.**





***Disclosure
      Controls and Procedures***





Under
      the
      supervision and with the participation of our management, including our chief
      executive officer and the chief financial officer, we conducted an evaluation
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934, as of September 25, 2007, the end of the period covered
      by
      this report (the “Evaluation Date”). Based on this evaluation, our chief
      executive officer and chief financial officer concluded as of the Evaluation
      Date that our disclosure controls and procedures were effective such that the
      material information required to be included in our Securities and Exchange
      Commission (“SEC”) reports is recorded, processed, summarized and reported
      within the time periods specified in SEC rules and forms relating to us and
      our
      consolidated subsidiaries, and was made known to others within those entities,
      particularly during the period when this report was being prepared.





***Changes
      in internal controls over financial reporting***





There
      were no significant changes in our internal controls over financial reporting
      (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
      Act
      of 1934) during the nine months ended September 25, 2007 that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.


31





**PART
      II: OTHER INFORMATION**





**Item
      1. Legal Proceedings.**




On
      August
      15, 2007, the Company entered into the Settlement Agreement and General Release
      (the “Agreement”) dated August 15, 2007 by and between the Company and Berry
      Shino Securities, Inc. (“Berry Shino”) pursuant to which the parties agreed to
      resolve a dispute relating to the alleged failure of the Company to pay in
      full
      for services rendered by Berry Shino in connection with a private placement
      of
      the Company’s securities in 2003 (the “Dispute”). The parties entered into the
      Agreement to resolve the Dispute without litigation and its attendant costs
      and
      without admission of liability by the Company.




In
      accordance with the terms of the Agreement, the Company agreed to issue to
      Berry
      Shino, 275,000 shares of restricted Class A Common Stock (the “Settlement
      Amount”) in full satisfaction of the Dispute. In exchange for the Settlement
      Amount, Berry Shino agreed to not pursue any claims against the Company and
      irrevocably and completely released and discharged the Company, its present
      or
      former affiliates, subsidiaries, parents, directors, officers, shareholders,
      employees and representatives, and their respective successors and assigns
      (the
“Releasees”) from, and waived, any and all actions, causes of action, suits,
      debts, dues, sums of money, accounts, reckonings, complaints, covenants,
      contracts, controversies, agreements, promises, damages, judgments, claims,
      counterclaims, demands, losses and other liabilities whatsoever, in law or
      equity, which Berry Shino, its directors, officers, employees, agents and
      representatives, and their respective successors and assigns, ever had, now
      has,
      or hereafter can, shall or may have for, upon or by reason of any matter, cause
      or thing whatsoever from the beginning of the world to August 15, 2007, whether
      presently known or unknown, asserted or unasserted, against any Releasee,
      including, without limitation, any and all claims arising out of, related to,
      or
      connected with the Dispute.





**Item
      1A. Risk Factors.**





There
      have been no material changes in our business, operations or prospects that
      would require a change to the Risk Factor disclosure included in our most recent
      Annual Report on Form 10-K that have not already been disclosed.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**





None.




**Item
      3. Defaults Upon Senior Securities.**





None.





**Item
      4. Submission of Matters to a Vote of Security
      Holders.**





None.




**Item
      5. Other Information.**





There
      have been no material changes to the procedures by which security holders may
      recommend nominees to the Company’s board of directors.





**Item
      6. Exhibits.**




Exhibit
              Number
            
            Description31.1
            
            Certification
                of Chief Executive Officer pursuant to Rules 13A-14(A)/15D-15(E)
                of the
                Securities Exchange Act of 1934, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002, filed herewith.31.2
            
            Certification
                of the Chief Financial Officer pursuant to Rules 13A-14(A)/15D-15(E)
                of
                the Securities Exchange Act of 1934, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002, filed herewith.32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer Pursuant to
                18
                U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed
                herewith.


32





**SIGNATURES**





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




**NEW
                DRAGON ASIA CORP.**Dated:
                November 6, 2007
            By:
            */s/
                Li Xia Wang*Name:
                Li Xia WangTitle:
                Chief Executive Officer




Dated:
                November 6, 2007
            By:
            */s/
                Peter Mak*Name:
                Peter MakTitle:
                Chief Financial Officer




33