**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, 2006




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 Filerx





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 30, 2006
      was
      52,433,450.










**NEW
      DRAGON ASIA CORP.**





**FORM
      10-Q**





**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 2006**





**TABLE
      OF CONTENTS**




Page**PART
                I:**
            **FINANCIAL
                INFORMATION**ITEM
                1.
            Consolidated
                Financial Statements:Consolidated
                Balance Sheets as of September 25, 2006 (unaudited) and December
                25,
                2005
            
            3Consolidated
                Statements of Operations (unaudited) for the three months and nine
                months
                ended September 25, 2006 and 2005
            
            4Consolidated
                Statements of Stockholders’ Equity and Comprehensive Income (unaudited)
                for the nine months ended September 25, 2006 and the year ended December
                25, 2005
            
            5Consolidated
                Statements of Cash Flows (unaudited) for the nine months ended September
                25, 2006 and 2005
            
            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
            
            32ITEM
                4.
            Controls
                and Procedures
            
            32**PART
                II:**
            **OTHER
                INFORMATION**ITEM
                1.
            Legal
                Proceedings
            
            33ITEM
                1A.
            Risk
                Factors
            
            33ITEM
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            33ITEM
                3.
            Defaults
                Upon Senior Securities
            
            33ITEM
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            33ITEM
                5.
            Other
                Information
            
            33ITEM
                6.
            Exhibits
            
            33**SIGNATURES**
            
            34**EXHIBITS**









**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,**
              **2006**
            
            **December
                25,**
              **2005**(Unaudited)**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            14,564
            
            $
            14,332Accounts
                receivable, net
            
            
            7,304
            
            
            6,515Deposits
                and prepayments, net
            
            
            4,382
            
            
            4,970Inventories,
                net
            
            
            7,991
            
            
            7,630Due
                from related companies
            
            
            846
            
            
            679Total
                current assets
            
            
            35,087
            
            
            34,126Deposit
                for property, machinery and equipment
            
            
            --
            
            
            1,000Property,
                machinery and equipment, net
            
            
            23,718
            
            
            18,315Land
                use rights, net
            
            
            6,910
            
            
            3,980Goodwill
            
            
            125
            
            
            --Total
                assets
            
            $
            65,840
            
            $
            57,421**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            3,770
            
            $
            2,696Other
                payables and accruals
            
            
            1,930
            
            
            2,298Taxes
                payable
            
            
            2,626
            
            
            1,854Embedded
                derivatives, at fair value
            
            
            7,527
            
            
            12,135Due
                to related companies
            
            
            398
            
            
            598Total
                current liabilities
            
            
            16,251
            
            
            19,581Due
                to New Dragon Asia Food Limited
            
            
            123
            
            
            137Due
                to joint venture partners
            
            
            303
            
            
            54Total
                liabilities
            
            
            16,677
            
            
            19,772Minority
                interests
            
            
            370
            
            
            91Series
                A and B Redeemable Convertible Preferred Stock, $0.0001 par
                value:
              Authorized
                shares - 5,000,000
              Issued
                and outstanding - 12,182 in 2006 and 13,600 in 2005
            
            
            4,566
            
            
            3,559CommitmentsStockholders’
                equity:Class
                A Common Stock, $0.0001 par value:
              Authorized
                shares - 102,000,000
              Issued
                and outstanding - 51,867,062 in 2006 and 49,322,291 in
                2005
            
            
            5
            
            
            5Class
                B Common Stock, $0.0001 par value:
              Authorized
                shares - 2,000,000 - none issued and outstanding
            
            
            --
            
            
            --Additional
                paid-in capital
            
            
            20,722
            
            
            15,216Receivable
                from stockholder
            
            
            (49
            )
            
            (49
            )Retained
                earnings
            
            
            21,919
            
            
            18,029Accumulated
                other comprehensive income
            
            
            1,630
            
            
            798Total
                stockholders’ equity
            
            
            44,227
            
            
            33,999Total
                liabilities and stockholders’ equity
            
            $
            65,840
            
            $
            57,421




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,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                revenue
            
            $
            12,964
            
            $
            11,645
            
            $
            35,604
            
            $
            28,920Cost
                of goods sold
            
            
            (10,442
            )
            
            (9,488
            )
            
            (29,056
            )
            
            (23,862
            )Gross
                profit
            
            
            2,522
            
            
            2,157
            
            
            6,548
            
            
            5,058Selling
                and distribution expenses
            
            
            (263
            )
            
            (149
            )
            
            (709
            )
            
            (431
            )General
                and administrative expenses(including
                stock-based compensation of $2,320
              for
                the nine months ended September 25, 2006)
            
            
            (711
            )
            
            (360
            )
            
            (4,020
            )
            
            (1,338
            )Income
                from operations
            
            
            1,548
            
            
            1,648
            
            
            1,819
            
            
            3,289Other
                income (expense):Interest
                expense
            
            
            --
            
            
            --
            
            
            --
            
            
            (1
            )Interest
                income
            
            
            26
            
            
            4
            
            
            49
            
            
            4Other
                income (expense)
            
            
            14
            
            
            (207
            )
            
            18
            
            
            (204
            )Gain
                (loss) on fair value adjustments to embedded derivatives
            
            
            2,593
            
            
            (8,359
            )
            
            3,198
            
            
            (8,359
            )VAT
                refund
            
            
            1,036
            
            
            928
            
            
            2,135
            
            
            1,723Income
                (loss) before income taxes and minority interests
            
            
            5,217
            
            
            (5,986
            )
            
            7,219
            
            
            (3,548
            )Provision
                for income taxes
            
            
            (427
            )
            
            (381
            )
            
            (1,061
            )
            
            (892
            )Income
                (loss) before minority interests
            
            
            4,790
            
            
            (6,367
            )
            
            6,158
            
            
            (4,440
            )Minority
                interests
            
            
            --
            
            
            (73
            )
            
            (133
            )
            
            (40
            )Net
                income (loss)
            
            $
            4,790
            
            $
            (6,440
            )
            $
            6,025
            
            $
            (4,480
            )Accretion
                of Redeemable Preferred Stock
            
            
            (470
            )
            
            (96
            )
            
            (1,456
            )
            
            (96
            )Preferred
                Stock dividends
            
            
            (214
            )
            
            (209
            )
            
            (679
            )
            
            (209
            )Income
                (loss) available to common stockholders
            
            $
            4,106
            
            $
            (6,745
            )
            $
            3,890
            
            $
            (4,785
            )Earnings
                (loss) per common shareBasic
            
            $
            0.08
            
            $
            (0.15
            )
            $
            0.08
            
            $
            (0.11
            )Diluted
            
            $
            0.08
            
            $
            (0.15
            )
            $
            0.07
            
            $
            (0.11
            )Weighted
                average number of common shares outstandingBasic
            
            
            51,936
            
            
            45,768
            
            
            51,101
            
            
            45,296Diluted
            
            
            61,618
            
            
            45,768
            
            
            52,450
            
            
            45,296





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
                ACommon Stock**
            
            **AdditionalPaid-inCapital**
            
            **Receivablefrom
                Stockholder**
            
            **Retained
                Earnings**
            
            **Accumulated
                Other Comprehensive Income**
            
            **Total
                Stockholders' Equity**
            
            **Comprehensive
                Income****Shares**
            
            **Amount**Balance
                at December 25, 2004
            
            
            45,061
            
            $
            4
            
            $
            9,909
            
            $
            --
            
            $
            16,922
            
            $
            --
            
            $
            26,835
            
            $
            --Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,747
            
            
            
            
            
            1,747
            
            
            1,747Accretion
                of Redeemable Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (454
            )
            
            
            
            
            (454
            )Preferred
                Stock Dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (187
            )
            
            
            
            
            (187
            )Stock-based
                compensation expense
            
            
            
            
            
            
            
            
            105
            
            
            
            
            
            
            
            
            
            
            
            105Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            798
            
            
            798
            
            
            798Preferred
                Stock issuance costs
            
            
            
            
            
            
            
            
            566
            
            
            
            
            
            
            
            
            
            
            
            566Conversion
                of Preferred Stock and related interest payments made in shares of
                Class A
                Common Stock
            
            
            2,039
            
            
            0.5
            
            
            2,611
            
            
            
            
            
            
            
            
            
            
            
            2,611.50Exercise
                of warrants
            
            
            2,222
            
            
            0.5
            
            
            2,025
            
            
            
            
            
            
            
            
            
            
            
            2,025.50Receivable
                from stockholder
            
            
            
            
            
            
            
            
            
            
            
            (49
            )
            
            
            
            
            
            
            
            (49
            )Balance
                at December 25, 2005
            
            
            49,322
            
            
            5
            
            
            15,216
            
            
            (49
            )
            
            18,029
            
            
            798
            
            
            33,999
            
            $
            2,545Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,025
            
            
            
            
            
            6,025
            
            
            6,025Accretion
                of Redeemable Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,456
            )
            
            
            
            
            (1,456
            )Preferred
                Stock Dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (679
            )
            
            
            
            
            (679
            )Stock-based
                compensation expense
            
            
            
            
            
            
            
            
            2,320
            
            
            
            
            
            
            
            
            
            
            
            2,320Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            832
            
            
            832
            
            
            832Conversion
                of Preferred Stock, related interest payments made, and cashless
                exercise
                of warrants in shares of Class A Common Stock
            
            
            1,618
            
            
            
            
            
            2,066
            
            
            
            
            
            
            
            
            
            
            
            2,066Exercise
                of stock options
            
            
            1,000
            
            
            
            
            
            1,120
            
            
            
            
            
            
            
            
            
            
            
            1,120Balance
                at September 25, 2006
            
            
            51,940
            
            $
            5
            
            $
            20,722
            
            $
            (49
            )
            $
            21,919
            
            $
            1,630
            
            $
            44,227
            
            $
            6,857





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,****2006**
            
            **2005****Cash
              flows from operating activities:**Net
                income
            
            $
            6,025
            
            $
            (4,480
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Allowance
                for doubtful accounts
            
            
            (124
            )
            
            5Provision
                for inventory reserve
            
            
            11
            
            
            (36
            )Depreciation
                and amortization of property, machinery, equipment and land use
                rights
            
            
            1,639
            
            
            917Gain
                on sale of property, machinery and equipment
            
            
            --
            
            
            (21
            )(Gain)
                loss on fair value adjustments to embedded derivatives
            
            
            (3,198
            )
            
            8,359Minority
                interests
            
            
            7
            
            
            42Stock-based
                compensation expense
            
            
            2,320
            
            
            105Changes
                in operating assets and liabilities:
              (Increase)
                decrease in:Accounts
                receivable
            
            
            (602
            )
            
            (187
            )Deposits
                and prepayments
            
            
            588
            
            
            (3,269
            )Inventories
            
            
            (372
            )
            
            (1,585
            )Due
                from related companies
            
            
            (167
            )
            
            341Increase
                (decrease) in:Accounts
                payable
            
            
            1,061
            
            
            58Other
                payables and accruals
            
            
            (813
            )
            
            81Taxes
                payable
            
            
            985
            
            
            188Due
                to related companies
            
            
            (200
            )
            
            (668
            )Net
                cash provided by (used in) operating activities
            
            
            7,160
            
            
            (150
            )**Cash
                flows from investing activities:**Acquisition
                of Chengdu plant
            
            
            (2,300
            )
            
            --Proceeds
                from disposal of property, machinery and equipment
            
            
            --
            
            
            33Purchases
                of property, machinery and equipment
            
            
            (4,720
            )
            
            (3,330
            )Purchases
                of land use rights
            
            
            (2,024
            )
            
            (110
            )Minority
                interests
            
            
            266
            
            
            --Net
                cash used in investing activities
            
            
            (8,778
            )
            
            (3,407
            )**Cash
                flows from financing activities:**Proceeds
                from issuance of preferred stock
            
            
            --
            
            
            6,000Payments
                of issuance costs related to preferred stock
            
            
            (60
            )
            
            (538
            )Preferred
                stock dividend
            
            
            (277
            )
            
            (96
            )Repayments
                to parent company
            
            
            (14
            )
            
            (55
            )Proceeds
                from joint venture partners
            
            
            249
            
            
            13Proceeds
                from issuance of common stock upon exercise of warrants
            
            
            --
            
            
            1,879Proceeds
                from issuance of common stock upon exercise of stock
                options
            
            
            1,120
            
            
            --Net
                cash provided by financing activities
            
            
            1,018
            
            
            7,203Foreign
                currency translation adjustment
            
            
            832
            
            
            772Net
                increase in cash and cash equivalents
            
            
            232
            
            
            4,418Cash
                and cash equivalents at the beginning of the period
            
            
            14,332
            
            
            219Cash
                and cash equivalents at the end of the period
            
            $
            14,564
            
            $
            4,637**Non-Cash
                Investing and Financing Activities**Conversion
                of preferred stock into common stock
            
            $
            1,800
            
            $
            209Interest
                payments on preferred stock in form of common stock
            
            $
            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 seven 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.





These
      consolidated financial statements are unaudited. However, 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 unaudited consolidated financial
      statements have been prepared in accordance with the instructions for Form
      10-Q
      and, therefore, 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/A for the
      fiscal year ended December 25, 2005.





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 primarily
      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 balance sheet at fair value. These derivatives, including
      embedded derivatives in our Series A & B Redeemable convertible Preferred
      Stock, are separately valued and accounted for on our balance sheet. The pricing
      models we use for determining fair values of our 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. The
      Company has obtained a valuation report from a valuation firm to support its
      estimates.




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 sheet as of September
      25,
      2006 and December 25, 2005 and recorded unrealized changes in the values of
      these derivatives in our consolidated statement of operations as “(loss) gain on
      fair value adjustments to embedded derivatives” for the periods ended September
      25, 2006.




7




The
      EITF
      recently deliberated the impact of liquidated damages clauses in registration
      rights agreements and the effect on accounting and classification of instruments
      subject to the scope of EITF 00-19 in EITF 05-04, The Effect of a Liquidated
      Damages Clause on a Freestanding Financial Instrument Subject to Issue No.
      00-19. The EITF has not reached a consensus on this issue and has deferred
      deliberation until the FASB addresses certain questions, which could affect
      a
      conclusion on this issue. Specifically, EITF 05-04 presents alternative views
      on
      whether the liquidated damages provisions in registration rights agreements
      should be combined with or treated separately from the associated financial
      instrument. We view the registration rights agreement and the financial
      instrument as a liability to be recorded as incurred. If the EITF were to adopt
      the view that the registration rights agreement should be viewed as a separate
      instrument from the financial instrument, we may have to account for
      additional derivatives.





**NOTE
      3. RECENT ACCOUNTING PRONOUNCEMENTS**





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
      provides criteria for the recognition, measurement, presentation and disclosure
      of uncertain tax positions that have an effect on a company’s financial
      statements accounted for in accordance with SFAS No. 109, “Accounting for Income
      Taxes”, as a result of positions taken or expected to be taken in a company’s
      tax return. A tax benefit from an uncertain position may be recognized only
      if
      it is “more likely than not” that the position is sustainable based on its
      technical merits. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006. The Company is currently evaluating the
      potential effect that the adoption of FIN 48 will have on the Company's
      financial statement presentation and disclosures.





In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156,
“Accounting for Servicing of Financial Assets - an amendment of FASB Statement
      No. 140”, that provides guidance on accounting for separately recognized
      servicing assets and servicing liabilities. In accordance with the provisions
      of
      SFAS No. 156, separately recognized servicing assets and servicing liabilities
      must be initially measured at fair value, if applicable. Subsequent to initial
      recognition, the Company may use either the amortization method or the fair
      value measurement method to account for servicing assets and servicing
      liabilities within the scope of this Statement. SFAS No. 156 is effective as
      of
      the beginning of an entity’s fiscal year that begins after September 15, 2006.
      The Company will adopt SFAS No. 156 in fiscal year 2007. The adoption of this
      Statement is not expected to have a material effect on the Company’s
      consolidated financial statements.




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140,” to
      permit fair value remeasurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation in
      accordance with the provisions of SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities.” SFAS No. 155 is effective for all financial
      instruments acquired, issued, or subject to a remeasurement occurring after
      the
      beginning of an entity’s fiscal year that begins after September 5, 2006. The
      Company will adopt SFAS No. 155 in fiscal year 2007. The adoption of this
      Statement is not expected to have a material effect on the Company’s
      consolidated financial statements.





In
      April
      2006, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-6, “Determining the
      Variability to Be Considered in Applying FASB Interpretation No. 46(R)”, that
      will become effective beginning in the third quarter of 2006. FSP FIN No.
      46(R)-6 clarifies that the variability to be considered in applying
      Interpretation 46(R) shall be based on an analysis of the design of the variable
      interest entity. The adoption of the FSP is not expected to have a material
      effect on the Company’s consolidated financial statement.





**NOTE
      4. CONDENSED BALANCE SHEET INFORMATION**





Condensed
      balance sheet information as of September 25, 2006 consisted of the following
      (in thousands):





Inside
                China
            
            Outside
                China
            
            TotalAssets-
                Cash and cash equivalents
            
            $
            13,782
            
            $
            782
            
            $
            14,564-
                Others
            
            
            51,207
            
            
            69
            
            
            51,276Total
                assets
            
            
            64,989
            
            
            851
            
            
            65,840Liabilities
            
            
            8,776
            
            
            7,901
            
            
            16,677Minority
                interests
            
            
            370
            
            
            --
            
            
            370Intercompany
            
            
            24,649
            
            
            (24,649
            )
            
            --Equity
            
            
            35,611
            
            
            8,616
            
            
            44,227





8




Assets
      located outside of China consist primarily of cash and cash equivalents and
      deposits. Liabilities located outside of China consist primarily of embedded
      derivatives accounted for at fair value and preferred stock dividends payable.





Condensed
      statement of operation information for the nine months ended September 25,
      2006
      consisted of the following (in thousands):





Inside
                China
            
            Outside
                China
            
            TotalNet
                revenue
            
            $
            35,604
            
            $
            --
            
            $
            35,604Cost
                of goods sold
            
            
            (29,056
            )
            
            --
            
            
            (29,056
            )General
                and administrative expenses
            
            
            (690
            )
            
            (3,330
            )
            
            (4,020
            )Income
                (loss) from operations
            
            
            5,149
            
            
            (3,330
            )
            
            1,819Provision
                for income taxes
            
            
            (1,061
            )
            
            --
            
            
            (1,061
            )Other
                income (expense)
            
            
            2,179
            
            
            3,221
            
            
            5,400Net
                income (loss)
            
            
            6,134
            
            
            (109
            )
            
            6,025





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.





The
      calculation of diluted weighted average common shares outstanding for the three
      months ended September 25, 2006 and 2005 and for the nine months ended September
      25, 2006 and 2005 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,****2006**
            
            **2005****Income**
            
            **Weighted**
                **Average**
                  **Shares**
            
            **Per-Share**
            
            **Income**
                **(Loss)**
            
            **Weighted**
                **Average**
                  **Shares**
            
            **Per-Share**Earnings
                per share - basicIncome
                available to common stockholders
            
            $
            4,106
            
            
            51,936
            
            $
            0.08
            
            $
            (6,745
            )
            
            46,004
            
            $
            (0.14
            )Effect
                of dilutive securitiesRedeemable
                convertible preferred stock
            
            
            684
            
            
            8,846
            
            
            
            
            
            --
            
            
            --Options
                and warrants
            
            
            --
            
            
            836
            
            
            
            
            
            --
            
            
            --Earnings
                per share - dilutedNet
                income
            
            $
            4,790
            
            
            61,618
            
            $
            0.08
            
            $
            (6,745
            )
            
            46,004
            
            $
            (0.14
            )




9




**Nine
                Months Ended September 25,****2006**
            
            **2005****Income**
            
            **Weighted**
                **Average**
                  **Shares**
            
            **Per-Share**
            
            **Income**
                **(Loss)**
            
            **Weighted**
                **Average**
                  **Shares**
            
            **Per-Share**Earnings
                per share - basicIncome
                available to common stockholders
            
            $
            3,890
            
            
            51,101
            
            $
            0.08
            
            $
            (4,785
            )
            
            45,376
            
            $
            (0.11
            )Effect
                of dilutive securitiesRedeemable
                convertible preferred stock
            
            
            ---
            
            
            --
            
            
            
            
            
            --
            
            
            --Options
                and warrants
            
            
            --
            
            
            1,349
            
            
            
            
            
            --
            
            
            --Earnings
                per share - dilutedIncome
                available to common stockholders
            
            $
            3,890
            
            
            52,540
            
            $
            0.07
            
            $
            (4,785
            )
            
            45,376
            
            $
            (0.11
            )




**NOTE
      6. ACCOUNTS RECEIVABLE**





Accounts
      receivable consisted of the following (in thousands):




**September
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Accounts
                receivable
            
            $
            8,073
            
            $
            7,408Less:
                Allowance for doubtful accounts
            
            
            (769
            )
            
            (893
            )$
            7,304
            
            $
            6,515





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





**September
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Balance
                at the beginning of the period
            
            $
            893
            
            $
            775Add:
                provision during the period
            
            
            130
            
            
            250Less:
                write-offs during the period
            
            
            (254
            )
            
            (132
            )Balance
                at the end of the period
            
            $
            769
            
            $
            893





**NOTE
      7. DEPOSITS AND PREPAYMENTS**





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




**September
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Deposits
                for raw materials
            
            $
            3,877
            
            $
            4,350Prepayments
                and advances
            
            
            505
            
            
            620$
            4,382
            
            $
            4,970




**NOTE
      8. INVENTORIES**





Inventories
      consisted of the following (in thousands):




**September
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Raw
                materials (including packing materials)
            
            $
            6,442
            
            $
            6,133Finished
                goods
            
            
            1,694
            
            
            1,6318,136
            
            
            7,764Less:
                Inventory reserve
            
            
            (145
            )
            
            (134
            )$
            7,991
            
            $
            7,630




10


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





**September
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Balance
                at the beginning of the period
            
            $
            134
            
            $
            547Add:
                provision during the period
            
            
            21
            
            
            --Less:
                write-offs during the period
            
            
            (10
            )
            
            (413
            )Balance
                at the end of the period
            
            $
            145
            
            $
            134





**NOTE
      9. DUE FROM RELATED COMPANIES**





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




**September
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Due
                from related companies for sales
            
            $
            846
            
            $
            679




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





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




Useful
                Life
            
            **September
                25,**
              **2006**
            
            **December
                25,**
              **2005**(In
                years)
            
            **(Unaudited)**Buildings
            
            
            40
            
            $
            12,998
            
            $
            9,967Machinery
                and equipment
            
            
            5
                - 12
            
            
            18,524
            
            
            14,66331,522
            
            
            24,630Less:
                Accumulated depreciation and amortization
            
            
            
            
            
            (7,804
            )
            
            (6,315
            )$
            23,718
            
            $
            18,315





**NOTE
      11. LAND USE RIGHTS**





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




**September
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Land
                use rights
            
            $
            7,785
            
            $
            4,705Less:
                Accumulated amortization
            
            
            (875
            )
            
            (725
            )$
            6,910
            
            $
            3,980




**NOTE
      12. OTHER PAYABLES AND ACCRUALS**





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




**September
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Deposits
                from customers
            
            $
            712
            
            $
            1,093Accruals
                for payroll, bonus and benefits
            
            
            233
            
            
            334Utilities
                and accrued expenses
            
            
            985
            
            
            871$
            1,930
            
            $
            2,298





11




**NOTE
      13. 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, 2006, all of the
      five-year warrants had been exercised, and 3,118 shares of Series A Preferred
      Stock were converted into 3,282,106 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,
      2006,
      200 shares of Series B Preferred Stock were converted into 125,000 shares of
      Class A Common Stock, and no warrants were exercised.





The
      Convertible Redeemable Preferred Stock is recorded as mezzanine equity in the
      financial statements because it is both redeemable in cash or stock and
      convertible at anytime by the holder.




Dividends
      on the Preferred Stock are payable as follows:





Series
      A
      Preferred Stock: 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.





Series
      B
      Preferred Stock: 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.





The
      accounting for the warrants issued with the preferred stock was determined
      under
      the guidance of SFAS 133, FASB FSP No. 150-1, FASB FPS No 150-5 and Emerging
      Issues Task Force (“EITF”) No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to and Potentially Settled in
      a
      Company’s Own Stock* .
      Accordingly, the warrants are treated as derivatives and classified as a
      liability. The warrants are recorded at fair value, based on the Black-Scholes
      and Binomial pricing models, and revalued each reporting period with the change
      in fair value recorded as other income (expense). Since the warrants and the
      conversion feature were deemed to be embedded derivatives, the Company recorded
      the fair value of all the embedded derivatives at the transaction date as a
      liability. The total fair value of these liabilities reduced the book value
      of
      the preferred stock at the date of the sale. The redemption value of the
      preferred stock is accreted as preferred stock dividends over the redemption
      period, which resulted in an accretion of $1,456,000 during the nine months
      ended September 25, 2006.





In
      connection with the issuance of the Preferred Stock A and Preferred Stock B,
      the
      Company paid professional fees, placement agent fees and associated expenses
      amounting to $1,843,000. These professional fees, placement agent fees and
      associated expenses were recorded by the Company as a reduction of the proceeds
      from the sale of the Preferred Stock.





**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, 2006, 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, 2006, warrants to purchase 25,000
      shares of Class A Common Shares were outstanding.





**NOTE
      15. WARRANTS**





During
      the year ended December 25, 2005, warrant holders relating to the September
      2003
      and October 2003 private placement transactions exercised their warrants to
      purchase 1,650,000 and 400,000 shares of Class A Common Stock at exercise prices
      of $0.99 and $0.979, respectively. Accordingly, the excess of the exercise
      price
      over the par value of the Common Stock (amounting to $2,025,000) was recorded
      as
      additional paid-in capital. As of September 25, 2006, the Company had not
      received the proceeds from warrants exercised to purchase 49,647 shares of
      Class
      A Common Stock and has recorded a stockholder receivable. Legal action to
      recover such receivable has been commenced by the Company.




12




In
      connection with the issuance of Series A Preferred Stock, as part of the
      compensation to the placement agent, five-year warrants to purchase 378,947
      shares of Class A Common Stock at an exercise price of $1.04 per share were
      also
      issued. The warrants issued to the placement agent contained a cashless exercise
      provision. The Company estimated the per share value of the warrants using
      the
      Black-Scholes pricing model with the following assumptions:




**Warrants
                Issued to**
              **Private
                Placement Agent**Expected
                life (in years)
            
            
            5Expected
                volatility
            
            
            40
            %Risk-free
                interest rate
            
            
            4
            %Dividend
                yield
            
            
            0
            %Estimated
                fair value per share
            
            $
            0.43Aggregate
                value of the warrants
            
            $
            163,000





In
      connection with the issuance of Series B Preferred Stock, as part of the
      compensation to the placement agent, five-year warrants to purchase 356,250
      shares of Class A Common Stock at an exercise price of $1.76 per share were
      also
      issued. The warrants issued to the private placement agent contained a cashless
      exercise provision. The Company estimated the per share value of the warrant
      using the Black-Scholes pricing model with the following
      assumptions:




**Warrants
                Issued to**
              **Private
                Placement Agent**Expected
                life (in years)
            
            
            5Expected
                volatility
            
            
            98.8
            %Risk-free
                interest rate
            
            
            3.6
            %Dividend
                yield
            
            
            0
            %Estimated
                fair value per share
            
            $
            1.13Aggregate
                value of the warrants
            
            $
            403,000





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




**Shares**
            
            **Weighted
                Average Exercise Price**Outstanding
                at December 25, 2003
            
            
            2,075,000
            
            $
            0.9883Issued
            
            
            --
            
            
            --Exercised
            
            
            --
            
            
            --Forfeited/Cancelled
            
            
            --
            
            
            --Outstanding
                at December 25, 2004
            
            
            2,075,000
            
            
            0.9883Issued
            
            
            6,861,842
            
            
            1.3889Exercised
            
            
            2,327,368
            
            
            0.9945Forfeited/Cancelled
            
            
            --
            
            
            --Outstanding
                at December 25, 2005
            
            
            6,609,474
            
            
            1.4020Issued
            
            
            --
            
            
            --Exercised
            
            
            101,579
            
            
            1.0400Forfeited/Cancelled
            
            
            --
            
            
            --Outstanding
                at September 25, 2006
            
            
            6,507,895
            
            
            1.4076Warrants
                exercisable at December 25, 2005
            
            
            6,609,474
            
            
            1.4020Warrants
                exercisable at September 25, 2006
            
            
            6,507,895
            
            
            1.4076





13




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, 2006
      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
            
            
            1.76




**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 during the
      fiscal year ended 2005. In November 2004, options to purchase 400,000 shares
      of
      Class A Common Stock were issued to Peter Mak, the Company’s Chief Financial
      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, 2006, all of these options were exercised and the
      underlying Class A Common Stock was sold by Mr. Mak





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, 2006, all of these options
      were exercised and the underlying Class A Common Stock was sold by Mr.
      Mak.




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, 2006, 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
            %





The
      following table summarizes outstanding options as at September 25, 2006 and
      related weighted average fair value and life information:




Options
                Outstanding
            
            Options
                ExercisableRange
                of Exercise
              Price
                Per Share
            
            Number
                Outstanding
              at
                September 25, 2006
            
            Weighted
                Average
              Fair
                Value
            
            Weighted
                Average
              Remaining
                Life (Years)
            
            Number
                Exercisable
              at
                September 25, 2006
            
            Weighted
                Average
              Exercise
                Price$
                1.60
            
            2,000,000
            
            $
                1.60
            
            5.5
            
            2,000,000
            
            $
                1.60





**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.





14




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,****2006**
            
            **2005**
            
            **2006**
            
            **2005****(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**Pre-determined
                annual fee charged by joint venture partners:Shandong
                Longfeng Group Company (a)
            
            $
            19
            
            $
            18
            
            $
            57
            
            $
            54Shandong
                Longfeng Flour Company Limited (b)
            
            
            9
            
            
            9
            
            
            27
            
            
            27$
            28
            
            $
            27
            
            
            84
            
            
            81




(a)
              Shandong
                  Longfeng Group Company is a joint venture partner of the Company
                  and the
                  parent company.
 (b)
                Subsidiary
                    of Shandong Longfeng Group
                    Company.
  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 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 Florida corporation with wholly owned operating
      subsidiaries. As a result, we are 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 contra-account related to Series A Preferred Stock and Series B
      Preferred Stock, could not be used to offset any income derived from PRC when
      measuring the PRC income tax liabilities. As of September 25, 2006 and December
      25, 2005, there were no material deferred tax assets or deferred tax
      liabilities.





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





*Delta
      Link Limited & 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 these acquired companies 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.





15




Allocation
      of initial purchase consideration (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




*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.




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/A for the
      fiscal year ended December 25, 2005, the Quarterly Reports on Form 10-Q/A 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.





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





**Contractual
      Joint Ventures**





A
      contractual joint venture is an entity established between us and another joint
      venture partner, with the rights and obligations of each party governed by
      a
      contract. Currently, we have established three contractual joint ventures with
      three Chinese partners in China. i.e. Shandong Longfeng Flour Co. Ltd., Shandong
      Longfeng Group Co. and Shandong Yukai Food Co., Ltd., with percentage of
      ownership ranging from 79.64% to 90%. Pursuant to each Chinese joint venture
      agreement, each Chinese joint venture partner is entitled to receive a
      pre-determined annual fee and is not responsible for any profit or loss,
      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.





**Shipping
      and Handling Costs**





Shipping
      and handling costs are included in selling expenses for all periods
      presented.




**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 a reasonable basis for making judgments on the
      allowance for doubtful accounts.





17




We
      normally grant up to 90 days credit to our customers. We monitor our allowance
      for doubtful accounts on a monthly basis. The provisions and write-offs recorded
      during 2006 and 2005 reflect estimates made by management and are intended
      to
      approximate actual results.





**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.





In
      November 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (SFAS) No. 151, “Inventory Costs,”
which clarifies the accounting for abnormal amounts of idle facility expense,
      freight, handling costs, and wasted material. We adopted SFAS No. 151 in the
      first quarter of 2006. The adoption of SFAS No. 151 did not have a material
      impact on our consolidated financial statements.





**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 & B Preferred Stock, are separately
      valued and accounted for on our balance sheet. The pricing models we use for
      determining fair values of our 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. The Company has
      obtained a valuation report from a valuation firm to support its
      estimates.





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.




The
      EITF
      recently deliberated the impact of liquidated damages clauses in registration
      rights agreements and the effect on accounting and classification of instruments
      subject to the scope of EITF 00-19 in EITF 05-04 “The Effect of a Liquidated
      Damages Clause on a Freestanding Financial Instrument Subject to Issue No.
      00-19.” The EITF has not reached a consensus on this issue and has deferred
      deliberation until the FASB addresses certain questions, which could affect
      a
      conclusion on this issue. Specifically, EITF 05-04 presents alternative views
      on
      whether the liquidated damages provisions in registration rights agreements
      should be combined with or treated separately from the associated financial
      instrument. Based on our analysis of the EITF, we view the registration rights
      agreement and the financial instrument a liability to be recorded as incurred.
      If the EITF were to adopt the view that the registration rights agreement should
      be viewed as a separate instrument from the financial instrument, we may
      have to account for additional derivatives.





**Stock-Based
      Compensation**





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





18




***Recent
      Accounting Pronouncements***





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140,” to
      permit fair value remeasurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation in
      accordance with the provisions of SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities.” SFAS No. 155 is effective for all financial
      instruments acquired, issued, or subject to a remeasurement occurring after
      the
      beginning of an entity’s fiscal year that begins after September 5, 2006. The
      Company will adopt SFAS No. 155 in fiscal year 2007. The adoption of this
      Statement is not expected to have a material effect on the Company’s
      consolidated financial statements.





In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156,
“Accounting for Servicing of Financial Assets - an amendment of FASB Statement
      No. 140”, that provides guidance on accounting for separately recognized
      servicing assets and servicing liabilities. In accordance with the provision
      of
      SFAS No. 156, separately recognized servicing assets and servicing liabilities
      must be initially measured at fair value, if applicable. Subsequent to initial
      recognition, the company may use either the amortization method or the fair
      value measurement method to account for servicing assets and servicing
      liabilities within the scope of this Statement. SFAS No. 156 is effective as
      of
      the beginning of an entity’s fiscal year that begins after September 15, 2006.
      The Company will adopt SFAS No. 156 in fiscal year 2007. The adoption of this
      Statement is not expected to have a material effect on the Company’s
      consolidated financial statements.





In
      April
      2006, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-6, “Determining the
      Variability to Be Considered in Applying FASB Interpretation No. 46(R)”, that
      will become effective beginning in the third quarter of 2006. FSP FIN No.
      46(R)-6 clarifies that the variability to be considered in applying
      Interpretation 46(R) shall be based on an analysis of the design of the variable
      interest entity. The adoption of the FSP is not expected to have a material
      effect on the Company’s consolidated financial statement.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
      provides criteria for the recognition, measurement, presentation and disclosure
      of uncertain tax positions that has an effect on a company’s financial
      statements accounted for in accordance with SFAS No. 109, “Accounting for Income
      Taxes”, as a result of positions taken or expected to be taken in a company’s
      tax return. A tax benefit from an uncertain position may be recognized only
      if
      it is “more likely than not” that the position is sustainable based on its
      technical merits. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006. The Company is currently evaluating the
      potential effect that the adoption of FIN 48 will have on the Company's
      financial statement presentation and disclosures.





***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 seven 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.





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:
      packet noodles for home preparation and 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.





19




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 obtained HACCP (Hazard
      Analysis Critical Control Point) certification from CCIC Conformity Assessment
      Services Co. Ltd., a Chinese quality assurance examination authority, enabling
      the company to begin exports of instant noodles and soybean powder to Europe.
      From the second quarter of the year, we began export sales to Sweden and Greece.
      Export sales accounted for approximately 8% of our instant noodle sales for
      the
      first nine months of fiscal 2006, similar to the same period in fiscal
      2005.





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.




***Significant
      establishments and acquisitions during the nine months ended September 25,
      2006***





*Acquisition
      of*  *Delta
      Link Limited and Chengdu Manufacturing Plant*





On
      February 24, 2006, we acquired Delta Link and its Chinese subsidiary, a noodle
      manufacturing facility in Chengdu, Sichuan Province, for cash consideration
      of
      $3,300,000. The Chengdu Plant serves the Western China market.





*Expansion
      of Longyuan Packing Plant*





On
      January 10, 2006, we established New Dragon Asia (Long Kou) Packing Materials
      Company Limited (“NDAPM”), a wholly-owned subsidiary in Longkou, Shandong
      Province. NDAPM is principally engaged in the manufacturing and sale of packing
      materials, with a registered capital of $3,600,000. The expansion is planned
      to
      be the second phase of the development of Longkou City Longyuan Packing
      Materials Company Limited (“LCLPM”), our 55% owned subsidiary. It was
      established as a separate entity in order to (i) acquire the remaining interests
      in LCLPM (45%) from the Chinese joint venture partner at net book value and
      (ii)
      enjoy a new income tax holiday. As of September 25, 2006, the transfer of the
      remaining 55% equity interest in LCLPM to NDAPM has been completed at net book
      value, and LCLPM has become a 100% owned subsidiary of NDAPM, which is
      indirectly owned 100% by us.





***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.





20




***Employees***





On
      September 25, 2006, we had approximately 1,500 employees. All of our employees
      are located in the seven 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.





***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):




**Nine
                months ended**
              **September****25,**
            
            **Three
                months ended**
              **September
                25,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                revenue
            
            $
            35,604
            
            $
            28,920
            
            $
            12,964
            
            $
            11,645Cost
                of goods sold
            
            
            (29,056
            )
            
            (23,862
            )
            
            (10,442
            )
            
            (9,488
            )Gross
                profit
            
            
            6,548
            
            
            5,058
            
            
            2,522
            
            
            2,157Selling
                and distribution expenses
            
            
            (709
            )
            
            (431
            )
            
            (263
            )
            
            (149
            )General
                and administrative expenses(including
                Stock-based compensation of $2,320 for the nine months ended September
                25,
                2006)
            
            
            (4,020
            )
            
            (1,338
            )
            
            (711
            )
            
            (360
            )Gain
                (loss) on fair value adjustments to embedded derivatives
            
            
            3,198
            
            
            (8,359
            )
            
            2,593
            
            
            (8,359
            )Income
                (loss) before income taxes and minority interest
            
            
            7,219
            
            
            (3,548
            )
            
            5,217
            
            
            (5,986
            )Provision
                for income taxes
            
            
            (1,061
            )
            
            (892
            )
            
            (427
            )
            
            (381
            )Net
                income (loss)
            
            
            6,025
            
            
            (4,480
            )
            
            4,790
            
            
            (6,440
            )EBITDA*
            
            
            7,798
            
            
            5,790
            
            
            3,093
            
            
            2,736EBITDA
                margin on revenue
            
            
            22
            %
            
            20
            %
            
            24
            %
            
            23
            %





*
      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, (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.




21




The
      following table presents a reconciliation from net earnings, which is the most
      directly comparable GAAP operating performance measure, to EBITDA for the third
      quarters of 2006 and 2005, respectively.




**Nine
                months ended**
              **September
                25,**
            
            **Three
                months ended**
              **September
                25,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                income
            
            $
            6,025
            
            $
            (4,480
            )
            $
            4,790
            
            $
            (6,440
            )Income
                tax
            
            
            1,061
            
            
            892
            
            
            427
            
            
            381Interest
                expense
            
            
            (49
            )
            
            (3
            )
            
            (26
            )
            
            (4
            )Depreciation
                and amortization
            
            
            1,639
            
            
            917
            
            
            495
            
            
            335Loss
                (gain) on fair value adjustments to embedded derivatives
            
            
            (3,198
            )
            
            8,359
            
            
            (2,593
            )
            
            8,359Non-cash
                stock-based compensation
            
            
            2,320
            
            
            105
            
            
            --
            
            
            105EBITDA
            
            $
            7,798
            
            $
            5,790
            
            $
            3,093
            
            $
            2,736





***Nine
      Months Ended September 25, 2006 Compared to Nine Months Ended September 25,
      2005***





***Net
      Revenue***





Net
      revenue for the nine months ended September 25, 2006 was $35,604,000,
      representing an increase of $6,684,000, or 23%, from $28,920,000 for the nine
      months ended September 25, 2005. The increase was primarily due to the increase
      in market demand for our flour and instant noodles, together with the inclusion
      of results for the soybean products business.





Approximately
      90% of the increase was due to the growth in market demand for flour and instant
      noodles, and the remaining 10% of the increase was derived from the addition
      of
      the soybean products business. The selling prices for all our products remained
      stable.





***Gross
      Profit***





As
      a
      percentage of net revenue, gross profit increased to 18% for the nine months
      ended September 25, 2006 from 17% for the nine months ended September 25, 2005.
      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 $709,000 for the nine months ended September
      25,
      2006, representing an increase of $278,000 from $431,000 for the corresponding
      period of 2005. The increase was primarily due to the expansion
      of marketing activities.





As
      a
      percentage of net revenue, selling and distribution expenses increased to 2%
      in
      the nine months ended September 25, 2006 from 1% in the corresponding period
      in
      2005 as a result of the expansion
      of marketing activities .





***General
      and Administrative Expenses***





General
      and administrative expenses increased $2,682,000, or 200%, to $4,020,000 for
      the
      nine months ended September 25, 2006 as compared to $1,338,000 for the nine
      months ended September 25, 2005. The increase was primarily due to the
      stock-based compensation cost, which amounted to $2,320,000 and is non-cash
      in
      nature and non-recurring. The charge for stock-based compensation related to
      the
      granting of options to purchase up to 2,000,000 shares of Class A Common Stock
      on January 20, 2006.





***Income
      from Operations***





Income
      from operations decreased $1,470,000, or 45%, to $1,819,000 for the nine months
      ended September 25, 2006 as compared to $3,289,000 for the nine months ended
      September 25, 2005. The decrease was primarily due to the stock-based
      compensation charged in 2006, which was non-cash.





***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. The 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, resulting from changes in the fair values
      of these instruments was subsequently recorded in our statements of operations.
      For the nine months ended September 25, 2006, the gain from changes in the
      fair
      value of these instruments was $3,198,000. For the nine months ended September
      25, 2005, the loss from changes in the fair value of these instruments was
      $8,359,000.





22




***VAT
      Refunds***





VAT
      refund increased to $2,135,000 for the nine months ended September 25, 2006
      as
      compared to $1,723,000 for the nine months ended September 25, 2005. This
      increase was solely due to the tax refund received from the municipal government
      of China to encourage foreign investment.





***Net
      Income***





Net
      income increased to $6,025,000 for the nine months ended September 25, 2006
      as
      compared to a loss of $4,480,000 for the nine months ended September 25, 2005.
      Such change was primarily due to (i) the growth of our business and (ii) gain
      derived from changes in the fair values of derivative instruments.





***Three
      Months Ended September 25, 2006 Compared to Three Months Ended September 25,
      2005***





***Net
      Revenue***





Net
      revenue for the quarter ended September 25, 2006 was $12,964,000, representing
      an increase of $1,319,000, or 11%, from $11,645,000 for the quarter ended
      September 25, 2005. The increase was primarily due to the increase in market
      demand for our flour and instant noodles, together with the inclusion of results
      for the soybean products business.





Approximately
      90% of the increase was due to the growth in market demand for flour and instant
      noodles, and the remaining 10% of the increase derived from the addition of
      the
      soybean products business. The selling prices for all our products remained
      stable.





***Gross
      Profit***





As
      a
      percentage of net revenue, gross profit increased to 19.5% for the three months
      ended September 25, 2006 from 18.5% for the three months ended September 25,
      2005. 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 $263,000 for the quarter ended September 25,
      2006, representing an increase of $114,000 from $149,000 for the corresponding
      quarter of 2005. The increase was primarily due to the expansion of marketing
      activities.





As
      a
      percentage of net revenue, selling and distribution expenses increased to 2%
      in
      the quarter ended September 25, 2006 from 1% in the corresponding period in
      2005
      as a result of the expansion of marketing activities.





***General
      and Administrative Expenses***





General
      and administrative expenses increased $351,000, or 98%, to $711,000 for the
      quarter ended September 25, 2006 as compared to $360,000 for the quarter ended
      September 25, 2005. The increase was primarily due to the increase in
      professional fees on services including fees for investor relations, legal
      and
      accounting advice.





***Income
      from Operations***





Income
      from operations decreased $100,000, or 6%, to $1,548,000 for the three months
      ended September 25, 2006 as compared to $1,648,000 for the three months ended
      September 25, 2005. The decrease was primarily due to the increased professional
      fees for investor relations, legal and accounting advice.





***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. The 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, resulting from changes in the fair values
      of these instruments was subsequently recorded in our statements of operations.
      For the three months ended September 25, 2006, the gain from changes in the
      fair
      value of these instruments was $2,593,000. For the three months ended September
      25, 2005, the loss from changes in the fair value of these instruments was
      $8,359,000.





23




***VAT
      Refunds***





VAT
      refund increased to $1,036,000 for the quarter ended September 25, 2006 as
      compared to $928,000 for the quarter ended September 25, 2005. This increase
      was
      solely due to the tax refund received from the municipal government of China
      to
      encourage foreign investment.




***Net
      Income***





Net
      income increased $11,230,000, or 174% to $4,790,000 for the quarter ended
      September 25, 2006 as compared to a loss of $6,440,000 for the quarter ended
      September 25, 2005. Such increase was primarily due to (i) the growth of our
      business and (ii) gain derived from changes in the fair value of derivative
      instruments.





***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.





Our
      working capital increased $4,291,000 to $18,836,000 at September 25, 2006 as
      compared to $14,545,000 at December 25, 2005, which was primarily due to (i)
      the
      growth of our business and (ii) fair value variation of derivative
      instruments.





Cash
      and
      cash equivalents were $14,564,000 as of September 25, 2006, an increase of
      $232,000 from December 25, 2005, which was primarily due to the growth of our
      business.





Net
      cash
      provided by operating activities for the nine months ended September 25, 2006
      was $7,160,000, which was primarily due to the increase of sales in the nine
      months. Also, the decreased cost of wheat contributed to higher cash flow from
      operations. Net cash provided by financing activities of $1,018,000 for the
      nine
      months ended September 25, 2006 was mainly due to the additional capital derived
      from the exercise of stock options.





Net
      cash
      used in investing activities for the nine months ended September 25, 2006 was
      $8,778,000, which primarily resulted from the acquisition of the Chengdu Plant
      and the expansion of the Longyuan packing plant.





***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.





24




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 effects 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 effects 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, 2006, we had obligations that resulted from the redeemable
      convertible preferred stock that may be paid in cash or shares or converted
      by
      the holder, and had operating leases for manufacturing and warehouse facilities
      expiring at various dates through February 2009 and other commitments and
      long-term liabilities through August 2049 as follows:





Payment
                Obligations By Period2006
                (a)
            
            2007
            
            2008
            
            2009
            
            2010
            
            Thereafter
            
            Total(In
                thousands)Redeemable
                convertible preferred stock
            
            $
            --
            
            $
            545
            
            $
            3,796
            
            $
            3,796
            
            $
            4,045
            
            $
            --
            
            $
            12,182Operating
                lease obligations
            
            
            15
            
            
            62
            
            
            62
            
            
            10
            
            
            --
            
            
            --
            
            
            149Acquisition
                of property, plant and equipment
            
            
            128
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            128Pre-determined
                annual fee charged
              by
                joint venture partners
            
            
            27
            
            
            111
            
            
            111
            
            
            111
            
            
            111
            
            
            3,877
            
            
            4,348Total
            
            $
            170
            
            $
            718
            
            $
            3,969
            
            $
            3,917
            
            $
            4,156
            
            $
            3,877
            
            $
            16,807





(a)
      Remaining period of September 26, 2006 through and including December 25,
      2006.




25




Reconciliation
      of the outstanding payment obligations of mandatorily 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
            
            
            (1,418
            )$
            12,182


**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.




***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. At October 30, 2006, Mr. Lu owned 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 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.





26




**RISKS
      RELATED TO OUR BUSINESS**





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





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




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





Many
      of
      our competitors are larger and have greater financial resources, including
      our
      primary competitors, the 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.





27




***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.





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





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





***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 business. 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.





28




***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.





***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.





29




***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-
            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





30




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.





31





**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 (“RMB”). Hence, the
      effect of the fluctuations of exchange rate is considered minimal to our
      business operations.





Although
      the Chinese government regulations now allow convertibility of RMB for current
      account transactions, significant restrictions still remain such as complicated
      document inspection, limited foreign current balance. 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 expenditure. 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.





***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, 2006, 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 three months ended September 25, 2006 that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





***Other
      Information***





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




32




**PART
      II: OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





None.





**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.**





None.





**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.




33





**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 8, 2006
            By:
            */s/
                Li Xia Wang*Name:
                Li Xia WangTitle:
                Chief Executive Officer


Dated:
                November 8, 2006
            By:
            */s/
                Peter Mak*Name:
                Peter MakTitle:
                Chief Financial Officer




34