**NWD
      20081028**


**Loeb
      & Loeb 20081023**


**Horwath
      20081027**





**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, 2008




or




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





For
      the
      transition period from  to





Commission
      File 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, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      Accelerated Filer o Accelerated Filer o  Non-Accelerated Filero Smaller
      Reporting Companyx





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





The
      number of shares of Class A Common Stock outstanding as of October 31, 2008
      was
      60,922,981.







**NEW
      DRAGON ASIA CORP.**





**FORM
      10-Q**





**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 2008**





**TABLE
      OF CONTENTS**


Page**PART
                  I:**
              **FINANCIAL
                  INFORMATION**
              
              3ITEM
                  1.
              Consolidated
                  Financial Statements:
              
              3Consolidated
                  Balance Sheets as of September 25, 2008 (unaudited) and December
                  25,
                  2007
              
              3Consolidated
                  Statements of Operations (unaudited) for the three months and nine
                  months
                  ended September 25, 2008 and 2007
              
              4Consolidated
                  Statements of Stockholders’ Equity and Comprehensive Income for the nine
                  months ended September 25, 2008 (unaudited) and the year ended
                  December
                  25, 2007
              
              5Consolidated
                  Statements of Cash Flows (unaudited) for the nine months ended
                  September
                  25, 2008 and 2007
              
              6Notes
                  to Consolidated Financial Statements (unaudited)
              
              7ITEM
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              18ITEM
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              26ITEM
                  4.
              Controls
                  and Procedures
              
              26**PART
                  II:**
              **OTHER
                  INFORMATION**
              
              27ITEM
                  1.
              Legal
                  Proceedings
              
              27ITEM
                  1A.
              Risk
                  Factors
              
              27ITEM
                  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,**
              **2008**
            
            **December 25,**
              **2007**(Unaudited)**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            5,298
            
            $
            3,646Accounts
                receivable, net
            
            
            9,567
            
            
            9,223Deposits
                and prepayments, net
            
            
            14,082
            
            
            12,183Inventories,
                net
            
            
            25,730
            
            
            22,050Due
                from related companies
            
            
            1,022
            
            
            913Total
                current assets
            
            
            55,699
            
            
            48,015Property,
                machinery and equipment, net
            
            
            27,807
            
            
            25,986Land
                use rights, net
            
            
            7,737
            
            
            7,294Goodwill
            
            
            125
            
            
            125Total
                assets
            
            $
            91,368
            
            $
            81,420**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            4,555
            
            $
            2,982Other
                payables and accruals
            
            
            2,772
            
            
            2,765Taxes
                payable
            
            
            689
            
            
            3,530Embedded
                derivatives, at fair value
            
            
            566
            
            
            2,493Due
                to related companies
            
            
            —
            
            
            36Total
                current liabilities
            
            
            8,582
            
            
            11,806Due
                to New Dragon Asia Food Limited
            
            
            2,648
            
            
            1,405Due
                to joint venture partners
            
            
            870
            
            
            272Total
                liabilities
            
            
            12,100
            
            
            13,483Minority
                interests
            
            
            316
            
            
            294Series
                A and B Redeemable Convertible Preferred Stock, $0.0001 par
                value:
              Authorized
                shares - 5,000,000
              Issued
                and outstanding – 7,253 shares and 9,434 shares at September 25, 2008 and
                December 25, 2007
            
            
            4,904
            
            
            5,321CommitmentsStockholders’
                equity:Class
                A Common Stock, $0.0001 par value:
              Authorized
                shares - 102,000,000
              Issued
                and outstanding – 58,758,275 at September 25, 2008 and 55,195,385 at
                December 25, 2007
            
            
            6
            
            
            5Class
                B Common Stock, $0.0001 par value:
              Authorized
                shares - 2,000,000
              Issued
                and outstanding – none
            
            
            —
            
            
            —Additional
                paid-in capital
            
            
            31,860
            
            
            29,982Retained
                earnings
            
            
            28,451
            
            
            24,568Accumulated
                other comprehensive income
            
            
            13,731
            
            
            7,767Total
                stockholders’ equity
            
            
            74,048
            
            
            62,322Total
                liabilities and stockholders’ equity
            
            $
            91,368
            
            $
            81,420





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,****2008**
                  
                  **2007**
                  
                  **2008**
                  
                  **2007**Net
                      revenue
                  
                  $
                  14,942
                  
                  $
                  13,955
                  
                  $
                  41,156
                  
                  $
                  38,150Cost
                      of goods sold
                  
                  
                  (12,439
                  )
                  
                  (11,148
                  )
                  
                  (33,966
                  )
                  
                  (30,865
                  )Gross
                      profit
                  
                  
                  2,503
                  
                  
                  2,807
                  
                  
                  7,190
                  
                  
                  7,285Selling
                      and distribution expenses
                  
                  
                  (387
                  )
                  
                  (302
                  )
                  
                  (977
                  )
                  
                  (825
                  )General
                      and administrative expenses
                  
                  
                  (569
                  )
                  
                  (731
                  )
                  
                  (1,815
                  )
                  
                  (2,025
                  )Income
                      from operations
                  
                  
                  1,547
                  
                  
                  1,774
                  
                  
                  4,398
                  
                  
                  4,435Other
                      income (expense):Interest
                      income
                  
                  
                  4
                  
                  
                  3
                  
                  
                  6
                  
                  
                  18Other
                      income (expense)
                  
                  
                  32
                  
                  
                  15
                  
                  
                  247
                  
                  
                  143Gain
                      on fair value adjustments toembedded
                      derivatives
                  
                  
                  362
                  
                  
                  1,903
                  
                  
                  1,790
                  
                  
                  7,541VAT
                      refund
                  
                  
                  32
                  
                  
                  —
                  
                  
                  60
                  
                  
                  540Income
                      (loss) before income taxes and minority interests
                  
                  
                  1,977
                  
                  
                  3,695
                  
                  
                  6,501
                  
                  
                  12,677Provision
                      for income taxes
                  
                  
                  (470
                  )
                  
                  (491
                  )
                  
                  (1,256
                  )
                  
                  (1,211
                  )Income
                      (loss) before minority interests
                  
                  
                  1,507
                  
                  
                  3,204
                  
                  
                  5,245
                  
                  
                  11,466Minority
                      interests
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Net
                      income (loss)
                  
                  $
                  1,507
                  
                  $
                  3,204
                  
                  $
                  5,245
                  
                  $
                  11,466Accretion
                      of Redeemable Preferred Stock
                  
                  
                  (282
                  )
                  
                  (377
                  )
                  
                  (942
                  )
                  
                  (1,133
                  )Preferred
                      Stock Dividends
                  
                  
                  (127
                  )
                  
                  (178
                  )
                  
                  (420
                  )
                  
                  (534
                  )Income
                      (loss) available to common stockholders
                  
                  $
                  1,098
                  
                  $
                  2,649
                  
                  $
                  3,883
                  
                  $
                  9,799Earnings
                      per common shareBasic
                  
                  $
                  0.02
                  
                  $
                  0.05
                  
                  $
                  0.07
                  
                  $
                  0.18Diluted
                  
                  $
                  0.02
                  
                  $
                  0.05
                  
                  $
                  0.07
                  
                  $
                  0.18Weighted
                      average number of common shares outstandingBasic
                  
                  
                  58,625
                  
                  
                  54,073
                  
                  
                  57,263
                  
                  
                  53,858Diluted
                  
                  
                  58,625
                  
                  
                  54,950
                  
                  
                  57,263
                  
                  
                  54,735





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)**





**Class A Common**
              **Stock**
            
            **Additional**
              **Paid-in**
            
            **Retained**
            
            **Accumulated Other**
              **Comprehensive**
            
            **Total Stockholders'**
            
            **Comprehensive****Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Income**
            
            **Equity**
            
            **Income**Balance
                at December 25, 2006
            
            
            53,614
            
            $
            5
            
            $
            28,411
            
            $
            12,668
            
            $
            2,928
            
            $
            44,012
            
            $
            (474
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            
            14,115
            
            
            
            
            
            14,115
            
            
            14,115Accretion
                of redeemable preferred stock
            
            
            
            
            
            
            
            
            
            
            
            (1,512
            )
            
            
            
            
            (1,512
            )Preferred
                stock dividends
            
            
            
            
            
            
            
            
            
            
            
            (703
            )
            
            
            
            
            (703
            )Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,839
            
            
            4,839
            
            
            4,839Class
                A Common Stock issued in dispute resolution
            
            
            275
            
            
            
            
            
            269
            
            
            
            
            
            
            
            
            269Conversion
                of preferred stocks and related dividend payments in Class A Common
                Stock
            
            
            1,306
            
            
            
            
            
            1,302
            
            
            
            
            
            
            
            
            1,302Balance
                at December 25, 2007
            
            
            55,195
            
            $
            5
            
            $
            29,982
            
            $
            24,568
            
            $
            7,767
            
            $
            62,322
            
            $
            18,954Net
                income
            
            
            
            
            
            
            
            
            
            
            
            5,245
            
            
            
            
            
            5,245
            
            
            5,245Accretion
                of Redeemable Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            (942
            )
            
            
            
            
            (942
            )Preferred
                Stock Dividends
            
            
            
            
            
            
            
            
            
            
            
            (420
            )
            
            
            
            
            (420
            )Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,964
            
            
            5,964
            
            
            5,964Conversion
                of Preferred Stock and related dividend into shares of Class A Common
                Stock
            
            
            3,563
            
            
            1
            
            
            1,878
            
            
            
            
            
            
            
            
            1,879Balance
                at September 25, 2008 (unaudited)
            
            
            58,758
            
            $
            6
            
            $
            31,860
            
            $
            28,451
            
            $
            13,731
            
            $
            74,048
            
            $
            11,209





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,****2008**
              
              **2007****Cash
                  flows from operating activities:**Net
                  income (loss)
              
              $
              5,245
              
              $
              11,466Adjustments
                  to reconcile net income (loss) to net cash provided by (used in)
                  operating
                  activities:Allowance
                  for doubtful accounts
              
              
              112
              
              
              299Provision
                  for inventory reserve
              
              
              2
              
              
              4Depreciation
                  and amortization of property, machinery, equipment and land use
                  rights
              
              
              1,562
              
              
              1,213(Gain)
                  loss on fair value adjustments to embedded derivatives
              
              
              (1,790
              )
              
              (7,541
              )Stock-based
                  expense for services received
              
              
              —
              
              
              269Changes
                  in operating assets and liabilities:(Increase)
                  decrease in:Accounts
                  receivable
              
              
              (456
              )
              
              (98
              )Deposits
                  and prepayments
              
              
              (1,899
              )
              
              (5,079
              )Inventories
              
              
              (3,682
              )
              
              (8,343
              )Due
                  from related companies
              
              
              (109
              )
              
              (36
              )Increase
                  (decrease) in:Accounts
                  payable
              
              
              1,573
              
              
              1,340Other
                  payables and accruals
              
              
              53
              
              
              (213
              )Taxes
                  payable
              
              
              (2,841
              )
              
              (815
              )Due
                  to related companies
              
              
              (36
              )
              
              —Net
                  cash provided by (used in) operating activities
              
              
              (2,266
              )
              
              (7,534
              )**Cash
                  flows from investing activities:**Purchases
                  of property, machinery and equipment
              
              
              (598
              )
              
              (1,237
              )Proceeds
                  from sale of property, machinery and equipment
              
              
              3
              
              
              —Net
                  cash used in investing activities
              
              
              (595
              )
              
              (1,237
              )**Cash
                  flows from financing activities:**Preferred
                  stock dividend
              
              
              —
              
              
              (49
              )Proceeds
                  from (repayments to) parent company
              
              
              1,243
              
              
              752Proceeds
                  from (repayment to) joint venture partners
              
              
              598
              
              
              60Payment
                  for preferred stock redemption
              
              
              (84
              )
              
              —Net
                  cash provided by financing activities
              
              
              1,757
              
              
              763Foreign
                  currency translation adjustment
              
              
              2,756
              
              
              1,472Net
                  increase (decrease) in cash and cash equivalents
              
              
              1,652
              
              
              (6,536
              )Cash
                  and cash equivalents at beginning of period
              
              
              3,646
              
              
              10,276Cash
                  and cash equivalents at end of period
              
              $
              5,298
              
              $
              3,740**Non-Cash
                  Investing and Financing Activities**Conversion
                  of preferred stock into Class A common stock
              
              $
              2,181
              
              $
              —Dividend
                  payments on preferred stock in the form of Class A common
                  stock
              
              $
              466
              
              $
              500





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 the People’s Republic of
      China (the “PRC” or “China”). The Company is headquartered in Shandong Province
      in the PRC and has its corporate office in Shenzhen and eight manufacturing
      plants in Yantai, Beijing, Chengdu, and Penglai.





**NOTE
      2. BASIS OF PRESENTATION**





The
      consolidated financial statements include the financial statements of New Dragon
      Asia Corp. and its majority owned 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 of less than 20% in other entities are
      accounted for using the cost method.





These
      consolidated financial statements for interim periods are unaudited. In the
      opinion of management, the consolidated financial statements include all
      adjustments, consisting of only normal, recurring adjustments, necessary for
      their fair presentation. Interim results are not necessarily indicative of
      results to be expected for a full year. The accompanying consolidated financial
      statements have been prepared in accordance with the rules and regulations
      of
      the Securities and Exchange Commission and do not include all information and
      footnotes necessary for a complete presentation of financial statements in
      conformity with U.S. GAAP. These statements should be read in conjunction with
      the Company’s Annual Report on Form 10-K for the fiscal year ended December 25,
      2007.





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





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





***Accounting
      for Derivative Instruments***





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





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


7





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





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





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





***Adoption
      of New Accounting Pronouncements***





**Fair
      Value of Financial Instruments**





The
      Company partially adopted SFAS 157 on December
      26, 2007, delaying application for non-financial assets and non-financial
      liabilities as permitted. This statement establishes a framework for measuring
      fair value, and expands disclosures about fair value measurements.





SFAS
      157
      establishes a fair value hierarchy that prioritizes the inputs to valuation
      techniques used to measure fair value into three levels as follows:





-
            Level
                1 — quoted prices (unadjusted) in active markets for identical asset
                or liabilities that the Company has the ability to access as of the
                measurement date. Financial assets and liabilities utilizing Level
                1
                inputs include active exchange-traded securities and exchange-based
                derivatives.-
            Level
                2 — inputs other than quoted prices included within Level 1 that are
                directly observable for the asset or liability or indirectly observable
                through corroboration with observable market data. Financial assets
                and
                liabilities utilizing Level 2 inputs include fixed income securities,
                non-exchange-based derivatives, mutualfunds,and fair-value hedges.-
            Level
                3 — unobservable inputs for the asset or liability only used when there
                is
                little, if any, market activity for the asset or liability at the
                measurement date. Financial assets and liabilities utilizing Level
                3
                inputs include infrequently-traded, non-exchange-based derivatives
                and
                commingled investment funds, and are measured using present value
                pricing
                models.





In
      accordance with SFAS 157, the Company determines the level in the fair value
      hierarchy within which each fair value measurement in its entirety falls, based
      on the lowest level input that is significant to the fair value measurement
      in
      its entirety. The following table presents the embedded derivative, the
      Company’s only financial asset measured and recorded at fair value on the
      Company’s Consolidated Balance Sheets on a recurring basis and its level within
      the fair value hierarchy as of September 25, 2008:





**(In
                thousands)**
            
            **Fair
                Value****As
                of September 25, 2008**
            
            **Level
                1**
            
            **Level
                2**
            
            **Level
                3**
            
            **Total**Embedded
                derivativeliabilities
            
            $
            —
            
            $
            566
            
            $
            —
            
            $
            566





The
      following table reconciles, for the period ended September 25, 2008, the
      beginning and ending balances for financial instruments that are recognized
      at
      fair value in the consolidated financial statements:


8





Balance
                of embedded derivative at December 25, 2007
            
            $
            2,493Gain
                on fair value adjustments to embedded derivatives
            
            
            (1,790
            )Conversion
                of shares effect on embedded derivative
            
            
            (137
            )Balance
                at September 25, 2008
            
            $
            566





The
      valuation of the derivatives are calculated using a complex binomial pricing
      model that is based on changes in the volatility of our shares and our stock
      price and the time to conversion of the related financial instruments. See
      note
      13 for more information on the valuation methods used.





**Fair
      Value Option**





On
      February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities - Including
      an Amendment of SFAS No. 115” (“SFAS 159”). The fair value option established by
      SFAS 159 permits all entities to choose to measure eligible items at fair value
      at specified election dates. A business entity will report unrealized gains
      and
      losses on items for which the fair value option has been elected in earnings
      (or
      another performance indicator if the business entity does not report earnings)
      at each subsequent reporting date. The fair value option: (a) may be applied
      instrument by instrument, with a few exceptions, such as investments otherwise
      accounted for by the equity method; (b) is irrevocable (unless a new election
      date occurs); and (c) is applied only to entire instruments and not to portions
      of instruments. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. The Company had not chosen
      to
      adopt this statement early. Management currently believes its adoption of SFAS
      159 will not be material to its financial statement until such time as it
      decides to adopt a fair value option for an eligible item and it has no plans
      at
      this time to do so.





**NOTE
      3. RECENT ACCOUNTING PRONOUNCEMENTS**




In
      March
      2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities, an Amendment
      of FASB No. 133,” (“SFAS 161”). SFAS 161 is intended to improve
      transparency in financial reporting by requiring enhanced disclosures of an
      entity’s derivative instruments and hedging activities and their effects on the
      entity’s financial position, financial performance, and cash flows. SFAS 161
      applies to all derivative instruments within the scope of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”).
      SFAS 161 also applies to non-derivative hedging instruments and all hedged
      items
      designated and qualifying under SFAS 133. SFAS 161 is effective prospectively
      for financial statements issued for fiscal years and interim periods beginning
      after November 15, 2008, with early application encouraged. SFAS 161
      encourages, but does not require, comparative disclosures for periods prior
      to
      its initial adoption. We will adopt SFAS 161 on December 26, 2008 and are
      currently evaluating the potential impact on our financial statements when
      implemented.





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,”
(“SFAS 141(R)”). SFAS 141(R) requires us to continue to follow the guidance in
      SFAS 141 for certain aspects of business combinations, with additional guidance
      provided defining the acquirer, recognizing and measuring the identifiable
      assets acquired, the liabilities assumed, and any noncontrolling interest in
      the
      acquiree, assets and liabilities arising from contingencies, defining a bargain
      purchase and recognizing and measuring goodwill or a gain from a bargain
      purchase. In addition, under SFAS 141(R) adjustments associated with changes
      in
      tax contingencies that occur after the one year measurement period are recorded
      as adjustments to income. This statement is effective for all business
      combinations for which the acquisition date is on or after the beginning of
      an
      entity’s first fiscal year that begins after December 15, 2008; however,
      the guidance in this standard regarding the treatment of income tax
      contingencies is retrospective to business combinations completed prior to December
      26, 2008 .
      We will
      adopt SFAS 141(R) for any business combinations occurring at or subsequent
      to December
      26, 2008 .





In
      April
      2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
      the Useful Life of Intangible Assets”.  FSP 142-3 amends the factors
      an entity should consider in developing renewal or extension assumptions used
      in
      determining the useful life of recognized intangible assets under FASB Statement
      No. 142, “Goodwill and Other Intangible Assets”.  This new guidance
      applies prospectively to intangible assets that are acquired individually or
      with a group of other assets in business combinations and asset acquisitions.
      FSP 142-3 is effective for financial statements issued for fiscal years and
      interim periods beginning after December 15, 2008.  Early adoption is
      prohibited.  We are currently evaluating the impact, if any, that FSP
      142-3 will have on our consolidated financial statements.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements,” an Amendment of ARB No. 51,
“Consolidated Financial Statements,” (“SFAS 160”). SFAS 160 establishes
      accounting and reporting standards for the noncontrolling interest in a
      subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
      noncontrolling interest in a subsidiary is an ownership interest in the
      consolidated entity that should be reported as equity in the consolidated
      financial statements. This statement is effective as of the beginning of an
      entity’s first fiscal year that begins after December 15, 2008 with
      retrospective application. We will adopt SFAS 160 beginning December
      26, 2008 and are
      currently evaluating the potential impact on our financial statements when
      implemented.


9





**NOTE
      4. CONDENSED BALANCE SHEET INFORMATION**





Condensed
      balance sheet information as of September 25, 2008
      consisted of the following (in thousands):





Inside China
            
            Outside China
            
            TotalAssets-
                Cash and cash equivalents
            
            $
            5,242
            
            $
            56
            
            $
            5,298-
                Others
            
            
            86,050
            
            
            20
            
            
            86,070Total
                assets
            
            
            91,292
            
            
            76
            
            
            91,368Liabilities
            
            
            8,839
            
            
            3,261
            
            
            12,100Minority
                interests
            
            
            316
            
            
            —
            
            
            316Intercompany
            
            
            14,051
            
            
            (14,051
            )
            
            —Equity
            
            
            62,741
            
            
            11,307
            
            
            74,048





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





Condensed
      statement of operation information for the nine months ended September 25, 2008
      consisted of the following (in thousands):





Inside China
            
            Outside China
            
            TotalNet
                revenue
            
            $
            41,156
            
            $
            —
            
            $
            41,156Cost
                of goods sold
            
            
            (33,966
            )
            
            —
            
            
            (33,966
            )General
                and administrative expenses
            
            
            (1,140
            )
            
            (675
            )
            
            (1,815
            )Income
                (loss) from operations
            
            
            5,073
            
            
            (675
            )
            
            4,398Provision
                for income taxes
            
            
            (1,256
            )
            
            —
            
            
            (1,256
            )Other
                income
            
            
            313
            
            
            1,790
            
            
            2,103Net
                income
            
            
            4,130
            
            
            1,115
            
            
            5,245





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.





**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 128”), and
      SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS 128 requires
      companies with complex capital structures to present basic and diluted
      EPS. Basic EPS is measured as the income or loss available to common
      shareholders divided by the weighted average common shares outstanding for
      the
      period. Diluted EPS is similar to basic EPS but presents the dilutive
      effect on a per share basis of potential common shares ( *e.g* .,
      convertible securities, options and warrants) as if they had been converted
      at
      the beginning of the periods presented, or issuance date, if
      later. Potential common shares that have an anti-dilutive effect
      ( *i.e* .,
      those
      that increase income per share or decrease loss per share) are excluded from
      the
      calculation of diluted EPS. Approximately 16,143 dilutive shares on an “as
      converted” basis for the Series A and B Redeemable Convertible Preferred Stock
      were excluded from the calculation of diluted EPS for the three and nine months
      ended September 25, 2008 since their effect would have been anti-dilutive.
      In
      addition, options for 8,000 shares and warrants for 6,507 shares were excluded
      for the three and nine months ended September 25, 2008.





The
      calculation of diluted weighted average common shares outstanding for the three
      months ended September 25, 2008 and 2007 and for the nine months ended September
      25, 2008 and 2007 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 Series A and B
      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,****2008**
              
              **2007****Weighted**
              
              
              
              
              
              **Weighted****Average**
              
              
              
              
              
              **Average****Income**
              
              **Shares**
              
              **Per-Share**
              
              **Income**
              
              **Shares**
              
              **Per-Share**Earnings
                  per share – basicIncome
                  available to common stockholders
              
              $
              1,098
              
              
              58,625
              
              $
              0.02
              
              $
              2,649
              
              
              54,073
              
              $
              0.05Effect
                  of dilutive securitiesRedeemable
                  convertible preferred stock
              
              
              —
              
              
              —
              
              
              
              
              
              —
              
              
              —Options
                  and warrants
              
              
              —
              
              
              —
              
              
              
              
              
              —
              
              
              877Earnings
                  per share – dilutedIncome
                  available to common stockholders
              
              $
              1,098
              
              
              58,625
              
              
              0.02
              
              $
              2,649
              
              
              54,950
              
              $
              0.05




10





**Nine Months Ended September
                25,****2008**
            
            **2007****Weighted**
            
            
            
            
            
            **Weighted****Average**
            
            
            
            
            
            **Average****Income**
            
            **Shares**
            
            **Per-Share**
            
            **Income**
            
            **Shares**
            
            **Per-Share**Earnings
                per share – basicIncome
                available to common stockholders
            
            $
            3,883
            
            
            57,263
            
            $
            0.07
            
            $
            9,799
            
            
            53,858
            
            $
            0.18Effect
                of dilutive securitiesRedeemable
                convertible preferred stock
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            —Options
                and warrants
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            877Earnings
                per share – dilutedIncome
                available to common stockholders
            
            $
            3,883
            
            
            57,263
            
            
            0.07
            
            $
            9,799
            
            
            54,735
            
            $
            0.18





**NOTE
      6. ACCOUNTS RECEIVABLE**





Accounts
      receivable consisted of the following (in thousands):




**September****25, 2008**
            
            **December 25, 2007****(Unaudited)**Accounts
                receivable
            
            $
            10,651
            
            $
            10,167Less:
                Allowance for doubtful accounts
            
            
            (1,084
            )
            
            (944
            )$
            9,567
            
            $
            9,223





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





**September****25, 2008**
            
            **December 25, 2007****(Unaudited)**Balance
                at the beginning of the period
            
            $
            944
            
            $
            719Add:
                provision during the period
            
            
            182
            
            
            272Less:
                write-offs during the period
            
            
            (42
            )
            
            (47
            )Balance
                at the end of the period
            
            $
            1,084
            
            $
            944





**NOTE
      7. DEPOSITS AND PREPAYMENTS**





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




**September****25, 2008**
            
            **December 25, 2007****(Unaudited)**Deposits
                for raw materials
            
            $
            13,960
            
            $
            12,053Prepayments
                and advances
            
            
            122
            
            
            130$
            14,082
            
            $
            12,183




**NOTE
      8. INVENTORIES**





Inventories
      consisted of the following (in thousands):


11




**September****25, 2008**
            
            **December 25, 2007****(Unaudited)**Raw
                materials (including packing materials)
            
            $
            24,003
            
            $
            20,403Finished
                goods
            
            
            1,829
            
            
            1,74325,832
            
            
            22,146Less:
                Inventory reserve
            
            
            (102
            )
            
            (96
            )$
            25,730
            
            $
            22,050





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




**September****25, 2008**
            
            **December 25, 2007****(Unaudited)**Balance
                at the beginning of the period
            
            $
            96
            
            $
            104Add:
                provision during the period
            
            
            9
            
            
            20Less:
                write-offs during the period
            
            
            (3
            )
            
            (28
            )Balance
                at the end of the period
            
            $
            102
            
            $
            96





**NOTE
      9. DUE FROM RELATED COMPANIES**





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




**September****25, 2008**
            
            **December 25, 2007****(Unaudited)**Due
                from related companies for sales
            
            $
            1,022
            
            $
            913




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





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




Useful Life
            
            **September****25, 2008**
            
            **December 25, 2007**(In
                years)
            
            **(Unaudited)**Buildings
            
            
            40
            
            $
            14,889
            
            $
            13,839Machinery
                and equipment
            
            
            5
                - 12
            
            
            21,805
            
            
            20,229Construction
                in process
            
            
            
            
            
            1,685
            
            
            1,12438,379
            
            
            35,192Less:
                Accumulated depreciation and amortization
            
            
            
            
            
            (10,572
            )
            
            (9,206
            )$
            27,807
            
            $
            25,986





**NOTE
      11. LAND USE RIGHTS**





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




**September****25, 2008**
            
            **December 25, 2007****(Unaudited)**Land
                use rights
            
            $
            9,040
            
            $
            8,415Less:
                Accumulated amortization
            
            
            (1,303
            )
            
            (1,121
            )$
            7,737
            
            $
            7,294




**NOTE
      12. OTHER PAYABLES AND ACCRUALS**





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


12







**September****25, 2008**
            
            **December 25, 2007****(Unaudited)**Deposits
                from customers
            
            $
            526
            
            $
            566Accruals
                for payroll, bonus and benefits
            
            
            306
            
            
            294Utilities
                and accrued expenses
            
            
            1,940
            
            
            1,905$
            2,772
            
            $
            2,765





**NOTE
      13. REDEEMABLE CONVERTIBLE PREFERRED STOCK**





On
      July
      11, 2005, the Company issued 6,000 shares of Series A 7% Redeemable Convertible
      Preferred Stock (“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, 2008, all of the warrants issued to the
      placement agent were exercised cashlessly and 4,936 shares of Series A Preferred
      Stock were converted into 5,322,739 shares of Class A Common Stock.





On
      December 22, 2005, the Company issued 9,500 shares of Series B 7% Redeemable
      Convertible Preferred Stock (“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, 2008, 3,311 shares of
      Series B Preferred Stock were converted into 3,399,269 shares of Class A Common
      Stock, and no warrants were exercised.





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





**Redeemable
                Convertible Preferred Stock****Number
                of**
              **shares**
            
            **Series
                A**
            
            **Series
                B**
            
            **Combined**Sale
                of Series A Preferred Stock
            
            
            6,000
            
            $
            6,000
            
            
            
            
            $
            6,000Sale
                of Series B Preferred Stock
            
            
            9,500
            
            
            
            
            $
            9,500
            
            
            9,500Expenses
                of Offering
            
            
            
            
            
            (685
            )
            
            (1,142
            )
            
            (1,827
            )Original
                Discounts
            
            
            
            
            
            (4,558
            )
            
            (5,686
            )
            
            (10,244
            )Initial
                Balance of Redeemable Preferred Stock
            
            
            
            
            
            757
            
            
            2,672
            
            
            3,429Net
                value at conversion of preferred stock to common stock
            
            
            (8,247
            )
            
            (1,564
            )
            
            (1,736
            )
            
            (3,300
            )Accumulated
                accretion of original discounts
            
            
            
            
            
            1,528
            
            
            3,247
            
            
            4,775BalanceSeptember25, 2008
            
            
            7,253
            
            
            721
            
            
            4,183
            
            $
            4,904





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





**Warrants**
            
            **Embedded Conversion Feature**Expected
                life (in years)
            
            Remaining
                term at valuation date
            
            Remaining
                Term to conversion or redemption date at each valuation
                dateExpected
                volatility
            
            65%
            
            65%Risk-free
                interest rate
            
            2.39%
            
            0.81%
                to 2.01%Dividend
                yield
            
            0
            
            0





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


13




The
      changes in the derivative liabilities during the period are as follows (in
      thousands):





Fair
                Value at December 25, 2006
            
            $
            11,138Gain
                on change in value of derivatives during the period
            
            
            (8,412
            )Conversion
                of 728 shares of Series A & B Preferred Stock to common stock during
                2007
            
            
            (233
            )Fair
                Value at December 25, 2007
            
            $
            2,493Gain
                on change in value of derivatives during the period
            
            
            (1,790
            )Conversion
                of 2,181 shares of Series A & B Preferred Stock to common stock during
                2008
            
            
            (137
            )Fair
                Value at September 25, 2008
            
            $
            566





**NOTE
      14. COMMON STOCK**





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, 2008, warrants to purchase 25,000
      shares of Class A Common Shares were outstanding.





**NOTE
      15. WARRANTS**





The
      following table summarizes the Company’s outstanding warrants as of September
      25, 2008:




**Shares**
            
            **Weighted Average Exercise Price**Warrants
                exercisable at September 25, 2008
            
            
            6,507,895
            
            
            1.4093





The
      number of shares of Class A Common Stock issuable under warrants related to
      the
      private placements and the respective exercise prices as of September 25, 2008
      are summarized as follows:




**Shares of Class A Common Stock**
              **Issuable Under Warrants**
            
            **Exercise**
              **Price**October
                2003 private placement
            
            
            25,000
            
            $
            0.979July
                2005 private placement6-year
                warrants
            
            
            3,157,895
            
            
            1.04December
                2005 private placement6-year
                warrants
            
            
            2,968,750
            
            
            1.765-year
                warrants
            
            
            356,250
            
            
            1.76Warrants
                exercisable at September 25, 2008
            
            
            6,507,895




**NOTE
      16. STOCK-BASED COMPENSATION**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123R, “Share-Based Payment,” which established standards for transactions in
      which an entity exchanges its equity instruments for goods or services. This
      standard requires a public entity to measure the cost of services received
      in
      exchange for an award of equity instruments based on the grant-date fair value
      of the award. The Company adopted the requirements of SFAS No.123R for the
      fiscal year 2006. Because all stock options granted before December 25, 2004
      were fully vested and exercised or expired, no compensation charges were
      recorded in fiscal 2008 for these options. For stock options granted after
      December 25, 2004, the Company used the Black-Scholes option-pricing model
      to
      estimate the fair value of the options at the date of grant.





In
      November 2004, options to purchase 400,000 shares of Class A Common Stock were
      issued to an officer at an exercise price of $1.00 per share with a term of
      10
      years. The market price of the Class A Common Stock as of the grant date was
      $0.64 per share. As of September 25,
      2008, all of these options were exercised.





On June 22,
      2005, options to purchase an additional 600,000 shares of Class A Common Stock
      were issued to the same officer at an exercise price of $1.20 per share with
      a
      term of 10 years. The market price of the Class A Common Stock as of the grant
      date was $1.00 per share. As of September 25,
      2008, all of these options were exercised.


14





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,
      2008, none of these options were exercised. The Company recorded compensation
      expense of $2,320,000 based on an estimated fair value of the options of $1.16
      per share on January 20, 2006. The per share fair value of the stock options
      granted has been estimated using the Black-Scholes option-pricing model with
      the
      following assumptions:




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





On
      December 13, 2006, options to purchase an additional 6,000,000 shares of Class
      A
      Common Stock were granted to the same officer at an exercise price of $1.82
      per
      share with a term of 10 years. The options were fully vested upon grant but
      became exercisable on April 3, 2007. The market price of the Class A Common
      Stock as of the grant date was $1.82 per share. As of December 25, 2006, these
      options were fully vested but not exercisable. The Company recorded compensation
      expense of $5,820,000 based on an estimated fair value of the options of $0.97
      per share on December 13, 2006, the grant date. The per share fair value of
      the
      stock options granted has been estimated using the Black-Scholes option-pricing
      model with the following assumptions:




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





The
      following table summarizes outstanding options as at September 25, 2008
      and related weighted average fair value and life information:





Options
                Outstanding
            
            Options
                ExercisableRange of Exercise
              Price Per Share
            
            Number Outstanding
              at September 25, 2008
            
            Weighted Average
              Fair Value
            
            Weighted Average
              Remaining Life (Years)
            
            Number Exercisable
              at September 25, 2008
            
            Weighted Average
              Exercise Price$
                1.60-1.82
            
            
            8,000,000
            
            $
            1.02
            
            
            6.50
            
            
            8,000,000
            
            $
            1.765





The
      Company recorded compensation expense of $8,140,000 based on the fair value
      of
      the options granted during the year of 2006. Any exercise of such options
      granted on December 13, 2006 was contingent upon the effectiveness of a
      shareholder consent, which occurred on April 3, 2007. The Company has no future
      compensation expense to record from this option outstanding at December 25,
      2006
      because they were fully vested upon grant and compensation cost was recorded
      as
      of that date. As of September 25,
      2008, our options granted had no intrinsic value.





**NOTE
      17. RELATED PARTY TRANSACTIONS**





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





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




**Three months ended**
              **September 25,**
            
            **Nine months ended**
              **September 25,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**Pre-determined
                annual fee charged by joint venture partners:Shandong
                Longfeng Group Company (a)
            
            $
            23
            
            $
            21
            
            $
            65
            
            $
            61Shandong
                Longfeng Flour Company Limited (b)
            
            
            13
            
            
            10
            
            
            34
            
            
            28$
            36
            
            $
            31
            
            
            99
            
            
            89




15





(a)
            Shandong
                Longfeng Group Company is a joint venture partner of the Company
                and New
                Dragon Asia Food Limited, the parent company of New Dragon Asia
                Corp.(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 25%. Three of the PRC subsidiaries of the
      Company are eligible to be exempt from income taxes for a two-year period
      commencing with the year in which their operations are profitable and then
      subject to a 50% reduction in income taxes for the next three years, starting
      from their first profitable year. Several PRC subsidiaries receive preferential
      tax rates in regions in which they operated and are also entitled to partial
      tax
      refunds from those tax bureaus.





New
      Dragon Asia Corp. is a Florida corporation with wholly-owned operating
      subsidiaries. As a result, the Company is not subject to PRC tax for the
      activities at the Florida company level. Costs or expenses incurred at the
      Florida company level, such as the stock-based compensation and the amortization
      of financing costs and derivative accounting related to Series A Preferred
      Stock
      and Series B Preferred Stock, cannot be used to offset any income derived in
      the
      PRC when measuring the PRC income tax liabilities. As of September 25, 2008
      and
      December 25, 2007, there were no material deferred tax assets or deferred tax
      liabilities. The expenses of the Florida company are not recoverable against
      future taxable income in the United States or the PRC and meet the definition
      of
      permanent differences for tax accounting purposes. The Company has never been
      audited by the taxing authority in the United States or the PRC. The Company
      believes that it has filed properly in all required jurisdictions.




In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This
      statement clarifies the criteria that an individual tax position must satisfy
      for some or all of the benefits of that position to be recognized in a company’s
      financial statements. FIN
      48
      prescribes a recognition threshold of more-likely-than-not, and a measurement
      attribute for all tax positions taken or expected to be taken on a tax return,
      in order for those tax positions to be recognized in the financial statements.
      Effective December 26, 2006, the Company has adopted the provisions of FIN
      48
      and there was no material effect on the financial statements. As a result,
      there
      was no cumulative effect related to adopting FIN
      48.





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





***Longyuan
      Packaging Plant***





On
      January 10, 2006, the Company established New Dragon Asia (Long Kou) Packing
      Materials Company Limited (“NDAPM”), a wholly-owned subsidiary in Longkou,
      Shandong Province. NDAPM is principally engaged in the manufacturing and sale
      of
      packing materials, with a registered capital of $3,600,000. During the nine
      months ended September 25, 2008, the Company has spent approximately $1.69
      million on the construction at the new plant and has committed to further
      capital expenditures of $0.63 million for the completion of the plant, which
      is
      scheduled to be completed in 2009.





**NOTE
      20. SEGMENT INFORMATION**





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





**For the three months ended**
              **September 25,**
            
            **For the nine months ended**
              **September 25,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(in
                thousands, unaudited)**Net
                revenueInstant
                noodles
            
            $
            3,648
            
            $
            3,853
            
            $
            10,578
            
            $
            10,866Flour
            
            
            8,789
            
            
            7,805
            
            
            23,111
            
            
            20,754Soybean
            
            
            2,505
            
            
            2,297
            
            
            7,467
            
            
            6,530$
            14,942
            
            $
            13,955
            
            $
            41,156
            
            $
            38,150Income
                (loss) from operationInstant
                noodles
            
            $
            94
            
            $
            360
            
            $
            644
            
            $
            828Flour
            
            
            1,335
            
            
            1,648
            
            
            3,633
            
            
            4,004Soybean
            
            
            118
            
            
            (234
            )
            
            121
            
            
            (397
            )$
            1,547
            
            $
            1,774
            
            $
            4,398
            
            $
            4,435Depreciation
                and amortizationInstant
                noodles
            
            $
            296
            
            $
            338
            
            $
            844
            
            $
            583Flour
            
            
            190
            
            
            164
            
            
            527
            
            
            467Soybean
            
            
            69
            
            
            55
            
            
            191
            
            
            163$
            555
            
            $
            557
            
            $
            1,562
            
            $
            1,213




16





**September 25,**
            
            **December 25,****2008**
            
            **2007****(in
                thousands)**Identifiable
                long-term assetsInstant
                noodles
            
            $
            23,722
            
            $
            22,640Flour
            
            
            7,404
            
            
            7,470Soybean
            
            
            4,418
            
            
            3,170$
            35,544
            
            $
            33,280


17





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





In
      addition to historical information, the matters discussed in this Form 10-Q
      contain forward-looking statements that involve risks or uncertainties.
      Generally, the words "believes," "anticipates," "may," "will," "should,"
      "expect," "intend," "estimate," "continue," and similar expressions or the
      negative thereof or comparable terminology are intended to identify
      forward-looking statements. Such statements are subject to certain risks and
      uncertainties, including the matters set forth in this report or other reports
      or documents we file with the Securities and Exchange Commission from time
      to
      time, which could cause actual results or outcomes to differ materially from
      those projected. Undue reliance should not be placed on these forward-looking
      statements, which speak only as of the date hereof. We undertake no obligation
      to update these forward-looking statements. Readers should carefully review
      the
      risks described in other documents we file from time to time with the Securities
      and Exchange Commission, including the Annual Report on Form 10-K for the fiscal
      year ended December 25, 2007, the Quarterly Reports on Form 10-Q filed by the
      Company and Current Reports on Form 8-K (including any amendments to such
      reports). References in this filing to the “Company”, “Group”, “we”, “us”, and
“our” refer to New Dragon Asia Corp. and its subsidiaries.





***Critical
      Accounting Policies***





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





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





**Contractual
      Joint Ventures**





A
      contractual joint venture is an entity established between us and another joint
      venture partner, with the rights and obligations of each party governed by
      a
      contract. Currently, we have established four contractual joint ventures with
      two Chinese partners in China - Shandong Longfeng Flour Co. Ltd. and Shandong
      Longfeng Group Co., with percentage of ownership ranging from 76.94% 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 entitled
      to receive any profits and is not responsible for any losses, regardless of
      the
      ownership in the contractual joint venture. In view of such contracted profit
      sharing arrangement, the contractual joint ventures are accounted for as
      wholly-owned by the Company. Accordingly, the Company’s consolidated financial
      statements include the financial statements of the contractual joint
      ventures.





**Revenue
      Recognition**





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





**Accounting
      for Derivative Instruments**





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





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


18




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





**Share-Based
      Payment**





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




**Allowance
      for Doubtful Accounts**





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





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





**Inventories
      Valuation**





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





***Recent
      Accounting Pronouncements***





In
      March
      2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about
      Derivative Instruments and Hedging Activities, an Amendment of FASB
      No. 133,” (“SFAS 161”). SFAS 161 is intended to improve transparency in
      financial reporting by requiring enhanced disclosures of an entity’s derivative
      instruments and hedging activities and their effects on the entity’s financial
      position, financial performance, and cash flows. SFAS 161 applies to all
      derivative instruments within the scope of SFAS No. 133, “Accounting for
      Derivative Instruments and Hedging Activities,” (“SFAS 133”). SFAS 161 also
      applies to non-derivative hedging instruments and all hedged items designated
      and qualifying under SFAS 133. SFAS 161 is effective prospectively for financial
      statements issued for fiscal years and interim periods beginning after
      November 15, 2008, with early application encouraged. SFAS 161 encourages,
      but does not require, comparative disclosures for periods prior to its initial
      adoption. We will adopt SFAS 161 on December 26, 2008 and are currently
      evaluating the potential impact on our financial statements when
      implemented.





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,”
(“SFAS 141(R)”). SFAS 141(R) requires us to continue to follow the guidance in
      SFAS 141 for certain aspects of business combinations, with additional guidance
      provided defining the acquirer, recognizing and measuring the identifiable
      assets acquired, the liabilities assumed, and any noncontrolling interest in
      the
      acquiree, assets and liabilities arising from contingencies, defining a bargain
      purchase and recognizing and measuring goodwill or a gain from a bargain
      purchase. In addition, under SFAS 141(R) adjustments associated with changes
      in
      tax contingencies that occur after the one year measurement period are recorded
      as adjustments to income. This statement is effective for all business
      combinations for which the acquisition date is on or after the beginning of
      an
      entity’s first fiscal year that begins after December 15, 2008; however,
      the guidance in this standard regarding the treatment of income tax
      contingencies is retrospective to business combinations completed prior to December
      26, 2008 .
      We will
      adopt SFAS 141(R) for any business combinations occurring at or subsequent
      to December
      26, 2008 .





In
      April
      2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
      the Useful Life of Intangible Assets” (“FSP 142-3”).  FSP 142-3 amends
      the factors an entity should consider in developing renewal or extension
      assumptions used in determining the useful life of recognized intangible assets
      under FASB Statement No. 142, “Goodwill and Other Intangible
      Assets”.  This new guidance applies prospectively to intangible assets
      that are acquired individually or with a group of other assets in business
      combinations and asset acquisitions. FSP 142-3 is effective for financial
      statements issued for fiscal years and interim periods beginning after December
      15, 2008.  Early adoption is prohibited.  We are currently
      evaluating the impact, if any, that FSP 142-3 will have on our consolidated
      financial statements.




19




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements,” an Amendment of ARB No. 51,
“Consolidated Financial Statements,” (“SFAS 160”). SFAS 160 establishes
      accounting and reporting standards for the noncontrolling interest in a
      subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
      noncontrolling interest in a subsidiary is an ownership interest in the
      consolidated entity that should be reported as equity in the consolidated
      financial statements. This statement is effective as of the beginning of an
      entity’s first fiscal year that begins after December 15, 2008 with
      retrospective application. We will adopt SFAS 160 beginning on December
      26, 2008 and are
      currently evaluating the potential impact on our financial statements when
      implemented.




In
      September 2006, the Financial Accounting Standards Board (FASB) issued
      SFAS No. 157, Fair Value Measurements, which defines fair value,
      establishes a framework for measuring fair value in accordance with generally
      accepted accounting principles, and expands disclosures about fair value
      measurements. SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. Adoption
      of SFAS No. 157 did not have a material impact on our consolidated
      financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 permits companies to choose to measure many financial instruments
      and certain other items at fair value. SFAS No. 159 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007. Adoption of SFAS No. 159 did not have a material impact on our
      consolidated financial statements..




***Overview***





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





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





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





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





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





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





In
      addition to domestic sales, we export noodles to other countries such as South
      Korea, Australia, Malaysia, and Indonesia. We also 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.
      During the second quarter of the year 2006, we began export sales of noodles
      to
      Sweden and Greece. In early 2008, we began exporting noodles to Nigeria,
      Africa.


20




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.





With
      the
      strong growth of our soybean powder business, we have recently decided to add
      soybean milk into our product line. We believe that soybean milk as a beverage
      should generate higher margins than our existing food business. Such expansion
      would not increase our capital expenditures substantially given that we have
      our
      own packaging company in Longkou. The production and sale of soybean milk will
      likely commence in the first quarter of 2009.




***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. We do not face substantial competition
      in the “high-quality” soybean powder market.





***Employees***





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




**Three months ended**
                **September****25,**
              
              **Nine months ended**
                **September 25,****2008**
              
              **2007**
              
              **2008**
              
              **200****7**Net
                  revenue
              
              $
              14,942
              
              $
              13,955
              
              $
              41,156
              
              $
              38,150Cost
                  of goods sold
              
              
              (12,439
              )
              
              (11,148
              )
              
              (33,966
              )
              
              (30,865
              )Gross
                  profit
              
              
              2,503
              
              
              2,807
              
              
              7,190
              
              
              7,285Selling
                  and distribution expenses
              
              
              (387
              )
              
              (302
              )
              
              (977
              )
              
              (825
              )General
                  and administrative expenses
              
              
              (569
              )
              
              (731
              )
              
              (1,815
              )
              
              (2,025
              )Gain
                  (loss) on fair value adjustments to embedded derivatives
              
              
              362
              
              
              1,903
              
              
              1,790
              
              
              7,541Income
                  (loss) before income taxes and minority interest
              
              
              1,977
              
              
              3,695
              
              
              6,501
              
              
              12,677Provision
                  for income taxes
              
              
              (470
              )
              
              (491
              )
              
              (1,256
              )
              
              (1,211
              )Net
                  income (loss)
              
              
              1,507
              
              
              3,204
              
              
              5,245
              
              
              11,466




21





***Nine
      Months Ended September 25, 2008 Compared to Nine Months Ended September 25,
      2007***





***Net
      Revenue***





Net
      revenue for the nine months ended September 25, 2008 was $41,156,000,
      representing an increase of $3,006,000, or 8%, from $38,150,000 for the nine
      months ended September 25, 2007.





The
      increase was mainly due to the increase in the average selling price for our
      flour products, which represented $20,754,000 of net revenue for the nine months
      ended September 25, 2007 and $23,111,000 for the nine months ended September
      25,
      2008.





***Gross
      Profit***





As
      a
      percentage of net revenue, gross profit margin decreased to 17% for the nine
      months ended September 25, 2008 from 19% for the nine months ended September
      25,
      2007 as a result of the increase in raw material prices, principally
      wheat.





***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 $977,000 for the nine months ended September
      25,
      2008, representing an increase of $152,000 from $825,000 for the corresponding
      period of 2007. The increase was primarily due to the increase in selling
      commissions.





As
      a
      percentage of net revenue, selling and distribution expenses remained constant
      at 2% for the nine months ended September 25, 2008 as compared with the
      corresponding period in 2007. These results were primarily because we made
      no
      major change to our selling and distribution channels and as a result our costs
      were stabilized. We monitor our selling and distribution expenses by
      reviewing **** the
      amount of expenses compared with the amount of revenue earned and adjust our
      expenses to maintain **** the percentage of net revenue.
      Spending has to be approved by a sales director in advance and must in be in
      line with the sales budget.





***General
      and Administrative Expenses***





General
      and administrative expenses decreased $210,000, or 10%, to $1,815,000 for the
      nine months ended September 25, 2008 as compared to $2,025,000 for the nine
      months ended September 25, 2007. The decrease was primarily due to the reduction
      of headcount at our back office.





***Income
      from Operations***





Income
      from operations slightly decreased $37,000, or 0.8%, to $4,398,000 for the
      nine
      months ended September 25, 2008 from $4,435,000 for the nine months ended
      September 25, 2007 as a result of the increase in wheat prices.





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





The
      Company issued Series A Redeemable Convertible Preferred Stock in July 2005,
      together with 3,157,895 warrants to purchase Class A Common Stock resulting
      in
      aggregate gross proceeds of $6 million. The Company also issued Series B
      Redeemable Convertible Preferred Stock in December 2005, together with 2,968,750
      warrants to purchase Class A Common Stock resulting in aggregate gross 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, from changes in the fair values of these instruments was
      recorded in our statement of income. For the nine months ended September 25,
      2008, the gain in this regard was $1,790,000. For the corresponding period
      of
      2007, it was approximately $7.54 million. The determination of the change in
      the
      value of the derivatives requires the use of a complex valuation model and
      can
      fluctuate significantly between periods based on changes in the price of our
      shares and the time remaining in the life of the underlying financial
      instruments. Increase in our stock’s market value increases the value of the
      derivative creating losses in our income statements and decrease in the stock’s
      market value reduces the value of the derivatives creating gains in our income
      statements.


22





***VAT
      Refunds***





VAT
      refunds decreased to $60,000 for the nine months ended September 25, 2008 as
      compared to $540,000 for the nine months ended September 25, 2007. This decrease
      was solely due to the decrease in the amount of tax refunds received from the
      municipal government of China.





***Net
      Income***





Net
      income was $5,245,000 for the nine months ended September 25, 2008 as compared
      to $11,466,000 for the nine months ended September 25, 2007. Such decrease
      was
      primarily due to the fluctuation in gain derived from changes in the fair value
      of derivative instruments.





***Three
      Months Ended September 25, 2008 Compared to Three Months Ended September 25,
      2007***





***Net
      Revenue***





Net
      revenue for the quarter ended September 25, 2008 was $14,942,000, representing
      an increase of $987,000, or 7%, from $13,955,000 for the quarter ended September
      25, 2007.





The
      increase was due to the increase in the average selling price for our flour
      products, which represented $7,805,000 of net revenue for the three months
      ended
      September 25, 2007 and $8,789,000 for the three months ended September 25,
      2008.





***Gross
      Profit***





As
      a
      percentage of net revenue, gross profit margin decreased to 17% for the three
      months ended September 25, 2008 from 20% for the three months ended September
      25, 2007 due to the increase in raw material prices, principally
      wheat.





***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 $387,000 for the quarter ended September 25,
      2008, representing an increase of $85,000 or 28% from $302,000 for the
      corresponding quarter of 2007. The increase was primarily due to the increase
      in
      selling commissions.





As
      a
      percentage of net revenue, selling and distribution expenses slightly increased
      to 2.6% for the quarter ended September 25, 2008 as compared to 2.2% for the
      corresponding period in 2007. The increase was primarily due to the increase
      in
      selling commissions.





***General
      and Administrative Expenses***





General
      and administrative expenses decreased by $162,000, or 22%, to $569,000 for
      the
      quarter ended September 25, 2008 as compared to $731,000 for the quarter ended
      September 25, 2007. The decrease was primarily due to the reduction of headcount
      at our back office.





***Income
      from Operations***





Income
      from operations was $1,547,000 for the three months ended September 25, 2008
      as
      compared to $1,774,000 for the three months ended September 25, 2007. The
      decrease was primarily due to the increase in selling and distribution expenses
      and the decrease in gross profit.





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





The
      Company issued Series A Redeemable Convertible Preferred Stock in July 2005,
      together with 3,157,895 warrants to purchase Class A Common Stock resulting
      in
      aggregate gross proceeds of $6 million. The Company also issued Series B
      Redeemable Convertible Preferred Stock in December 2005, together with 2,968,750
      warrants to purchase Class A Common Stock resulting in aggregate gross 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, from changes in the fair values of these instruments was
      recorded in our statement of income. For the three months ended September 25,
      2008, the gain in this regard was $362,000. For the corresponding period of
      2007, it was approximately $1.9 million. The determination of the change in
      the
      value of the derivatives requires the use of a complex valuation model and
      can
      fluctuate significantly between periods based on changes in the price of our
      shares and the time remaining in the life of the underlying financial
      instruments. Increase in our stock’s market value increases the value of the
      derivative creating losses in our income statements and decrease in the stock’s
      market value reduces the value of the derivatives creating gains in our income
      statements.


23




***VAT
      Refunds***





VAT
      refund was $32,000 for the quarter ended September 25, 2008 as compared to
      $0
      for the quarter ended September 25, 2007. This increase was solely due to the
      fact that no tax refunds were received from the municipal government of China
      during the quarter ended September 25, 2007.




***Net
      Income***





Net
      income was $1,507,000 for the quarter ended September 25, 2008 as compared
      to
      $3,204,000 for the quarter ended September 25, 2007. Such decrease was primarily
      due to the fluctuation in gain derived from changes in the fair value of
      derivative instruments.





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





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





Our
      working capital increased $10,908,000 to $47,117,000 at September 25, 2008
      as
      compared to $36,209,000 at December 25, 2007, which was primarily due to the
      growth and profitability of the business.





Cash
      and
      cash equivalents were $5,298,000 as of September 25, 2008, an increase of
      $1,652,000 from December 25, 2007. The Company believes that it has enough
      cash
      available and expects to have enough income from operations to operate for
      the
      next 12 months.





***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.





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.




24





Mandatory
                Conversion
            
            The
                Company may at any time force the conversion of the Preferred Stock
                if the
                volume-weighted current market price of the Class A Common Stock
                exceeds
                300% of the then applicable conversion price.
            
            The
                Company may at any time force the conversion of the Preferred Stock
                if the
                volume-weighted current market price of the Class A Common Stock
                exceeds
                200% of its price at issuance of the Preferred Stock.Registration
            
            The
                Company shall file to register the underlying Class A common shares
                within
                30 days of the closing date and make its best efforts to have the
                Registration declared effective at the earliest date. In the event
                such
                Registration is not continuously effective during the period such
                shares
                are subject to transfer restrictions under the U.S. federal securities
                laws, then (subject to certain exceptions) the holders are entitled
                to
                receive liquidated damages equal to 2.0% of the purchase price of
                the
                Preferred Stock per month.
            
            The
                Company shall file to register the underlying Class A common shares
                with
                30 days of the closing date and make its best efforts to have the
                Registration declared effective at the earliest date. In the event
                such
                Registration is not continuously effective during the period such
                shares
                are subject to transfer restrictions under the U.S. federal securities
                laws, then (subject to certain exceptions) the holders are entitled
                to
                receive liquidated damages equal to 2.0% of the purchase price of
                the
                Preferred Stock per month.Anti-dilution
            
            In
                the event the Company issues, at any time while Preferred Stock are
                still
                outstanding, Common Stock or any type of securities giving rights
                to
                Common Stock at a price below the Issue Price, the Company agrees
                to
                extend full-ratchet anti-dilution protection to the
                investors.
            
            In
                the event the Company issues, at any time while Preferred Stock are
                still
                outstanding, Common Stock or any type of securities giving rights
                to
                Common Stock at a price below the Issue Price, the Company agrees
                to
                extend full-ratchet anti-dilution protection to the
                investors.





As
      of
      September 25, 2008, the Company had long-term debt obligations that resulted
      from the redeemable convertible preferred stock and the pre-determined annual
      fee charged by joint venture partners through February 2009 and other
      commitments and long-term liabilities through August 2049 as
      follows:





Payment
                Obligations By Period2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            Thereafter
            
            Total(In
                thousands)Redeemable
                convertible preferred stock
            
            $
            1,504
            
            $
            3,274
            
            $
            2,475
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            7,253Pre-determined
                annual fee charged by joint venture partners
            
            
            29
            
            
            118
            
            
            118
            
            
            118
            
            
            118
            
            
            3,886
            
            
            4,387Total
            
            $
            1,533
            
            $
            3,392
            
            $
            2,593
            
            $
            118
            
            $
            118
            
            $
            3,886
            
            $
            11,640





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




(In
                thousands)Aggregated
                balance as of the issue date
            
            $
            15,500Partial
                redemption of Series A Preferred Stock in 2005
            
            
            (1,900
            )Partial
                redemption of Series A and B Preferred Stock in 2006
            
            
            (3,438
            )Partial
                redemption of Series A Preferred Stock in 2007
            
            
            (728
            )Partial
                redemption of Series A and B Preferred Stock in 2008
            
            
            (2,181
            )$
            7,253




25





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





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





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





The
      majority of our operations are conducted in the PRC except for some minor export
      business and limited overseas purchases of raw materials. Most of our sales
      and
      purchases are conducted within the PRC in Chinese Renminbi. Hence, the effect
      of
      the fluctuations of the Renminbi exchange rate relative to other currencies
      is
      considered minimal to our business operations. However, we use the United States
      dollar for financial reporting purposes and therefore, fluctuations in the
      exchange rate between the Renminbi and the U.S dollar will result in increases
      or decreases in other comprehensive income or loss. Conversion of Renminbi
      into
      foreign currencies is regulated by The People’s Bank of China through a unified
      floating exchange rate system. Although the PRC government has stated its
      intention to support the value of Renminbi, there can be no assurance that
      such
      exchange rate will not again become volatile or that Renminbi will not
      strengthen or devalue significantly against the US dollar. Exchange rate
      fluctuations may adversely affect the value, in US dollar terms, of our net
      assets and income derived from our operations in the PRC.





***Interest
      Rate Risk***





The
      Company does not have significant interest rate risk, as our debt obligations
      are primarily short-term in nature, with fixed interest rates. Our embedded
      derivatives liabilities
      are revalued each accounting period and their fair value can be affected by
      interest rate fluctuations based on changes in the risk free interest rate
      (generally the interest rate on intermediate term obligations of the United
      States Government).





***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
      4T. 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, 2008, 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 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, 2008 that have materially affected, or
      are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.




26





**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.





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 declared or paid any 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
      Series A and Series B Preferred Stock, our future earnings, if any, capital
      requirements, financial condition and such other factors as our Board of
      Directors may consider to be relevant from time to time. We do not expect to
      declare or pay any dividends on our Class A Common Stock in the foreseeable
      future.





***We
      are controlled by our major shareholder***





Our
      major
      shareholder, New Dragon Asia Food Ltd., which is controlled by our Chairman,
      Mr.
      Heng Jing Lu, owns approximately 49% of our outstanding shares. Mr. Lu has
      sole
      voting and dispositive control over the shares of us held by New Dragon Asia
      Food Ltd. As a result, Mr. Lu, through this shareholder, effectively exercises
      control over all matters requiring shareholder approval, including the election
      of directors and approval of significant corporate transactions. This
      concentration of ownership may also have the effect of delaying or preventing
      a
      change in control of us that may not be viewed as beneficial by other
      shareholders.





***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, Hero Treasure Ltd.,
      Delta Link Ltd., Mix Creation Ltd., Rich Delta Ltd. and Keen General Ltd. and
      their respective subsidiaries in China. As a result, our profits available
      for
      distribution to our shareholders are dependent on the profits available for
      distribution from our subsidiaries. If our 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 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.


27





***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 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.





***Dividend
      Policy***





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





**RISKS
      RELATED TO OUR BUSINESS**





***We
      may be subject to product liability claims and product recalls that could result
      in a decrease in demand for our products due to negative publicity, 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 our
      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.




In
      September 2008, the Health Ministry of the People’s Republic of China announced
      that several babies had died in recent months and thousands more had been
      sickened by contaminated milk formula powder due to the presence of melamine,
      an
      industrial chemical sometimes used to make plastics and fertilizer. On October
      22, 2008, the United Nations issued a paper addressing food safety in China,
      citing key challenges for China as the need for a more modern food safety law;
      the need for improved monitoring, inspection and enforcement; and the need
      to
      continue to improve standards to bring China in line with international norms.
      Although none of our products contain milk powder, negative international
      publicity surrounding this food safety issue could influence the popular
      perceptions of international consumers and result in lower demand for exports
      of
      food products from China, which could have an adverse effect on our sales and
      profitability.





***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 retail outlets and sufficient shelf
                space.





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


28





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





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





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





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





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





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





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





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





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





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


29




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





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





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





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





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





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





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





Over
      the
      last few years, China’s economy has registered a high growth rate. Recently,
      there have been indications that rates of inflation have increased. In response,
      the Chinese government has taken measures to curb this excessively expansive
      economy. These measures include restrictions on the availability of domestic
      credit, reducing the purchasing capability of certain of our 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 legal precedents. Since 1979, the PRC government
      has been developing a comprehensive system of commercial laws, and considerable
      progress has been made in introducing laws and regulations dealing with economic
      matters such as foreign investment, corporate organization and governance,
      commerce, taxation and trade. Two examples are the promulgation of the Contract
      Law of the PRC to unify the various economic contract laws into a single code,
      which went into effect on October 1, 1999, and the Securities Law of the
      People’s Republic of China, which went into effect on July 1, 1999. However,
      because these laws and regulations are relatively new, and because of the
      limited volume of published cases and their non-binding nature, interpretation
      and enforcement of these laws and regulations involve uncertainties. In
      addition, as the Chinese legal system develops, changes in such laws and
      regulations, their interpretation or their enforcement may have a material
      adverse effect on our business operations.


30




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





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





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





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




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





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





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





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





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





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


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





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





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


31




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





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





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





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





-  government
      involvement;


-  level
      of
      development;


-  growth
      rate;


-  control
      of foreign exchange; and


-  allocation
      of resources.





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





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





-  changes
      in the rate or method of taxation;


-  imposition
      of additional restrictions on currency conversion and remittances
      abroad;


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


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





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





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





***The
      discontinuation of the preferential tax treatment currently available to our
      Chinese subsidiaries might adversely affect our results of operations.***





Our
      Chinese operating subsidiaries are subject to the People’s Republic of China
      Enterprise Income Tax Law Concerning Foreign-Invested Enterprises and Foreign
      Enterprises. Under this law and its related regulations, our Chinese
      subsidiaries as foreign-invested enterprises, are generally subject to
      enterprise income tax at a statutory rate of 33% (30% national income tax plus
      3% local income tax) through 2007, and 25% from January 1, 2008 under the
      tax law described below. However, as manufacturing foreign invested enterprises,
      our Chinese subsidiaries enjoyed “two-year exemption, three-year 50% reduction”
preferential tax treatment from their first profitable year. However, under
      the
      new tax law, a new manufacturing foreign-invested enterprise established after
      March 16, 2007 will not be entitled to such preferential tax treatment anymore.


32




On
      March 16, 2007, the National People’s Congress of the People’s Republic of
      China passed the People’s Republic of China Enterprise Income Tax Law, which was
      effective as of January 1, 2008. In accordance with the new law, a unified
      enterprise income tax rate of 25% and unified tax deduction standards will
      be
      applied equally to both domestic-invested enterprises and foreign-invested
      enterprises. Enterprises established prior to March 16, 2007 eligible for
      preferential tax treatment in accordance with the currently prevailing tax
      laws
      and administrative regulations shall, under the regulations of the State
      Council, gradually be subject to the new tax rate over a five-year transition
      period starting from the effectiveness date of the new law. For foreign-invested
      enterprises that currently enjoy “two-year exemption, three-year 50% reduction”
preferential tax treatment, the tax holiday are still valid .




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





None.




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





None.





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





None.




**Item
      5. Other Information.**





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





**Item
      6. Exhibits.**




**Exhibit**
              **Number**
            
            **Description**31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of
                the
                Securities Exchange Act of 1934, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002, filed herewith.31.2
            
            Certification
                of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A)
                of
                the Securities Exchange Act of 1934, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002, filed herewith.32.1
            
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906
                of the
                Sarbanes-Oxley Act of 2002), filed herewith.32.2
            
            Certification
                of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section
                906 of
                the Sarbanes-Oxley Act of 2002), filed
                herewith.


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 7, 2008
            By:
            */s/
                Li Xia Wang*Name:
                Li Xia WangTitle:
                Chief Executive OfficerDated:
                November 7, 2008
            By:
            */s/
                Peter Mak*Name:
                Peter MakTitle:
                Chief Financial Officer





34