**UNITED
      STATES**





**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**





**AMENDMENT
      NO. 1**


**FORM
      10-Q/A**








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








For
      the
      quarterly period ended: September 25, 2005





or





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




For
        the
        transition period from  to





**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 TowerFuhua
                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 filing requirements for the
      past 90 days. Yes x No o





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-12 of the Exchange Act): Yes o No x




Check
      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 November 4, 2005
      was
      47,282,953.











**NEW
      DRAGON ASIA CORP.**





**FORM
      10-Q/A**





**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 2005**


****


**TABLE
      OF CONTENTS**








PagePART
                I:
            FINANCIAL
                INFORMATIONITEM
                1.
            Consolidated
                Financial Statements:Consolidated
                Balance Sheets as of September 25, 2005 and December 25, 2004
            4Consolidated
                Statements of Income (unaudited) for the three months ended September
                25,
                2005 and 2004 and the nine months ended
              September
                25, 2005 and 2004
            5Consolidated
                Statements of Stockholders’ Equity and Comprehensive Income as of
                September 25, 2005 (unaudited) and December 25, 2004
            6Consolidated
                Statements of Cash Flows (unaudited) for the nine months ended September
                25, 2005 and 2004
            7Notes
                to Consolidated Financial Statements (unaudited)
            8ITEM
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            19ITEM
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            32ITEM
                4.
            Controls
                and Procedures
            32PART
                II:
            OTHER
                INFORMATIONITEM
                1.
            Legal
                Proceedings
            33ITEM
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            33ITEM
                3.
            Defaults
                Upon Senior Securities
            33ITEM
                4.
            Submission
                of Matters to a Vote of Security Holders
            33ITEM
                5.
            Other
                Information
            33ITEM
                6.
            Exhibits
            33**SIGNATURES****EXHIBITS**





2




**EXPLANATORY
      NOTE**





We
      are
      filing this Amendment No. 1 to Quarterly Report on Form 10-Q/A to (a) amend
      the
      financial statements and the notes to the financial statements and (b) amend
      Item 2 of Part I to amend our Management's Discussion and Analysis of Financial
      Condition and Results of Operations . Except as specifically referenced herein,
      this Amendment No. 1 to Quarterly Report on Form 10-Q/A does not reflect any
      event occurring subsequent to November 9, 2006, the filing date of the original
      report.





3





**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,**
            
            
            **December
                25,****2005**
            
            
            **2004****Restated****(Unaudited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            4,637
            
            $
            219Accounts
                receivable, net
            
            
            6,596
            
            
            6,414Deposits
                and prepayments, net
            
            
            5,838
            
            
            2,520Inventories,
                net
            
            
            5,611
            
            
            3,990Due
                from related companies
            
            
            842
            
            
            1,183Total
                current assets
            
            
            23,524
            
            
            14,326Property,
                machinery and equipment, net
            
            
            18,584
            
            
            16,098Land
                use rights, net
            
            
            3,847
            
            
            3,822Total
                assets
            
            $
            45,955
            
            $
            34,246**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            2,754
            
            $
            2,696Other
                payables and accruals
            
            
            1,979
            
            
            1,898Taxes
                payable
            
            
            1,679
            
            
            1,491Due
                to related companies
            
            
            163
            
            
            831Embedded
                derivatives at fair value
            
            
            12,915
            
            
            --Total
                current liabilities
            
            
            19,490
            
            
            6,916Due
                to parent company
            
            
            248
            
            
            303Due
                to joint venture partners
            
            
            123
            
            
            110Total
                liabilities
            
            
            19,861
            
            
            7,329Minority
                interests
            
            
            124
            
            
            82Series
                A Redeemable convertible preferred stock,
            
            
            1,115
            
            
            --Stockholders'
                equity:Share
                capital
            
            
            5
            
            
            4Additional
                paid-in capital
            
            
            11,941
            
            
            9,909Retained
                earnings
            
            
            12,137
            
            
            16,922Accumulated
                other comprehensive income
            
            
            772
            
            
            --Total
                stockholders’ equity
            
            
            24,855
            
            
            26,835Total
                liabilities and stockholders' equity
            
            $
            45,955
            
            $
            34,246





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







4





**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF INCOME (** **LOSS)**





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




**Three
                months ended**
              **September
                25,**
            
            
            **Nine
                months ended**
              **September
                25,****2005
                Restated**
            
            
            **2004**
            
            
            **2005
                Restated**
            
            
            **2004**Net
                sales
            
            $
            11,645
            
            $
            9,886
            
            $
            28,920
            
            $
            25,831Cost
                of goods sold
            
            
            (9,488
            )
            
            (7,958
            )
            
            (23,862
            )
            
            (21,009
            )Gross
                profit
            
            
            2,157
            
            
            1,928
            
            
            5,058
            
            
            4,822Selling
                and distribution expenses
            
            
            (149
            )
            
            (198
            )
            
            (431
            )
            
            (822
            )General
                and administrative expenses
            
            
            (360
            )
            
            (686
            )
            
            (1,338
            )
            
            (1,811
            )Income
                from operations
            
            
            1,648
            
            
            1,044
            
            
            3,289
            
            
            2,189Other
                income (expense):Interest
                expense
            
            
            -
            
            
            (1
            )
            
            (1
            )
            
            (73
            )Interest
                income
            
            
            4
            
            
            --
            
            
            4
            
            
            13Other
                expense
            
            
            (207
            )
            
            (315
            )
            
            (204
            )
            
            (486
            )VAT
                refund
            
            
            928
            
            
            807
            
            
            1,723
            
            
            1,419(Loss)
                on fair value adjustments toembedded
                derivatives
            
            
            (8,359
            )
            
            --
            
            
            (8,359
            )
            
            --Income
                (loss) before taxes
            
            
            (5,986
            )
            
            1,535
            
            
            3,548
            )
            
            3,062Provision
                for income taxes
            
            
            (381
            )
            
            (346
            )
            
            (892
            )
            
            (1,004
            )Income
                (loss) before minority interests
            
            
            (6,367
            )
            
            1,189
            
            
            (4,440
            )
            
            2,058Minority
                interests
            
            
            (73
            )
            
            3
            
            
            (40
            )
            
            11Net
                (loss) income
            
            $
            (6,440
            )
            $
            1,192
            
            $
            (4,480
            )
            $
            2,069Dividend
                on preferred stock
            
            
            (96
            )
            
            
            
            
            (96
            )Accretion
                of Redeemable convertible preferred stock
            
            
            (209
            )
            
            --
            
            
            (209
            )
            
            --Income
                (loss) available to common stockholders
            
            $
            (6,745
            )
            $
            1,192
            
            $
            (4,785
            )
            $
            2,069Earnings
                (loss) per common shareBasic
            
            $
            (0.14
            )
            $
            0.03
            
            $
            (0.11
            )
            $
            0.05Diluted
            
            $
            (0.14
            )
            $
            0.03
            
            $
            (0.11
            )
            $
            0.05Weighted
                average number of common shares outstandingBasic
            
            
            46,004
            
            
            45,061
            
            
            45,376
            
            
            45,061Diluted
            
            
            46,004
            
            
            45,061
            
            
            45,376
            
            
            45,061





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








5





**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





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








**(Amounts
      in thousands, Restated)**


**(Unaudited)**




Class
                A Common
            
            
            
            
            
            
            
            
            Accumulated
                Other
            
            
            TotalStock
            
            
            Additional
            
            
            Retained
            
            
            Comprehensive
            
            
            Stockholders'
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Paid
                in Capital
            
            
            Earnings
            
            
            Income
            
            
            Equity
            
            
            IncomeBalance
                at December 25, 2004
            
            
            45,061
            
            $
            4
            
            $
            9,909
            
            $
            16,922
            
            $
            -
            
            $
            26,835
            
            $
            -Net
                (loss) income
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,480
            )
            
            -
            
            
            (4,480
            )
            
            (4,480
            )Accretion
                of Redeemable preferred stock
            
            
            
            
            
            
            
            
            
            
            
            (209
            )
            
            
            
            
            (209
            )Dividend
                on preferred stock
            
            
            
            
            
            
            
            
            
            
            
            (96
            )
            
            
            
            
            (96
            )Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            105
            
            
            -
            
            
            -
            
            
            105
            
            
            -Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            772
            
            
            772
            
            
            772Issuance
              of common stock upon exercise of
              warrantsrelated
                to 2003 and 2005 private placements
            
            
            2,122
            
            
            1
            
            
            1,927
            
            
            -
            
            
            -
            
            
            1,928
            
            
            -Balance
                at September 25, 2005
            
            
            47,183
            
            $
            5
            
            $
            11,941
            
            $
            12,137
            
            $
            772
            
            $
            24,855
            
            $
            (3,708
            )





6




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**(Amounts
      in thousands, Restated)**


**(Unaudited)**




**Nine
                months
                ended****September
                25,****2005**
            
            
            **2004****Cash
                flows from operating activities:**Net
                income
            
            $
            (4,480
            )
            $
            2,069Adjustments
                to reconcile net income to net cash provided by operating
                activities:Allowance
                for doubtful accounts
            
            
            5
            
            
            256Depreciation
                and amortization
            
            
            917
            
            
            933Gain
                on sale of property, machinery and equipment
            
            
            (21
            )
            
            (15
            )Loss/(gain)on
                fair value adjustments toembedded
                derivatives
            
            
            8,359
            
            
            --Minority
                interests
            
            
            42
            
            
            (11
            )Stock-based
                compensation
            
            
            105
            
            
            --Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (187
            )
            
            478Deposits
                and prepayments
            
            
            (3,269
            )
            
            (932
            )Inventories
            
            
            (1,621
            )
            
            (217
            )Amounts
                due from related companies
            
            
            341
            
            
            (1,181
            )Accounts
                payable
            
            
            58
            
            
            (415
            )Other
                payables and accruals
            
            
            81
            
            
            1,175Taxes
                payable
            
            
            188
            
            
            650Amounts
                due to related companies
            
            
            (668
            )
            
            (725
            )Net
                cash provided by (used in) operating activities
            
            
            (150
            )
            
            2,065**Cash
                flows from investing activities:**Proceeds
                from sale of property, machinery and equipment
            
            
            33
            
            
            1,971Purchases
                of property, machinery and equipment
            
            
            (3,330
            )
            
            (1,977
            )Proceeds
                from sale of land use rights
            
            
            --
            
            
            295Purchases
                of land use rights
            
            
            (110
            )
            
            (225
            )Net
                cash provided by (used in) investing activities
            
            
            (3,407
            )
            
            64**Cash
                flows from financing activities:**Proceeds
                from issuance of mandatorily redeemable convertible preferred
                stock
            
            
            6,000
            
            
            --Payments
                of costs related to issuance of preferred stock
            
            
            (538
            )
            
            --Proceeds
                from short-term borrowings
            
            
            --
            
            
            603Dividend
                on preferred stock
            
            
            (96
            )
            
            --Repayments
                of short-term borrowings
            
            
            --
            
            
            (3,121
            )Due
                to parent company
            
            
            (55
            )
            
            (149
            )Due
                to joint venture partners
            
            
            13
            
            
            (1,187
            )Proceeds
                from issuance of common stock upon exercise of warrants
            
            
            1,879
            
            
            --Capital
                contribution from minority interests
            
            
            --
            
            
            124Net
                cash provided by (used in) financing activities
            
            
            7,203
            
            
            (3,730
            )Foreign
                currency translation adjustment
            
            
            772
            
            
            --Net
                increase (decrease) in cash and cash equivalents
            
            
            4,418
            
            
            (1,601
            )Cash
                and cash equivalents at the beginning of the period
            
            
            219
            
            
            1,783Cash
                and cash equivalents at the end of the period
            
            $
            4,637
            
            $
            182**Non-cash
                Investing and Financing Activities**Accretion
                of redeemable preferred stock
            
            $
            209
            
            $
            --Receivable
                for common stock issued upon exercise of warrants
            
            $
            49
            
            $
            --





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





7





**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








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





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








**NOTE
      2. BASIS OF PRESENTATION**





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





Investments
      in companies in which the Company has significant influence, or ownership
      between 20% and 50% of the investees, 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
      investees. The adjustment is limited to the extent of the Company’s investment
      in and advances to the investees and financial guarantees made on behalf of
      the
      investees. The Company’s investments in other entities are accounted for using
      the cost method.





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





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





Certain
      information and footnote disclosures normally included in financial statements
      that have been prepared in accordance with generally accepted accounting
      principles have been condensed or omitted pursuant to the rules and regulations
      of the Securities and Exchange Commission, although management of the Company
      believes that the disclosures contained in these financial statements are
      adequate to make the information presented therein not misleading. For further
      information, refer to the financial statements and the notes thereto included
      in
      the Company’s Annual Report on Form 10-K/A for the fiscal year ended December
      25, 2005 and Form 10-K for the fiscal year ended December 25, 2004, as filed
      with the Securities and Exchange Commission.





***Accounting
      for Derivative Instruments***





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




8




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, 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 it estimates.





In
      September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
      "Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
      contracts that are settled in a company's own stock, including common stock
      warrants, to be designated as an equity instrument, asset or a liability. Under
      the provisions of EITF 00-19, a contract designated as an asset or a liability
      must be carried at fair value on a company's balance sheet, with any changes
      in
      fair value recorded in the company's results of operations. A contract
      designated as an equity instrument must be included within equity, and no fair
      value adjustments are required. In accordance with EITF 00-19, in August 2006,
      we determined that several of the outstanding warrants to purchase our common
      stock and the embedded conversion feature of our financial instruments, should
      be separately accounted for as liabilities. We had not classified these
      derivative liabilities as such in our historical financial statements. In order
      to reflect these changes, we restated our financial statements for the period
      ended September 25, 2005 to record the fair value of these warrants and
      conversion features on our balance sheet and record unrealized changes in the
      values of these derivatives in our consolidated statement of operations as
“Gain
      (loss) on derivative liabilities.”




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




***Restatement
      of Financial Statements to Reflect Derivative
      Accounting***





The
      consolidated financial statements for the interim period ended September 25,
      2005 included in this report have been restated to reflect additional
      non-operating gains and losses related to the classification of and accounting
      for: (1) the conversion features of Series A Preferred Stock and associated
      warrants, (2) the amortization associated with the discount recorded with
      respect to our Series A Preferred Stock as a preferred stock dividend, and
      (3)
      the conversion features associated with the preferred stock issued by us
      and associated warrants





We
      have
      determined that the conversion features of certain of our financial instruments,
      including our 2005 preferred stock and warrants to purchase our common stock
      are
      derivatives that we are required to account for as if they were free-standing
      instruments under GAAP. We have also determined that we are required to
      designate these derivatives as liabilities in our financial statements. As
      a
      result, we report the value of these embedded derivatives as current liabilities
      on our balance sheet and we report changes in the value of these derivatives
      as
      non-operating gains or losses on our statement of operations. The value of
      the
      derivatives is required to be recalculated (and resulting non-operating gains
      or
      losses reflected in our statement of operations and resulting adjustments to
      the
      associated liability amounts reflected on our balance sheet) on a quarterly
      basis, and is based on the market value of our common stock. Due to the nature
      of the required calculations and the large number of shares of our common stock
      involved in such calculations, changes in our common stock price may result
      in
      significant changes in the value of the derivatives and resulting gains and
      losses on our statement of operations. Our common stock price ranged from a
      low
      of $ 0.79
      to a
      high $2.78 during the quarter ending September 25, 2005, and the aggregate
      balance sheet amount shown for these derivative liabilities accordingly
      increased from $4,557 at July 11, 2005 (the date of issuance of the Series
      A
      Preferred Stock) to $12,916 on September 25, 2005. We were required to
      report a change of $8,359 as a (loss) on the embedded derivative liability
      in other income on our statement of income




***Summary
      of Restatement Items***





In
      late
      August 2006, we concluded that it was necessary to restate our financial results
      for the fiscal year ended December 25, 2005 and for the interim periods ended
      September 25, 2005, March 25, 2006 and June 25, 2006 to reflect additional
      non-operating gains and losses related to the classification of and accounting
      for: (1) the conversion feature of the Company's Series A Redeemable convertible
      Preferred Stock issued in July 2005 (the "Series A Preferred Stock") and the
      Company's Series B Preferred Stock issued in December 2005 (the "Series B
      Preferred Stock”), the warrants to purchase common stock associated with these
      offerings, the amortization dividend associated with the discount recorded
      with
      respect to the Series A and B Preferred Stock, and (3) warrants to purchase
      common stock issued with Series A and B Preferred Stock). We had previously
      classified the value of these conversion features and warrants to purchase
      common stock, when applicable, as equity. After further review, we have
      determined that these instruments should have been classified as derivative
      liabilities and therefore, the fair value of each instrument must be recorded
      as
      a derivative liability on our balance sheet. Changes in the fair values of
      these
      instruments will result in adjustments to the amount of the recorded derivative
      liabilities and the corresponding gain or loss will be recorded in our statement
      of income. At the date of the conversion of each respective instrument or
      portion thereof (or exercise of the options or warrants or portion thereof,
      as the case may be), the corresponding derivative liability will be reclassified
      as equity. The Company restated weighted average outstanding shares and fully
      diluted weighted average outstanding shares for the effects of change caused
      by
      the above restatement and other calculation errors.




9




We
      originally reported the Series A Preferred Stock and Series B Preferred Stock
      as
      long-term liabilities. The accompanying financial statements have been restated
      to show the Series A Preferred Stock as temporary equity between
      long-term liabilities and stockholder's equity (deficit) at September 25, 2005.
      We have also amended the periods subsequent to the interim period ended
      September 25, 2005.




The
      accompanying financial statements for the quarter ended September 25, 2005
      have
      been restated to effect the changes described above. The impact of the
      adjustments related to the classification of and accounting for the conversion
      features and warrants for the interim period ended September 25, 2005 are
      summarized below:


**Consolidated
        Statement of Income (in thousands except per share
        data)**




**Nine
                months Ended September 25, 2005****As
                previously reported**
            
            
            **Adjustment**
            
            
            
            
            **As
                restated**Income
                from operations
            
            $
            3,289
            
            
            
            
            
            
            $
            3,289Other
                income (expense):Interest
                expense
            
            
            (293
            )
            
            292
            
            ***a***
            
            
            (1
            )Interest
                income
            
            
            4
            
            
            
            
            
            
            
            4Other
                expense
            
            
            (204
            )
            
            
            
            
            
            
            (204
            )VAT
                refund
            
            
            1,723
            
            
            
            
            
            
            
            1,723(Loss)
                gain on fair value adjustments to embedded derivatives
            
            
            --
            
            
            (8,359
            )
            ***b***
            
            
            (8,359
            )Income
                (loss) before taxes
            
            
            4,519
            
            
            
            
            
            
            
            (3,548
            )Provision
                for income taxes
            
            
            (892
            )
            
            
            
            
            
            
            (892
            )Income
                (loss) before minority interests
            
            
            3,627
            
            
            
            
            
            
            
            (4,440
            )Minority
                interests
            
            
            (40
            )
            
            
            
            
            
            
            (40
            )Net
                income
            
            $
            3,587
            
            
            
            
            
            
            $
            (4,480
            )Dividend
                on preferred stock
            
            
            --
            
            
            (96
            )
            ***f***
            
            
            (96
            )Accretion
                of Redeemable preferred stock
            
            
            --
            
            
            (209
            )
            ***c***
            
            
            (209
            )Income
                (loss) available to common stockholders
            
            $
            3,587
            
            
            
            
            
            
            
            (4,785
            )Earnings
                (loss) per common shareBasic
            
            $
            0.08
            
            
            (0.19
            )
            ***d***
            
            $
            (0.11
            )Diluted
            
            $
            0.07
            
            
            (0.18
            )
            ***e***
            
            $
            (0.11
            )Weighted
                average number of common shares outstandingBasic
            
            
            45,296
            
            
            80
            
            ***g***
            
            
            45,376Diluted
            
            
            48,468
            
            
            (3,092
            )
            ***g***
            
            
            45,376




***Adjustments******a
                - reverse accretion of Redeemable preferred stock previously reported
                dividend******b
                - change in derivative value during the
                quarter******c
                - accretion of Redeemable preferred stock******d
                - to reflect basic earnings per share based upon corrected net
                loss.******e
                - adjust fully diluted earnings per share to equal basic loss per
                share
                due to the anti-dilutive effects of dilutive
                shares******f
                - reclassfiy preferred stock dividend from interest
                expense******g-Adjust
                weighted average shares outstanding for corrected
                calculations***




10


**Consolidated
        Statement of Income (in thousands except per share
        data)**




**Three****months Ended September 25, 2005****As
                previously reported**
            
            
            **Adjustment**
            
            
            
            
            **As
                restated**Income
                from operations
            
            $
            1,648
            
            
            
            
            
            
            $
            1,648Other
                income (expense):Interest
                expense
            
            
            (292
            )
            
            (292
            )
            ***a***
            
            
            --Interest
                income
            
            
            4
            
            
            
            
            
            
            
            4Other
                expense
            
            
            (207
            )
            
            
            
            
            
            
            (207
            )VAT
                refund
            
            
            928
            
            
            
            
            
            
            
            928(Loss)
                gain on fair value adjustments to embedded derivatives
            
            
            --
            
            
            (8,359
            )
            ***b***
            
            
            (8,359
            )Income
                (loss) before taxes
            
            
            2,081
            
            
            
            
            
            
            
            (5,986
            )Provision
                for income taxes
            
            
            (381
            )
            
            
            
            
            
            
            (381
            )Income
                (loss) before minority interests
            
            
            1,700
            
            
            
            
            
            
            
            (6,367
            )Minority
                interests
            
            
            (73
            )
            
            
            
            
            
            
            (73
            )Net
                income
            
            $
            1,627
            
            
            
            
            
            
            $
            (6,440
            )Dividend
                on preferred stock
            
            
            --
            
            
            (96
            )
            ***f***
            
            
            (96
            )Accretion
                of Redeemable preferred stock
            
            
            --
            
            
            (209
            )
            ***c***
            
            
            (209
            )Income
                (loss) available to common stockholders
            
            $
            1,627
            
            
            
            
            
            
            $
            (6,745
            )Earnings
                (loss) per common shareBasic
            
            $
            0.04
            
            
            (0.19
            )
            ***d***
            
            $
            (0.14
            )Diluted
            
            $
            0.03
            
            
            (0.18
            )
            ***e***
            
            $
            (0.14
            )Weighted
                average number of common shares outstandingBasic
            
            
            45,768
            
            
            236
            
            ***g***
            
            
            46,004Diluted
            
            
            50,333
            
            
            (4,3290
            
            ***g***
            
            
            46,004




***Adjustments******a
                - reverse accretion of redeemable preferred stock previously reported
                dividend******b-
                change in derivative value during the
                quarter******c-
                accretion of Redeemable preferred stock******d
                - to reflect basic earnings per share based upon corrected net
                loss.******e-
                adjust fully diluted earnings per share to equal basic loss per share
                due
                to the anti-dilutive effects of dilutive
                shares******f-
                reclassify preferred stock dividend from interest
                expense******g-Adjust
                weighted average shares outstanding for corrected calculations
                -***





11





***Balance
      Sheet Impact***





In
      addition to the effects on the Company’s consolidated statement of operations
      discussed above, the restatement impacted the consolidated balance sheet as
      of
      September 25, 2005. The following table sets forth the effects of the
      restatement adjustments on consolidated balance sheet as of September 25,
      2005:




**As****previously****reported**
            
            
            **Adjustments**
            
            
            
            
            **As
                restated**LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            2,754
            
            
            
            
            
            
            $
            2,754Other
                payables and accruals
            
            
            1,979
            
            
            
            
            
            
            
            1,979Taxes
                payable
            
            
            1,679
            
            
            
            
            
            
            
            1,679Embedded
                derivatives at fair value
            
            
            --
            
            
            12,915
            
            ***a***
            
            
            12,915Due
                to related companies
            
            
            163
            
            
            
            
            
            
            
            163Total
                current liabilities
            
            
            6,575
            
            
            
            
            
            
            
            19,490Due
                to parent company
            
            
            248
            
            
            
            
            
            
            
            248Due
                to joint venture partners
            
            
            123
            
            
            
            
            
            
            
            123Redeemable
                convertible preferred stock
            
            
            3,443
            
            
            (3,443
            )
            ***b***
            
            
            --Total
                liabilities
            
            
            10,389
            
            
            
            
            
            
            
            19,861Redeemable
                preferred stock:7%
                Series A Preferred, $.01 par value, 5,000,0000 shares
                authorized,8,000
                shares issued and outstanding; liquidation preference
                $6,000
            
            
            --
            
            
            1,115
            
            ***b***
            
            
            1,115Minority
                interests
            
            
            124
            
            
            
            
            
            
            
            124Stockholders'
                equity:Share
                capital
            
            
            5
            
            
            
            
            
            
            
            5Additional
                paid-in capital
            
            
            14,156
            
            
            (2,215
            )
            ***c***
            
            
            11,941Retained
                earnings
            
            
            20,509
            
            
            (8,372
            )
            ***d***
            
            
            12,137Accumulated
                other comprehensive income
            
            
            772
            
            
            
            
            
            
            
            772Total
                stockholders’ equity
            
            
            35,442
            
            
            
            
            
            
            
            24,855Total
                liabilities and stockholders' equity
            
            $
            45,955
            
            
            
            
            
            
            $
            45,955




***Adjustments******a-
                fair value of embedded derivatives at September 25,
                2006******b-
                reverse Redeemable convertible preferred stock at September 25, 2006
                and
                record as mezzanine financing******c-
                reverse values recorded for warrants and conversion features at date
                of
                the sale of Redeemable convertible preferred
                stock******d-
                to reflect aggregate effect of income statement
                adjustments.***





**NOTE
      3. EARNINGS PER SHARE**





The
      Company computes earnings per share (“EPS’) in accordance with Statement of
      Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
      and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  SFAS
      No. 128 requires companies with complex capital structures to present basic
      and diluted EPS.  Basic EPS is measured as the income or loss available to
      common shareholders divided by the weighted average common shares outstanding
      for the period.  Diluted EPS is similar to basic EPS but presents the
      dilutive effect on a per share basis of potential common shares (e.g.,
      convertible securities, options and warrants) as if they had been converted
      at
      the beginning of the periods presented, or issuance date, if later. 
Potential common shares that have an anti-dilutive effect (i.e., those that
      increase income per share or decrease loss per share) are excluded from the
      calculation of diluted EPS. Approximately 1,793 dilutive shares for warrants
      and
      option and 6,316 shares on an “as converted” basis for the Redeemable
      Convertible Preferred stock for the nine months ended September 25, 2005 and
      1,428 dilutive shares for warrants and option and 6,316 shares on an “as
      converted” basis for the Redeemable Convertible Preferred stock for the three
      months ended September 25, 2006 were excluded from the calculation of diluted
      loss per share since their effect would have been anti-dilutive. For the three
      months and nine months September 25, 2004 the potentially dilutive securities
      warrants and options shrike prices exceeded the average market price of the
      Company’s shares and would have resulted in a reduction of shares outstanding
      using the treasury stock method and were ant dilutive




12





The
      calculation of diluted weighted average common shares outstanding for the three
      and nine months ended September 25, 2005 is based on the average of the closing
      price of the Company’s common stock during such periods applied to warrants and
      options using the treasury stock method to determine if they are dilutive.
      The
      Redeemable Preferred stock is included on an “as converted “basis when these
      shares are dilutive.





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




**Three Months Ended September
                25,****2005**
            
            **2004****Income**
            
            **Weighted**
            
            
            
            
            
            **Weighted****(Loss)**
            
            **Average**
            
            
            
            **Income**
            
            **Average****Restated**
            
            **Shares**
            
            **Per-Share**
            
            **(Loss)**
            
            **Shares**
            
            **Per-Share**Earnings
                per share - basicIncome
                (loss) available to common stockholders
            
            $
            (6,745
            )
            
            46,004
            
            $
            (0.14
            )
            $
            1,192
            
            
            45,061
            
            $
            0.03Effect
                of dilutive securitiesRedeemable
                Convertible Preferred
                Stock
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --Options
                and Warrants
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --Earnings
                per share - dilutedIncome
                (loss) available to common stockholders
            
            $
            (6,745
            )
            
            46,004
            
            $
            (0.14
            )
            $
            1,192
            
            
            45,061
            
            $
            0.03








**Nine Months Ended September
                25,****2005**
            
            **2004****Income**
            
            **Weighted**
            
            
            
            
            
            **Weighted****(Loss)**
            
            **Average**
            
            
            
            **Income**
            
            **Average****Restated**
            
            **Shares**
            
            **Per-Share**
            
            **(Loss)**
            
            **Shares**
            
            **Per-Share**Earnings
                per share - basicIncome
                (loss) available to common stockholders
            
            $
            (4,785
            )
            
            45,376
            
            $
            (0.11
            )
            $
            2,069
            
            
            45,061
            
            $
            0.05Effect
                of dilutive securitiesRedeemable
                Convertible Preferred
                Stock
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --Options
                and Warrants
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --Earnings
                per share - dilutedIncome
                (loss) available to common stockholders
            
            $
            (4,785
            )
            
            45,376
            
            $
            (0.11
            )
            $
            2,069
            
            
            45,061
            
            $
            0.05








**NOTE
      4. ACCOUNTS RECEIVABLE**





Accounts
      receivable consisted of the following (in thousands):




**September
                25,**
            
            
            **December
                25,****2005**
            
            
            **2004****(Unaudited)**Accounts
                receivable
            
            $
            7,376
            
            $
            7,189Less:
                Allowance for doubtful accounts
            
            
            (780
            )
            
            (775
            )$
            6,596
            
            $
            6,414








**NOTE
      5. DEPOSITS AND PREPAYMENTS**





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




**September
                25,**
            
            
            **December
                25,****2005**
            
            
            **2004****(Unaudited)**Deposits
                and prepayments
            
            $
            5,937
            
            $
            2,627Less:
                Allowance for doubtful accounts
            
            
            (99
            )
            
            (107
            )$
            5,838
            
            $
            2,520





13





**NOTE
      6. INVENTORIES**





Inventories
      consisted of the following (in thousands):




**September
                25,**
            
            
            **December
                25,****2005**
            
            
            **2004****(Unaudited)**Raw
                materials (including packing materials)
            
            $
            4,827
            
            $
            2,812Finished
                goods
            
            
            1,295
            
            
            1,7256,122
            
            
            4,537Less:
                Provision for inventory obsolescence
            
            
            (511
            )
            
            (547
            )$
            5,611
            
            $
            3,990








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





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




**September
                25,**
            
            
            **December
                25,****2005**
            
            
            **2004****(Unaudited)**Buildings
            
            $
            10,118
            
            $
            9,415Machinery
                and equipment
            
            
            14,553
            
            
            11,94024,651
            
            
            21,355Less:
                Accumulated depreciation and amortization
            
            
            (6,067
            )
            
            (5,257
            )$
            18,584
            
            $
            16,098





**NOTE
      8. LAND USE RIGHTS**





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




**September
                25,**
            
            
            **December
                25,****2005**
            
            
            **2004****(Unaudited)**Land
                use rights
            
            $
            4,542
            
            $
            4,432Less:
                Accumulated amortization
            
            
            (695
            )
            
            (610
            )$
            3,847
            
            $
            3,822





**NOTE
      9. OTHER PAYABLES AND ACCRUALS**





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




**September
                25,**
            
            
            **December
                25,****2005**
            
            
            **2004****(Unaudited)**Deposits
                from customers
            
            $
            469
            
            $
            554Accruals
                for staff salaries, bonus and benefits
            
            
            237
            
            
            515Utilities
                and accrued expenses
            
            
            1,273
            
            
            829$
            1,979
            
            $
            1,898








14




**NOTE
      10. REDEEMABLE CONVERTIBLE PREFERRED STOCK**





On
      July
      11, 2005, the Company issued 6,000 shares of Series A Preferred Stock, initially
      convertible into an aggregate of 6,315,789 shares of Class A Common Stock at
      a
      conversion price of $0.95, 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 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 were
      also issued. Of the warrants issued to the placement agent, 277,368 were
      exercised cashlessly and 101,579 shares have not yet been
      exercised.





The
      key
      terms of the Series A Preferred Stock is as follows:





Series
                A 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.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.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.Registration
            The
                Company shall file to register the underlying Class A Common Stock
                within
                30 days of the closing date and make its best effects to have the
                Registration declared effective at the earliest date. In the event
                such
                Registration is not continuously effective during the period such
                shares
                are subject to transfer restrictions under the U.S. federal securities
                laws, then (subject to certain exceptions) the holders are entitled
                to
                receive liquidated damages equal to 2.0% of the purchase price of
                the
                Preferred Stock per month.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.





The
      accounting for the long warrants issued with the preferred stock was determined
      under the guidance of SFAS 133, FASB FSP No. 150-1, FASB FPS No 150-5 and
      Emerging Issues Task Force (“EITF”) No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to and Potentially Settled in
      a
      Company’s Own Stock* .
      Accordingly, the warrants are treated as derivatives and classified as a
      liability. The long term warrants are recorded at fair value, based on the
      Black-Scholes and Binomial pricing models, and revalued each reporting period
      with the change in fair value recorded as other income (expense). Since the
      long
      term warrants and the conversion feature was deemed to be embedded derivatives,
      the Company recorded the entire fair value of all the embedded derivatives
      at
      the transaction date as a liability.. Additionally the redemption value of
      the
      preferred stock of $6000 is accreted as preferred stock dividends over the
      redemption period, which resulted in an accretion of $209 during the period.





In
      relation to the issuance of the Series A Preferred Stock, the Company paid
      professional fees, placement agent fees and associated expenses amounting to
      $538,000.








**NOTE
      11. SHARE CAPITAL**





The
      Company is authorized to issue 107,000,000 shares of capital stock with a par
      value of $0.0001 each, of which 100,000,000 shares are Class A Common Stock,
      2,000,000 shares are Class B Common Stock, and 5,000,000 shares are Preferred
      Stock. As of September 25, 2005 and December 25, 2004, the following shares
      of
      capital stock were issued and outstanding:





**September
                25,**
              **2005**
            
            **December
                25,**
              **2004****(Unaudited)**Class
                A Common Stock
            
            
            47,182,953
            
            
            45,061,242Class
                B Common Stock
            
            
            --
            
            
            --Preferred
                Stock
            
            
            6,000
            
            
            --47,188,953
            
            
            45,061,242





15





**NOTE
      12. WARRANTS**





During
      the quarter ended September 25, 2005, warrant holders relating to the September
      2003 and October 2003 private placement transactions exercised their warrants
      to
      purchase 1,650,000 and 300,000 shares of Class A Common Stock at exercise prices
      of $0.99 to $0.979, respectively. Accordingly, the excess of the exercise price
      over the par value of the Common Stock (amounting to $1,927,000), was recorded
      as additional paid-in capital.





In
      connection with the issuance of Series A Preferred Stock, six-year warrants
      to
      purchase 3,157,895 shares of Class A Common Stock at an exercise price of $1.04
      per share were issued to the investors. In addition, as part of the compensation
      to the placement agent, five-year warrants to purchase 378,947 shares of Class
      A
      Common Stock at an exercise price of $1.04 per share were also issued. The
      warrants issued to the placement agent contained a cashless exercise provision.
      The Company estimated the per share value of the warrants using the
      Black-Scholes pricing model with the following assumptions:




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





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




Shares
            
            Weighted
                Average Exercise PriceOutstanding
                at December 25, 2003
            
            
            2,075,000
            
            $
            0.9883Issued
            
            
            --
            
            
            --Exercised
            
            
            --
            
            
            --Forfeited/Cancelled
            
            
            --
            
            
            --Outstanding
                at December 25, 2004
            
            
            2,075,000
            
            
            0.9883Issued
            
            
            6,861,842
            
            
            1.3889Exercised
            
            
            2,227,368
            
            
            0.9947Forfeited/Cancelled
            
            
            --
            
            
            --Outstanding
                at September 25, 2005
            
            
            6,709,474
            
            
            1.3918Warrants
                exercisable at September 25, 2005
            
            
            6,709,474
            
            
            1.3918Warrants
                exercisable at September 25, 2006
            
            
            6,709,474
            
            
            1.3918




Number
      of
      shares of Class A Common Stock issuable under warrants related to the private
      placement and the respective exercise prices are summarized as
      follows:




Shares
                of Class A Common
                StockIssuable
                Under Warrants
            
            Exercise
                PriceOctober
                2003 private placement
            
            
            125,000
            
            $
            0.979July
                2005 private placement6-year
                warrants
            
            
            3,157,895
            
            
            1.04








**NOTE
      13. SHARE - BASED PAYMENT**





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 2005. As all the stock options as of December 25, 2004 were fully
      vested, no compensation charges were recorded in fiscal 2005 for these
      outstanding options. For stock options granted during the year, the Company
      used
      the Black-Scholes option-pricing model to estimate the fair value of the options
      at the date of grant using the following assumptions:





16




**June
                22, 2005**Life
                (years)
            
            
            10Annual
                dividend per share
            
            
            NoneRisk
                - free interest rate
            
            
            3.6
            %Expected
                volatility
            
            
            40
            %





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, 2005, none 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, 2005, none of these options
      were exercised.




**Shares
                to
                be**
            
            **Weighted
                Average****Purchased**
            
            **Exercise
                Price**Options
                outstanding at December 25, 2003
            
            --
            
            $
                --Granted
                on November 2, 2004
            
            
            400,000
            
            
            1.00Options
                outstanding at December 25, 2004
            
            
            400,000
            
            
            1.00Granted
                on June 22, 2005
            
            
            600,000
            
            
            1.20Options
                outstanding at September 25, 2005
            
            
            1,000,000
            
            $
            1.12





Accordingly,
      the Company recorded compensation expense of $105,000 based on the fair value
      of
      the options granted on June 22, 2005.








**NOTE
      14. ACCUMULATED OTHER COMPREHENSIVE INCOME**





On
      July
      21, 2005, the People’s Bank of China announced an upward adjustment in the
      Renminbi exchange rate against the U.S. dollar of 2%. The exchange rate of
      the
      Renminbi will be valued against a number of currencies, rather than just  
exclusively to the United States dollar.





The
      functional currency of the Company is the Chinese Renminbi. However, the Company
      reports in U. S. dollars. The financial statements of the Company’s foreign
      subsidiaries have been translated into U.S. dollars in accordance with SFAS
      No.
      52, “Foreign Currency Translation”. All asset and liability accounts have been
      translated using the exchange rate in effect at the balance sheet date. Equity
      accounts have been translated at their historical exchange rates when the
      capital transaction occurred. Income statement amounts have been translated
      using the average exchange rate for the year. The revenues and expenses of
      the
      Company were translated to U. S. dollars at US$1.00 = RMB 8.1667 and the assets
      and liabilities of the Company maintained in Renminbi translated to U. S.
      dollars at US$1.00 = RMB 8.10. The foreign currency translation adjustment
      of
      $772,000 has been reported as comprehensive income in the consolidated statement
      of stockholders’ equity and comprehensive income.








**NOTE
      15. 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 the Company and related companies are
      summarized below (in thousands):




**Three
                months
                ended**
            
            
            **Nine
                months ended****September
                25,**
            
            
            **September
                25,****2005**
            
            
            **2004**
            
            
            **2005**
            
            
            **2004****(Unaudited)**
            
            
            **(Unaudited)**
            
            
            **(Unaudited)**
            
            
            **(Unaudited)****Pre-determined
              annual fee charged by joint venture
              partners:**Shandong
                Longfeng Group Company
            
            $
            27
            
            $
            27
            
            $
            81
            
            $
            81**Rental
                income from a joint venture partner**Shandong
                Longfeng Group Company
            
            $
            16
            
            $
            16
            
            $
            48
            
            $
            48





17




The
      amounts due from and due to related companies are unsecured, non-interest
      bearing and repayable upon demand. Balances are the result of normal commercial
      transactions.





**NOTE
      16. TAXATION**





The
      PRC
      subsidiaries within the Company are subject to PRC income taxes on an entity
      basis on income arising in or derived from the tax jurisdiction in which they
      operate. The group companies that are incorporated under the International
      Business Companies Act of the British Virgin Islands are exempt from payment
      of
      the British Virgin Islands income tax.





Substantially
      all of the Company’s income was generated in the PRC, which is subject to PRC
      income taxes at rates ranging from 24% to a statutory rate of 33%. Two of the
      PRC subsidiaries of the Company are eligible to be exempt from income taxes
      for
      a two-year period and then subject to a 50% reduction in income taxes, 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.





As
      of
      September 25, 2005 and December 25, 2004, there were no material deferred tax
      assets or deferred tax liabilities.








**NOTE
      17. RECLASSIFICATIONS**





Certain
      prior period comparative figures have been reclassified to conform to the
      current period presentation.





18




**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, 2004, 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 our 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 reasonable
      could have been used, or changes in the accounting estimates that are reasonably
      likely to occur, could materially impact the consolidated financial statements.
      We believe the following critical accounting policies reflect the more
      significant estimates and assumptions used in the preparation of the
      consolidated financial statements.





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





***Accounting
      for Derivative Instruments***





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





The
      pricing 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, , 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 it estimates.





In
      September 2000, the Emerging Issues Task Force (“EITF”) issued EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in, a Company’s Own Stock,” (“EITF 00-19”) which requires freestanding
      contracts that are settled in a company’s own stock, including common stock
      warrants, to be designated as an equity instrument, asset or a liability. Under
      the provisions of EITF 00-19, a contract designated as an asset or a liability
      must be carried at fair value on a company’s balance sheet, with any changes in
      fair value recorded in the company’s results of operations. A contract
      designated as an equity instrument must be included within equity, and no fair
      value adjustments are required. In accordance with EITF 00-19, in August 2006,
      we determined that several of the outstanding warrants to purchase our common
      stock and the embedded conversion feature of our financial instruments, should
      be separately accounted for as liabilities. We had not classified these
      derivative liabilities as such in our historical financial statements. In order
      to reflect these changes, we restated our financial statements for the period
      ended September 25, 2005 to record the fair value of these warrants and
      conversion features on our balance sheet and record unrealized changes in the
      values of these derivatives in our consolidated statement of operations as
“Gain
      (loss) on derivative liabilities.”




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




19





***Contractual
      Joint Ventures***





A
      contractual joint venture is an entity established between the Company and
      another joint venture partner, with the rights and obligations of each party
      governed by a contract. Currently, the Company has established three contractual
      joint ventures with three Chinese partners in China, with percentage of
      ownership ranging from 79.64% to 90%. Pursuant to each Chinese joint venture
      agreement, each Chinese joint venture partner is entitled to receive a
      pre-determined annual fee and is not responsible for any profit or loss,
      regardless of the ownership in the contractual joint venture. In view of such
      contracted profit sharing arrangement, the three contractual joint ventures
      are
      regarded as 100% owned by the Company. Hence, 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 and instant noodle. 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.





***Inventories
      valuation***





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





In
      November 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (SFAS) No. 151, “Inventory Costs,”
which clarifies the accounting for abnormal amounts of idle facility expense,
      freight, handling costs, and wasted material. SFAS No. 151 will be effective
      for
      inventory costs incurred during fiscal years beginning after June 15, 2005.
      We
      do not expect the adoption of SFAS No. 151 to have a material impact on our
      financial statements.




***Overview***





Headquartered
      in Shandong Province, PRC, New Dragon Asia Corp. is 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 six manufacturing plants
      in
      the PRC with an aggregate annual production capacity of approximately 110,000
      tons of flour and approximately 1.1 billion packets of instant noodles and
      4,500
      tons of Soybean powder.





***Operations***





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





We
      believe that we have a reputation for producing some of the highest quality
      food
      products in China. Our production plants operate to the highest level of hygiene
      and efficiency and most of our plants are certified under the ISO9002 standards.
      Most of our manufacturing equipment is 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.




Most
      of
      our products are regionally marketed and distributed. Our sales and marketing
      strategy focuses on maintaining strong distribution relationships with annual
      sales order meetings and 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.




20





Our
      primary customer base for both our flour products and instant noodles consists
      of small retail stores in the rural areas throughout China, where, we believe,
      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 is very strong in this sector.
      In
      addition, we sell to supermarkets located in urban areas.





In
      addition to domestic sales, we export noodles to other countries such in the
      region, including South Korea, Australia, Malaysia, Indonesia. Export sales
      accounted for approximately 8%, of our instant noodle sales for the first nine
      months of fiscal 2005, compared with 5% for the same period in fiscal
      2004.





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








***Strategy***





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





-
            Expand
                export sales-
            Continue
                to enhance our distributor relationships-
            Continue
                to improve product quality and diversify our product range with higher
                value-added products-
            Build
                strategic joint venture relationships 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. A significant plant acquisition 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.





***Significant
      Establishment, Acquisition and Disposal of Assets***





***Soy
      Bean Plant Lease***





On
      July
      28, 2005, we acquired the plant and machinery utilized for the production for
      soybean-derived products from a state-owned enterprise in Shandong. The facility
      had originally been operated by the Company under a 10-year lease agreement
      signed on April 27, 2005, which was cancelled upon our acquisition of the
      facility in July of this year. We commenced our soybean product business on
      September 1, 2005. We supply soybean powder in China to customers including
      Coca-Cola Shanghai.





***Competition***





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





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





***Employees***





We
      have
      approximately 1,500 employees. All of them are located in the six plants and
      the
      Shenzhen office. We have maintained good relationships with our employees and
      no
      major disputes have incurred since our inception.





***Currency
      Conversion***





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 as a result of changes in two countries’ economic conditions. To date,
      we have not engaged in any hedging transactions in connection with our
      operations.




21




***Results
      of Operations***





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




**Nine
                months
                ended**
            
            **Three
                months
                ended****September
                25,**
            
            **September
                25,**2005
                restated
            
            2004
            
            2005
                restated
            
            2004Revenues
            
            $
            28,920
            
            $
            25,831
            
            $
            11,645
            
            $
            9,886Cost
                of goods sold
            
            
            23,862
            
            
            21,009
            
            
            9,488
            
            
            7,958Gross
                Profit
            
            
            5,058
            
            
            4,822
            
            
            2,157
            
            
            1,928General
                and administrative expenses
            
            
            1,338
            
            
            1,811
            
            
            360
            
            
            686(Loss)
              gain on fair
              value adjustments to embeddedderivatives
            
            
            (8,359
            )
            
            --
            
            
            (8,359
            )
            
            --Income/(Loss)
                before income tax
            
            
            (3,548
            )
            
            3,062
            
            
            (5,986
            )
            
            1,535Provision
                for income
                tax
            
            
            892
            
            
            1,004
            
            
            381
            
            
            346Net
                Income/(loss)
            
            
            (4,480
            )
            
            2,069
            
            
            (6,440
            )
            
            1,192EBITDA*
            
            
            5,790
            
            
            4,066
            
            
            2,736
            
            
            1,858EBITDA
                margin on revenue
            
            
            20
            %
            
            16
            %
            
            23
            %
            
            19
            %





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


The
        following table presents a reconciliation from net earnings, which is the
        most
        directly comparable GAAP operating performance measure, to EBITDA for the
        third
        quarters of 2005 and 2004:
 
 **Three
                  months ended September 25,**
              
              **Nine
                  months ended September 25,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Net
                  income/(loss)
              
              $
              (6,440
              )
              $
              1,192
              
              $
              (4,480
              )
              $
              2,069Income
                  tax
              
              
              381
              
              
              346
              
              
              892
              
              
              1,004Interest
                  expenses
              
              
              (4
              )
              
              1
              
              
              (3
              )
              
              60Depreciation
                  and amortization
              
              
              335
              
              
              319
              
              
              917
              
              
              933Loss
                  on fair value adjustments to embedded derivatives
              
              
              8,359
              
              
              --
              
              
              8,359
              
              
              --Non-cash
                  stock-based compensation
              
              
              105
              
              
              --
              
              
              105
              
              
              --EBITDA
              
              $
              2,736
              
              $
              1,858
              
              $
              5,790
              
              $
              4,066


***Nine
      Months Ended September 25, 2005 Compared to Nine Months Ended September 25,
      2004***





***Revenue***





Revenue
      for the nine months ended September 25, 2005 was $28,920,000, representing
      an
      increase of $3,089,000, or12%, from $25,831,000 for the nine months ended
      September 25, 2004. The increase was primarily due to the growth in market
      demand for flour and instant noodles and the addition of the soybean products
      business.





***Gross
      Profit***





As
      a
      percentage of revenue, gross profit decreased to 17% in the nine months ended
      September 25, 2005 from 19% in the corresponding period in 2004. The decrease
      was primarily due to an increase in the price of packing materials.





***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 $431,000 for the nine months ended September
      25,
      2005, representing a decrease of $391,000, or 48%, from $822,000 for the
      corresponding period of 2004. The decrease was primarily due to cost controls
      implemented in early 2005.




22





As
      a
      percentage of revenue, selling and distribution expenses decreased to 1% in
      the
      nine months ended September 25, 2005 from 3% in the corresponding period in
      2004
      as a result of cost controls implemented in early 2005. To control costs, the
      Company has proposed more effective staffing of our facilities, restricted
      traveling costs and developed a more efficient sales methodology.





***General
      and Administrative Expenses***





General
      and administrative expenses decreased $473,000, or 26%, to $1,338,000 for the
      nine months ended September 25, 2005 as compared to $1,811,000 for the nine
      months ended September 25, 2004. The decrease was primarily the result of cost
      controls implemented in early 2005. To control costs, the Company has
      implemented more effective staffing of our facilities and more effective use
      of
      office equipment and resources.





***VAT
      Refunds***





VAT
      refunds increased $304,000 to $1,723,000 for the nine months ended September
      25,
      2005 as compared to $1,419,000 for the nine months ended September 25, 2004.
      This increase was primarily due to the tax refund from the local tax authority.





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





The
      Company issued Series A Preferred Stock in July 2005, together with 3,157,896
      warrants to purchase Class A Common Stock resulting in aggregate proceeds of
      $6
      million. T he
      fair
      value of each instrument was recorded as a derivative liability on our balance
      sheet. The corresponding gain or loss, which was non-cash in nature, from
      changes in the fair values of these instruments was recorded in our statement
      of
      income. For the nine months ended September 25, 2005, the loss in this regard
      was $8,359,000.





For
      the
      corresponding period of 2004, we did not issue any redeemable convertible
      preferred stock and there were no similar charges to the statements of
      income.





***Net
      Income (Loss)***





Net
      income decreased $6,549,000, or 317%, to a loss of $4,480,000 for the nine
      months ended September 25, 2005 as compared to net income of $2,069,000 for
      nine
      months ended September 25, 2004. Such decrease was primarily due to the
      accretion of redeemable preferred stock during the period.





As
      a
      percentage of revenue, net loss was 15% for the nine months ended September
      25,
      2005 as compared to net income representing 8% of revenue for the nine months
      ended September 25, 2004. The decrease was primarily due to the accretion of
      redeemable preferred stocks during the period.





***EBITDA***





EBITDA
      increased $1,724,000, or 42%, to $5,790,000 for the nine months ended September
      25, 2005 as compared to $4,066,000 for the nine months ended September 25,
      2004.
      Such increase was in consistent with our business growth.





***Three
      Months Ended September 25, 2005 Compared to Three Months Ended September 25,
      2004***





***Revenue***





Revenue
      for the quarter ended September 25, 2005 was $11,645,000, representing an
      increase of $1,759,000, or 18%, from $9,886,000 for the quarter ended September
      25, 2004. The increase was primarily due to the growth in market demand for
      flour and instant noodles and the addition of the soybean products
      business.





***Gross
      Profit***





As
      a
      percentage of revenue, gross profit decreased to 19% for the quarter ended
      September 25, 2005 from 20% for the quarter ended September 25, 2004. The
      decrease was primarily due to an increase in the price of packing materials.





***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 $149,000 for the quarter ended September 25,
      2005, representing a decrease of $49,000 from $198,000 for the corresponding
      quarter of 2004. The decrease was primarily due to cost controls implemented
      in
      early 2005.




23





As
      a
      percentage of revenue, selling and distribution expenses decreased to 1% in
      the
      third quarter of 2005 from 2% in the corresponding period in 2004 as a result
      of
      cost controls implemented in early 2005. To control costs, the Company has
      proposed more effective staffing of our facilities, restricted traveling costs
      and developed a more efficient sales methodology.





***General
      and Administrative Expenses***





General
      and administrative expenses decreased $326,000, or 48%, to $360,000 for the
      quarter ended September 25, 2005 as compared to $686,000 for the quarter ended
      September 25, 2004. The decrease was primarily the result of cost controls
      implemented in early 2005. To control costs, the Company has implemented more
      effective staffing of our facilities and more effective use of office equipments
      and resources.





***VAT
      Refunds***





VAT
      refund increase $121,000 to $928,000 for the quarter ended September 25, 2005
      as
      compared to $807,000 for the quarter ended September 25, 2004. This increase
      was
      primarily due to the tax refund from the local tax authority.





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





The
      Company issued Series A Preferred Stock in July 2005, together with 3,157,896
      warrants to purchase Class A Common Stock resulting in aggregate proceeds of
      $6
      million. T he
      fair
      value of each instrument was recorded as a derivative liability on our balance
      sheet. The corresponding gain or loss, which was non-cash in nature, from
      changes in the fair values of these instruments was recorded in our statement
      of
      operations. For the nine months ended September 25, 2005, the loss in this
      regard was $8,359,000.





For
      the
      corresponding period of 2004, we did not issue any redeemable convertible
      preferred stock and there were no similar charges to the statements of
      income.





***Net
      Income (Loss)***





Net
      income decreased $7,632,000, or 640% to a loss of $6,440,000 for the quarter
      ended September 25, 2005 as compared to net income of $1,192,000 for the quarter
      ended September 25, 2004. Such increase was primarily due to the accretion
      of
      redeemable preferred stock during the period.





As
      a
      percentage of revenue, net loss counted to 55% for the quarter ended September
      25, 2005 as compared to positive 12% for the quarter ended September 25, 2004.
      The increase was primarily due to the accretion of redeemable preferred stock
      during the period.





***EBITDA***





EBITDA
      increased $878,000, or 47%, to $2,736,000 for the three months ended September
      25, 2005 as compared to $1,858,000 for the three months ended September 25,
      2004. Such increase was in consistent with our business growth.





***Liquidity
      and Capital Resources***





Our
      primary liquidity needs are to purchase inventories and fund accounts receivable
      and capital expenditures. We have financed our working capital requirements
      through collections from customers and advances from related companies.





Our
      working capital decreased $3,376,000 to $4,034,000 at September 25, 2005 as
      compared to $7,410,000 at December 25, 2004. The decrease was primarily due
      to
      the fair value of embedded derivatives on $6 million redeemable convertible
      preferred stock being classified as a current liability.





Cash
      and
      cash equivalents were $4,637,000 as of September 25, 2005, an increase of
      $4,418,000 from December 25, 2004, such increase was mainly due to the increase
      in revenue, the proceeds from the issuance of Preferred Stock and proceeds
      received upon the exercise of warrants.





Net
      cash used in operating activities for the nine months ended September
      25, 2005 was $150,000, which was due to the changes in operating assets and
      liabilities resulting from the utilization by customers of deposits and
      prepayments. Net cash provided by financing activities of $7,203,000 for the
      nine months ended September 25, 2005, was mainly due to the proceeds from the
      issuance of Preferred Stock and the exercise of warrants.





Net
      cash
      used in investing activities for the nine months ended September 25, 2005 was
      $3,407,000, which was mainly due to the purchases of soybean
      facilities.




24





In
      July
      2005, we completed a private placement of our securities pursuant to which
      we
      received net proceeds of approximately $5,299,183 after payment of a fee to
      the
      placement agent and other offering expenses.




***Contractual
      Obligations***





As
      of
      September 25, 2005, we had operating leases for manufacturing and warehouse
      facilities expiring at various dates through March 2031. As of September 25,
      2005, we had no significant capital leases. Future minimum rental commitments
      under operating leases are as follows:




Years
              ending December 25
            
            Operating
                lease obligations(in
                thousands)2005
                (three months remaining)
            
            $
            312006
            
            
            1232007
            
            
            1232008
            
            
            1232009
            
            
            123Thereafter
            
            
            139Total
            
            $
            662





***Off-Balance
      Sheet Arrangements***





We
      do not
      have any special purpose entities or off-balance sheet financing arrangements.





***Recent
      Accounting Pronouncements***





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections”. SFAS No. 154 changes the requirements for the accounting for
      and reporting of a change in accounting principle. In addition, it carries
      forward without change the guidance contained in APB Opinion No. 20 for
      reporting the correction of an error in previously issued financial statements
      and a change in accounting estimate. SFAS No. 154 requires retrospective
      application to prior periods’ financial statements of changes in accounting
      principle in most circumstances. The provisions of SFAS 154 are effective in
      fiscal years beginning after December 15, 2005. The Company plans to
      prospectively adopt SFAS No. 154 at the beginning of fiscal 2006.





In
      December 2004, the FASB issued SFAS No. 153 “Exchanges of Non-monetary Assets -
      an amendment of APB Opinion No. 29”. SFAS No. 153 replaces the exception from
      fair value measurement in APB Opinion No. 29 for non-monetary exchanges of
      similar productive assets with a general exception from fair value measurement
      for exchanges of non-monetary assets that do not have commercial substance.
      A
      non-monetary exchange has commercial substance if the future cash flows of
      the
      entity are expected to change significantly as a result of the exchange. SFAS
      No. 153 is effective for all interim periods beginning after June 15, 2005.
      The
      adoption of SFAS No. 153 did not have a material impact on our financial
      statements.





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





**RISKS
      RELATED TO 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 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.




25





We
      are
      controlled by our major shareholder, which is controlled by our Chairman, Mr.
      Lu. Ms. Ling Wang, our Vice President and a director, is the holder of record
      of
      100% of the equity interests of Long Feng Food Overseas Ltd. ("Long Feng Food"),
      which in turn owns 100% of the equity interests of New Dragon Pacific Holding
      Ltd., which in turn holds 100% of the equity interests of New Dragon Asia Food
      Ltd. By virtue of an understanding with Ms. Wang, Mr. Lu has sole voting and
      dispositive control over the shares of Long Feng Food and, accordingly, has
      sole
      voting and dispositive control of the shares of us held by New Dragon Asia
      Food
      Ltd., which is our majority shareholder. 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 might also
      have the effect of delaying or preventing a change in control of us that may
      not
      be viewed as beneficial by other shareholders.





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





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





**RISKS
      RELATED TO OUR BUSINESS**





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





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




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





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





***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.




26





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





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





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





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





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





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





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





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





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





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





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





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





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




27





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








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





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





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





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





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





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





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





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





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





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





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





On
      September 8, 2006, several agencies of the PRC government issued a new
      regulation concerning restrictions on investments in China through special
      purpose companies incorporated overseas and the listing of the shares of those
      companies in overseas markets. The regulation contains a number of provisions
      relating to the acquisition of Chinese domestic companies which involve
“important industries,” may affect or potentially affect the national economic
      safety, or result to the transfer of actual control right of any company having
      “famous brands” or any “old established Chinese brand,” 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.




28





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 more stringent review and approval
      process with respect to our acquisition activities, which may adversely affect
      our business and prospects.





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





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





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





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





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





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




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





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





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





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





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




29





***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


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





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





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





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





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





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





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





-  government
      involvement


-  level
      of
      development


-  growth
      rate


-  control
      of foreign exchange; and


-  allocation
      of 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




30





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





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




31





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





We
      do not
      have significant market risk and we do not use financial instruments in the
      normal course of business that are subject to changes in financial market
      conditions.








***Interest
      Rate Risk***





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








**Item
      4. Controls and Procedures.******




***Evaluation
      of Disclosure Controls and Procedures***


Under
      the
      supervision and with the participation of the Company’s management, including
      our principal executive officer and the principal accounting officer, the
      Company conducted an evaluation of the effectiveness of the design and operation
      of its disclosure controls and procedures, as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period
      covered by this report (the “Evaluation Date”). Based on this evaluation, the
      Company’s principal executive officer and principal accounting officer concluded
      as of the Evaluation Date that the Company’s 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 the Company, including our consolidated subsidiaries, and was made
      known to them by others within those entities, particularly during the period
      when this report was being prepared.





***Change
      in Internal Controls***





There
      were no significant changes in our internal controls or in the other factors
      that could significantly affect our internal controls over financial reporting
      during the three months ended September 25, 2005.





***Other
      Information***





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





32





**PART
      II: OTHER INFORMATION**





**Item
      1. Legal Proceedings.** ****





None.





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





On
      July
      11, 2005, we issued 6,000 shares of Series A Preferred Stock initially
      convertible into an aggregate of 6,315,789 shares of Class A Common Stock at
      a
      conversion price of $0.95, raising $6.0 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 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 were
      also issued. In addition to the securities issued, a fee of $360,000 in cash
      was
      paid to the placement agent. The proceeds of the private placement were used
      to
      acquire a soybean processing factory and the remainder was and will continue
      to
      be used for general working capital purposes and may be used for potential
      future acquisitions.








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





None.








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





On
      July
      8, 2005, we sought and obtained the written consent, in lieu of a meeting of
      stockholders, of the holder of 78% of our outstanding voting stock, approving
      the terms of a proposed private placement involving the potential issuance,
      at
      below market price, of greater than 19.999% of our shares of Class A Common
      Stock outstanding immediately prior to the private placement which was completed
      on July 11, 2005. Further information relating to the matter is stated in the
      Company’s Definitive Information Statement on Schedule 14C, filed with the SEC
      on July 26, 2005.





**Item
      5. Other Information.******





None.








**Item
      6. Exhibits.** ****





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





33





**SIGNATURES**











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





**NEW
              DRAGON
              ASIA CORP.**Date: September
              28, 2006
            By:
            /s/ *Li
              Xia Wang*Name:
              Li Xia WangTitle:
              Chief Executive OfficerDated: September 28, 2006
            *Peter Mak*Name: Peter MakTitle: Chief Financial
              Officer


34