**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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





For
      the
      quarterly period ended: March 25, 2006





or





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





For
      the
      transition period from  to





Commission
      File Number: 001-15046





**NEW
      DRAGON ASIA CORP.**





(Exact
      name of Registrant as specified in its charter)





FLORIDA
            88-0404114(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification Number)Suite
                2808, International Chamber of Commerce 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 such filing requirements
      for
      the past 90 days. Yes x No o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. (See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act):




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




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




The
      number of shares of Class A Common Stock outstanding as of May 1, 2006 was
      51,239,876.









**NEW
      DRAGON ASIA CORP.**





**FORM
      10-Q**





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





**TABLE
      OF CONTENTS**


Page**PART
                I:**
            **FINANCIAL
                INFORMATION**ITEM
                1.
            Consolidated
                Financial Statements:Consolidated
                Balance Sheets as of March 25, 2006 (unaudited) and December 25,
                2005
            
            1Consolidated
                Statements of Operations (unaudited) for the three months ended March
                25,
                2006 and 2005
            
            2Consolidated
                Statements of Stockholders’ Equity and Comprehensive Income as of March
                25, 2006 (unaudited) and December 25, 2005
            
            3Consolidated
                Statements of Cash Flows (unaudited) for the three months ended March
                25,
                2006 and 2005
            
            4Notes
                to Consolidated Financial Statements (unaudited)
            
            5ITEM
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            
            11ITEM
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            23ITEM
                4.
            Controls
                and Procedures
            
            23**PART
                II:**
            **OTHER
                INFORMATION**ITEM
                1.
            Legal
                Proceedings
            
            24ITEM
                1A.
            Risk
                Factors
            
            24ITEM
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            24ITEM
                3.
            Defaults
                Upon Senior Securities
            
            24ITEM
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            24ITEM
                5.
            Other
                Information
            
            24ITEM
                6.
            Exhibits
            
            24**SIGNATURES**
            
            25**EXHIBITS**










**PART
      I: FINANCIAL INFORMATION**





**Item
      1. Consolidated Financial Statements.**




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**




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


**ASSETS**
            
            **March
                  25,**
                **2006**
            
            **December
                25,**
              **2005**(Unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            14,889
            
            $
            14,332Accounts
                receivable, net
            
            
            7,306
            
            
            6,515Deposits
                and prepayments, net
            
            
            4,877
            
            
            4,970Inventories,
                net
            
            
            7,270
            
            
            7,630Due
                from related companies
            
            
            834
            
            
            679Total
                current assets
            
            
            35,176
            
            
            34,126Deposit
                for property, machinery and equipment
            
            
            --
            
            
            1,000Property,
                machinery and equipment, net
            
            
            20,253
            
            
            18,315Land
                use rights, net
            
            
            5,082
            
            
            3,980Deferred
                financing cost, net
            
            
            1,665
            
            
            1,713Goodwill
            
            
            125
            
            
            --Total
                assets
            
            $
            62,301
            
            $
            59,134**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            2,990
            
            $
            2,696Other
                payables and accruals
            
            
            2,124
            
            
            2,298Taxes
                payable
            
            
            2,545
            
            
            1,854Due
                to related companies
            
            
            717
            
            
            598Total
                current liabilities
            
            
            8,376
            
            
            7,446Due
                to New Dragon Asia Food Limited
            
            
            65
            
            
            137Due
                to joint venture partners
            
            
            125
            
            
            54Mandatorily
                redeemable convertible preferred stock, net of discount of $7,822
            
            
            5,435
            
            
            4,945Total
                liabilities
            
            
            14,001
            
            
            12,582Minority
                interests
            
            
            436
            
            
            91CommitmentsStockholders'
                equity:Preferred
                Stock, $0.0001 par value:
              Authorized
                shares - 5,000,000
              Issued
                and outstanding - 13,257 in 2006 and 13,600 in 2005
            
            
            --
            
            
            --Class
                A Common Stock, $0.0001 par value:
              Authorized
                shares - 102,000,000
              Issued
                and outstanding - 50,501,988 in 2006 and 49,322,291 in
                2005
            
            
            5
            
            
            5Class
                B Common Stock, $0.0001 par value:
              Authorized
                shares - 2,000,000 - none issued and outstanding
            
            
            --
            
            
            --Additional
                paid-in capital
            
            
            28,616
            
            
            24,790Receivable
                from stockholder
            
            
            (49
            )
            
            (49
            )Retained
                earnings
            
            
            18,401
            
            
            20,917Accumulated
                other comprehensive income
            
            
            891
            
            
            798Total
                stockholders’ equity
            
            
            47,864
            
            
            46,461Total
                liabilities and stockholders' equity
            
            $
            62,301
            
            $
            59,134





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




1




**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





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


**Three
                months ended**
              **March
                25,****2006**
            
            **2005**Net
                revenue
            
            $
            11,096
            
            $
            8,282Cost
                of goods sold
            
            
            (9,242
            )
            
            (6,790
            )Gross
                profit
            
            
            1,854
            
            
            1,492Selling
                and distribution expenses
            
            
            (230
            )
            
            (121
            )General
                and administrative expenses(Including
                stock-based compensation of $2,320)
            
            
            (2,757
            )
            
            (573
            )Income
                (loss) from operations
            
            
            (1,133
            )
            
            798Other
                income (expense):Interest
                expense
            
            
            (1,171
            )
            
            --Interest
                income
            
            
            16
            
            
            --Other
                income
            
            
            5
            
            
            2VAT
                refund
            
            
            101
            
            
            --Income
                (loss) before income taxes and minority interests
            
            
            (2,182
            )
            
            800Provision
                for income taxes
            
            
            (258
            )
            
            (253
            )Income
                (loss) before minority interests
            
            
            (2,440
            )
            
            547Minority
                interests
            
            
            (76
            )
            
            41Net
                income (loss)
            
            $
            (2,516
            )
            $
            588Earnings
                (loss) per common shareBasic
            
            $
            (0.05
            )
            $
            0.01Diluted
            
            $
            (0.05
            )
            $
            0.01Weighted
                average number of common shares outstandingBasic
            
            
            49,750
            
            
            45,061Diluted
            
            
            49,750
            
            
            45,061








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





2


**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





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





**(Amounts
      in thousands, unaudited)**





Class
                A
              Common
                Stock
              Shares Amount
            
            Additional
              Paid-in
              Capital
            
            Receivable
                from Stockholder
            
            Retained
              Earnings
            
            Accumulated
              Other
              Comprehensive
              Income
            
            Total
              Stockholders’
              Equity
            
            Comprehensive
              IncomeBalance
                at
              December
                25, 2004
            
            45,061
            
            $
            4
            
            $
            9,909
            
            $
            -
            
            $
            16,922
            
            $
            -
            
            $
            26,835
            
            $
            -Net
                income
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,995
            
            
            -
            
            
            3,995
            
            
            3,995Stock-based
              compensation
                expense
            
            -
            
            
            -
            
            
            105
            
            
            -
            
            
            -
            
            
            -
            
            
            105
            
            
            -Foreign
                currency
              translation
                adjustment
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            798
            
            
            798
            
            
            798Preferred
                Stock issuance cost
            
            -
            
            
            -
            
            
            565
            
            
            -
            
            
            -
            
            
            -
            
            
            565
            
            
            -Fair
                value of warrants issued
            
            -
            
            
            -
            
            
            5,047
            
            
            -
            
            
            -
            
            
            -
            
            
            5,047
            
            
            -Beneficial
                conversion feature
            
            -
            
            
            -
            
            
            5,168
            
            
            -
            
            
            -
            
            
            -
            
            
            5,168
            
            
            -Conversion
                of Preferred Stock and related interest payments made in Class A
                Common
                Stock
            
            2,039
            
            
            0.5
            
            
            1,971
            
            
            -
            
            
            -
            
            
            -
            
            
            1,971.5
            
            
            -Exercise
                of warrants
            
            2,222
            
            
            0.5
            
            
            2,025
            
            
            -
            
            
            -
            
            
            -
            
            
            2,025.5
            
            
            -Receivable
                from stockholder
            
            -
            
            
            -
            
            
            -
            
            
            (49
            )
            
            -
            
            
            -
            
            
            (49
            )
            
            -Balance
                at
              December
                25, 2005
            
            49,322
            
            
            5
            
            
            24,790
            
            
            (49
            )
            
            20,917
            
            
            798
            
            
            46,461
            
            
            4,793Net
                income (loss)
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,516
            )
            
            -
            
            
            (2,516
            )
            
            (2,516
            )Stock-based
              compensation
                expense
            
            -
            
            
            -
            
            
            2,320
            
            
            -
            
            
            -
            
            
            -
            
            
            2,320
            
            
            -Foreign
                currency
              translation
                adjustment
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            93
            
            
            93
            
            
            93Conversion
                of Preferred Stock, related interest payments made, and cashless
                exercise
                of warrants in Class A Common Stock
            
            180
            
            
            -
            
            
            386
            
            
            -
            
            
            -
            
            
            -
            
            
            386
            
            
            -Exercise
                of stock options
            
            1,000
            
            
            -
            
            
            1,120
            
            
            -
            
            
            -
            
            
            -
            
            
            1,120
            
            
            -Balance
                at
              March
                25, 2006
            
            50,502
            
            $
            5
            
            $
            28,616
            
            $
            (49
            )
            $
            18,401
            
            $
            891
            
            $
            47,864
            
            $
            (2,423
            )





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





3





**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**(Amounts
      in thousands, unaudited)**


**Three
                months ended**
              **March
                25,****2006**
            
            **2005****Cash
                flows from operating activities:**Net
                income (loss)
            
            $
            (2,516
            )
            $
            588Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Allowance
                for doubtful accounts
            
            
            (251
            )
            
            86Provision
                for inventory reserve
            
            
            (13
            )
            
            (28
            )Depreciation
                and amortization of property, machinery, equipment and land use
                rights
            
            
            671
            
            
            297Amortization
                of deferred financing costs, value of warrants and beneficial conversion
                feature
            
            
            924
            
            
            --Minority
                interests
            
            
            76
            
            
            (41
            )Stock-based
                compensation expense
            
            
            2,320
            
            
            --Changes
                in operating assets and liabilities:
              (Increase)
                decrease in:Accounts
                receivable
            
            
            (477
            )
            
            131Deposits
                and prepayments
            
            
            93
            
            
            (2,071
            )Inventories
            
            
            373
            
            
            (617
            )Due
                from related companies
              Increase
                (decrease) in:
            
            
            (155
            )
            
            226Accounts
                payable
            
            
            281
            
            
            710Other
                payables and accruals
            
            
            (228
            )
            
            280Taxes
                payable
            
            
            691
            
            
            537Due
                to related companies
            
            
            119
            
            
            --Net
                cash provided by operating activities
            
            
            1,908
            
            
            98**Cash
                flows from investing activities:**Acquisition
            
            
            (2,300
            )
            
            --Purchases
                of property, machinery and equipment
            
            
            (381
            )
            
            (8
            )Purchases
                of land use rights
            
            
            (108
            )
            
            --Minority
                interest
            
            
            266
            
            
            --Net
                cash used in investing activities
            
            
            (2,523
            )
            
            (8
            )**Cash
                flows from financing activities:**Payments
                of issuance costs related to preferred stock
            
            
            (43
            )
            
            --Proceeds
                from/repayment to parent company
            
            
            (72
            )
            
            3Proceeds
                form/repayment to joint venture partners
            
            
            71
            
            
            (45
            )Proceeds
                from exercise of stock options
            
            
            1,120
            
            
            --Net
                cash provided by (used in) financing activities
            
            
            1,076
            
            
            (42
            )Foreign
                currency translation adjustment
            
            
            96
            
            
            --Net
                increase in cash and cash equivalents
            
            
            557
            
            
            48Cash
                and cash equivalents at the beginning of the period
            
            
            14,332
            
            
            219Cash
                and cash equivalents at the end of the period
            
            $
            14,889
            
            $
            267**Non-cash
                Investing and Financing Activities**Conversion
                  of preferred stock to common stock
            
            $
            343
            
            $
            --Interest
                payments on preferred stock in form of common stock
            
            $
            43
            
            $
            --





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




4


**NEW
      DRAGON ASIA CORP. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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




New
      Dragon Asia Corp., a corporation incorporated in the State of Florida
      (collectively with its subsidiaries, the “Company”), is principally engaged in
      the milling, sale and distribution of flour and related products, including
      instant noodles and soybean-derived products, to retail and wholesale customers
      throughout China through its foreign subsidiaries in China. The Company is
      headquartered in Shandong Province in the People’s Republic of China (“PRC” or
“China”) and has its corporate office in Shenzhen and 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 its subsidiaries. All significant intercompany balances and
      transactions have been eliminated on consolidation. These consolidated financial
      statements are unaudited. However, in the opinion of management, the
      consolidated financial statements include all adjustments, consisting of only
      normal, recurring accruals, necessary for their fair presentation. Interim
      results are not necessarily indicative of results to be expected for a full
      year. The accompanying unaudited consolidated financial statements have been
      prepared in accordance with the instructions for Form 10-Q and, therefore,
      do
      not include all information and footnotes necessary for a complete presentation
      of financial statements in conformity with accounting principles generally
      accepted in the United States. These statements should be read in conjunction
      with the Company’s Annual Report on Form 10-K for the fiscal year ended December
      25, 2005.





The
      consolidated financial statements were prepared in accordance with accounting
      principles generally accepted in the United States of America (“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 amount
      of
      assets and liabilities and 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 periods. 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 the 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.





**NOTE
      3. ACCOUNTS RECEIVABLE**




Accounts
      receivable consisted of the following (in thousands):




**March
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Accounts
                receivable
            
            $
            7,948
            
            $
            7,408Less:
                Allowance for doubtful accounts
            
            
            (642
            )
            
            (893
            )$
            7,306
            
            $
            6,515





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




**March
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Balance
                at the beginning of the period
            
            $
            893
            
            $
            775Add:
                provision during the period
            
            
            17
            
            
            250Less:
                write-offs during the period
            
            
            (268
            )
            
            (132
            )Balance
                at the end of the period
            
            $
            642
            
            $
            893





5





**NOTE
      4. DEPOSITS AND PREPAYMENTS**





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




**March
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Deposits
                for raw materials
            
            $
            4,555
            
            $
            4,350Prepayments
                and advances
            
            
            322
            
            
            620$
            4,877
            
            $
            4,970








**NOTE
      5. INVENTORIES**





Inventories
      consisted of the following (in thousands):




**March
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Raw
                materials (including packing materials)
            
            $
            5,893
            
            $
            6,133Finished
                goods
            
            
            1,498
            
            
            1,6317,391
            
            
            7,764Less:
                Inventory reserve
            
            
            (121
            )
            
            (134
            )$
            7,270
            
            $
            7,630





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




**March
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Balance
                at the beginning of the period
            
            $
            134
            
            $
            547Add:
                provision during the period
            
            
            --
            
            
            --Less:
                write-offs during the period
            
            
            (13
            )
            
            (413
            )Balance
                at the end of the period
            
            $
            121
            
            $
            134








**NOTE
      6. DUE FROM RELATED COMPANIES**




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


**March
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Due
                from affiliated companies for sales
            
            $
            834
            
            $
            679




6





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





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




Useful
                Life
            
            **March
                25,**
              **2006**
            
            **December
                25,**
              **2005**(In
                years)
            
            **(Unaudited)**Buildings
            
            
            40
            
            $
            12,445
            
            $
            9,967Machinery
                and equipment
            
            
            5
                -
                12
            
            
            14,732
            
            
            14,66327,177
            
            
            24,630Less:
                Accumulated depreciation and amortization
            
            
            
            
            
            (6,924
            )
            
            (6,315
            )$
            20,253
            
            $
            18,315








**NOTE
      8. LAND USE RIGHTS**





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




**March
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Land
                use rights
            
            $
            5,869
            
            $
            4,705Less:
                Accumulated amortization
            
            
            (787
            )
            
            (725
            )$
            5,082
            
            $
            3,980








**NOTE
      9. OTHER PAYABLES AND ACCRUALS**





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




**March
                25,**
              **2006**
            
            **December
                25,**
              **2005****(Unaudited)**Deposits
                from customers
            
            $
            589
            
            $
            1,093Accruals
                for payroll, bonus and benefits
            
            
            242
            
            
            334Utilities
                and accrued expenses
            
            
            1,293
            
            
            871$
            2,124
            
            $
            2,298








**NOTE
      10. CONVERTIBLE PREFERRED STOCK**





On
      July
      11, 2005, the Company issued 6,000 shares of Series A 7% Convertible Preferred
      Stock (“Preferred Stock A”), initially convertible into an aggregate of
      6,315,789 shares of Class A Common Stock at a conversion price of $0.95 per
      share, raising $6 million in gross proceeds. Six-year warrants to purchase
      an
      aggregate of 3,157,895 shares of Class A Common Stock at an exercise price
      of
      $1.04 per share were also issued to the investors. As part of the compensation
      to the placement agent, five-year warrants to purchase an aggregate of 378,947
      shares of Class A Common Stock at an exercise price of $1.04 share were also
      issued. As of March 25, 2006, all of the five-year warrants had been
      exercised.





On
      December 22, 2005, the Company issued 9,500 shares of Series B 7% Convertible
      Preferred Stock (“Preferred Stock B”), initially convertible into an aggregate
      of 5,937,500 shares of Class A Common Stock at a conversion price of $1.60
      per
      share, raising $9.5 million in gross proceeds. Six-year warrants to purchase
      an
      aggregate of 2,968,750 shares of Class A Common Stock at an exercise price
      of
      $1.76 per share were also issued to the investors. As part of the compensation
      to the placement agent, five-year warrants to purchase an aggregate of 356,250
      shares of Class A Common Stock at an exercise price of $1.76 per share were
      also
      issued.





Pursuant
      to SFAS No. 150, “Accounting for Certain Financial Instruments with
      Characteristics of Both Liabilities and Equity,” the Preferred Stock is recorded
      as a liability since it has an unconditional obligation that must be either
      redeemed for cash or settled by issuing shares of Class A Common Stock.





7




In
      connection with the issuance of the Preferred Stock A and Preferred Stock B,
      the
      Company paid professional fees, placement agent fees and associated expenses
      amounting to $1,260,000 and incurred non-cash expenses totaling $10,780,000
      related to the beneficial conversion feature and the fair value of warrants
      attached to the issuance of the Preferred Stock. These professional fees,
      placement agent fees and associated expenses were recorded by the Company as
      deferred financing costs. The beneficial conversion feature and the fair value
      of the warrants were recorded as discount to the preferred stock liability
      on
      the balance sheet and are being amortized over the term of the Preferred Stock
      through interest expense using the effective interest method. For the three
      months ended March 25, 2006, $ 924,000 of amortized deferred financing costs,
      beneficial conversion feature and the fair value of the warrants were charged
      to
      the interest expense. For the corresponding period in 2005, there were no such
      amortization expenses incurred.





**NOTE
      11. COMMON STOCK**





On
      September 4, 2003, the Company issued 3,300,000 shares of Class A Common Stock
      for an aggregate purchase amount of $1,650,000 or $0.5 per share. The shares
      were issued pursuant to an exemption provided by Section 4(2) of the Securities
      Act. The purchasers were also issued warrants to purchase 1,650,000 shares
      of
      the Company’s Class A Common Stock, which have a term of 5 years at an exercise
      price of $0.99 per share. As of March 25, 2006, all such warrants had been
      exercised.





On
      October 7, 2003, the Company issued 850,000 shares of Class A Common Stock
      for
      an aggregate purchase amount of $425,000 or $0.50 per share. The shares were
      issued pursuant to an exemption provided by Section 4(2) of the Securities
      Act.
      The purchasers were also issued warrants to purchase 425,000 shares of the
      Company’s Class A Common Stock, which have a term of 5 years and an exercise
      price of $0.979 per share. As of March 25, 2006, warrants to purchase 25,000
      shares of Class A Common Shares were outstanding.




**NOTE
      12. WARRANTS**





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





In
      February 2006, there were 101,579 warrants exercised on a cashless basis to
      acquire 44,165 shares of Class A Common Stock.





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




Shares
                of Class A Common Stock
              Issuable
                Under Warrants
            
            Exercise
                PriceOctober
                2003 private placement
            
            25,000
            
            $0.979July
                2005 private placement6-year
                warrants
            
            
            3,157,895
            
            
            1.04December
                2005 private placement6-year
                warrants
            
            
            2,968,750
            
            
            1.765-year
                warrants
            
            
            356,250
            
            
            1.76




**NOTE
      13. DILUTED COMMON SHARES**




The
      diluted weighted average number of common shares was a summation of the number
      of outstanding common shares plus the number of common shares that could be
      converted from outstanding stock options and warrants. For the three-month
      period ended March 25, 2006, the effects of 2 million stock options outstanding
      as of March 25, 2006 and approximately 6.5 million warrants were excluded from
      the calculation of diluted loss per share as the effect would have been
      antidilutive. For the three-month period ended March 25, 2005, there were no
      potentially dilutive securities outstanding. Therefore the results of basic
      and
      diluted earnings per share are equal.




8




**NOTE
      14. STOCK-BASED COMPENSATION**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123R, “Share-Based Payment,” which established standards for transactions in
      which an entity exchanges its equity instruments for goods or services. This
      standard requires a public entity to measure the cost of services received
      in
      exchange for an award of equity instruments based on the grant-date fair value
      of the award. The Company adopted the requirements of SFAS No.123R during the
      fiscal year ended 2005.





In
      November 2004, options to purchase 400,000 shares of Class A Common Stock were
      issued to Peter
      Mak, the Company’s Chief Financial Officer , at
      an
      exercise price of $1.00 per share with a term of 10 years. The market price
      of
      the Class A Common Stock as of the grant date was $0.64 per share. As of March
      25, 2006, all of these options were exercised.





On
      June
      22, 2005, options to purchase an additional 600,000 shares of Class A Common
      Stock were issued to the same officer at an exercise price of $1.20 per share
      with a term of 10 years. The market price of the Class A Common Stock as of
      the
      grant date was $1.00 per share. As of March 25, 2006, all of these options
      were
      exercised.




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





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






**NOTE
      15. EARNINGS PER SHARE**





The
      Company follows SFAS No.128, “Earnings Per Share” and SFAS No. 150, “ Accounting
      for Certain Financial Instruments with Characteristics of Both Liabilities
      and
      Equity,” which establishes standards for the computation, presentation and
      disclosure requirements for basic and diluted earnings per share for entities
      with publicly-held common shares and potential common stock issuances. Basic
      earnings per share are computed by dividing net income by the weighted average
      number of common shares outstanding. In computing diluted earnings per share,
      the weighted average number of shares outstanding is adjusted to reflect the
      effect of potentially dilutive securities, such as stock options and warrants.





For
      the
      three-month period ended March 25, 2006, the effects of 2 million stock options
      and approximately 6.5 million warrants were excluded from the calculation of
      diluted loss per share as the effect would have been antidilutive. For the
      three-month period ended March 25, 2005, there were no potentially dilutive
      securities outstanding. Therefore the results of basic and diluted earnings
      per
      share are equal.




**NOTE
      16. RELATED PARTY TRANSACTIONS**





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




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





**Three
                months ended**
              **March
                25,****2006**
            
            **2005****(Unaudited)**
            
            **(Unaudited)**Pre-determined
                annual fee charged by joint venture partners:Shandong
                Longfeng Group Company (a)
            
            $
            19
            
            $
            --Shandong
                Longfeng Flour Company Limited (b)
            
            
            9
            
            
            --28
            
            
            --




9




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





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






**NOTE
      17. TAXATION**




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





Substantially
      all of the Company’s income was generated in the PRC, which is subject to PRC
      income taxes at rates ranging from 24% to a statutory rate of 33%. Four of
      the
      PRC subsidiaries of the Company are eligible to be exempt from income taxes
      for
      a two-year period and then subject to a 50% reduction in income taxes for the
      next three years, starting from their first profitable year. Several PRC
      subsidiaries receive preferential tax rates in regions in which they operated
      and are also entitled to partial tax refunds from those tax bureaus.





As
      of
      March 25, 2006 and December 25, 2005, there were no material deferred tax assets
      or deferred tax liabilities.






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





*Delta
      Link Limited & Chengdu Plant*





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





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





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





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




Allocation
      of initial purchase consideration (in thousands):


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





*Longyuan
      Packaging Plant*





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




10




**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, 2005, 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.





To
        supplement our consolidated financial statements presented in accordance
        with
        GAAP, we discuss our results in terms of financial measures that may be deemed
        to be “non-GAAP financial measures” under the rules and regulations of the
        Securities and Exchange Commission. Our management believes that these measures
        provide meaningful information regarding the company’s performance and liquidity
        by excluding certain expenses that may not be indicative of its core operating
        results and facilitate comparisons to its historical operations and competitors’
operating results. To the extent such measures are not readily reconcilable
        to
        the comparable GAAP financial measures contained in its consolidated financial
        statements, we provide detailed reconciliations that permit investors to
        determine how such non-GAAP financial measures have been
        derived.




***Critical
      Accounting Policies***





The
      methods, estimates and judgments we use in applying our most critical accounting
      policies have a significant impact on the results we report in our financial
      statements. Critical accounting policies are those that are most important
      to
      the portrayal of our financial condition and results of operations and require
      us to make our most difficult and subjective judgments, often as a result of
      the
      need to make estimates of matters that are inherently uncertain. Based on this
      definition, our critical policies include revenue recognition, allowance for
      doubtful accounts, sales returns and allowances, asset impairment, and inventory
      valuation including product obsolescence. We believe that we consistently apply
      judgments and estimates and such consistent application results in financial
      statements and accompanying notes that fairly represent all periods presented.
      However, any factual errors or errors in these judgments and estimates may
      have
      a material impact on our statement of operations and financial condition.





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




**Contractual
      Joint Ventures**





A
      contractual joint venture is an entity established between us and another joint
      venture partner, with the rights and obligations of each party governed by
      a
      contract. If we own more than 50% of the joint venture and are able to
      govern and control its financial and operating policies and its board of
      directors, such joint venture is considered as an indirect subsidiary and is
      accounted for as a subsidiary.




**Revenue
      Recognition**





We
      recognize revenues in accordance with Securities and Exchange Commission (SEC)
      Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial
      Statements” and SAB No. 104, “Revenue Recognition”. Revenues represent the
      invoiced value of goods, net of value added tax (“VAT”), supplied to customers,
      and are recognized upon delivery of goods and passage of title.





All
      of
      our sales made in China are subject to Chinese value-added tax at rates ranging
      from 13% to 17% (“output VAT”). Such output VAT is payable after offsetting VAT
      paid by us on purchases (“input VAT”).




**Allowance
      for doubtful accounts**





Management
      provides for an allowance for doubtful accounts for those third party trade
      accounts that are not collected within one year.




11




**Inventories
      valuation**





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





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




**Mandatorily
      redeemable convertible preferred stock**





Preferred
      stock is an unconditional obligation that must be either redeemed for cash
      or
      settled by issuing shares of Class A Common Stock. The Company accounts for
      preferred stock in accordance with SFAS No. 150 “Accounting for Certain
      Financial Instruments with Characteristics of Both Liabilities and Equity.”





In
      connection with the issuance of mandatorily redeemable convertible preferred
      stock, the Company incurred professional fees, placement agent fees and
      associated expenses, which were recorded as deferred financing cost and are
      being amortized over the term of the preferred stock as interest expense using
      the effective interest method. The Company also recorded the beneficial
      conversion feature and the fair value of warrants issued in connection with
      the
      preferred stock financings. These amounts were recorded as a contra-account
      to
      the preferred stock liability on the balance sheet and are being amortized
      over
      the term of the preferred stock as interest expense using the effective interest
      method.




**Stock-Based
      Compensation**





On
      December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which
      replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes
      APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the financial statements based on the grant
      date fair value of the award. SFAS No. 123R was to be effective for interim
      or
      annual reporting periods beginning on or after June 15, 2005, but in April
      2005
      the SEC issued a rule that will permit most registrants to implement SFAS No.
      123R at the beginning of their next fiscal year, instead of the next reporting
      period as required by SFAS No. 123R. The pro forma disclosures previously
      permitted under SFAS No. 123 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.




***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 China at both wholesale and retail
      levels.





12




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





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





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





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





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





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





In
      addition to domestic sales, we export noodles to other countries such as South
      Korea, Australia, Malaysia and Indonesia. Export sales accounted for
      approximately  11%,
      of
      our instant noodle sales for the first three months of fiscal 2006, compared
      with 9% for the same period in fiscal 2005.





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




***Significant
      establishments and acquisitions during the three months ended March 25, 2006***




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





On
      February 24, 2006, the Company acquired a noodle manufacturing facility in
      Chengdu, Sichuan Province, for cash consideration of $3,300,000. The Chengdu
      Plant serves the Western China market.





*Expansion
      of Longyuan Packing Plant*





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




***Strategy***





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





-
            Acquire
                additional locations to increase our production
                capacity


-
            Build
                strategic alliance with multinational food groups to enhance product
                range
                and capitalize on our China distribution
                network





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





13





***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 eight plants
      and
      the Shenzhen executive office. We have maintained good relationships with our
      employees and no major disputes have incurred since our inception.




***Currency
      Conversion and Exchange***





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 currency hedging transactions in connection with
      our
      operations.




***Results
      of Operations***




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





**Three
                months ended**
              **March
                25,****2006**
            
            **2005**Net
              revenue
            
            $
            11,096
            
            $
            8,282Cost
                of goods sold
            
            
            (9,242
            )
            
            (6,790
            )Gross
                profit
            
            
            1,854
            
            
            1,492Selling
                and distribution expenses
            
            
            (230
            )
            
            (121
            )General
                and administrative expenses(Including
                Stock-based compensation of $2,320)
            
            
            (2,757
            )
            
            (573
            )Income
                (loss) before income taxes an minority interest
            
            
            (2,182
            )
            
            800Provision
                for income taxes
            
            
            (258
            )
            
            (253
            )Net
                income (loss)
            
            
            (2,516
            )
            
            588








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




***Net
      Revenue***





Net
        revenue for the quarter ended March 25, 2006 was $11,096,000, representing
        an
        increase of $2,814,000, or 34%, from $8,282,000 for the quarter ended March
        25,
        2005. The increase was primarily due to the increase in
        market demand for the
        Company’s flour,
        instant noodles ,
        together with the inclusion of results
        for the
        soybean products business ,
        which
        was not acquired until after the first quarter of 2005.




***Gross
      Profit***





As
      a
      percentage of net revenue, gross profit decreased to 17% for the quarter ended
      March 25, 2006 from 18% for the quarter ended March 25, 2005. The slight
      decrease was primarily due to an increase in the price of raw materials used
      in
      the manufacture of our products.





14





***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 $230,000 for the quarter ended March 25, 2006,
      representing an increase of $109,000 from $121,000 for the corresponding quarter
      of 2005. The increase was primarily due the expansion of marketing
      activities.





As
      a
      percentage of net revenue, selling and distribution expenses increased to 2%
      in
      the first quarter of 2006 from 1.5% in the corresponding period in 2005 as
      a
      result of expansion of marketing activities at the beginning of the year.




***General
      and Administrative Expenses***





General
      and administrative expenses increased $2,184,000, or 381%, to $2,757,000 for
      the
      quarter ended March 25, 2006 as compared to $573,000 for the quarter ended
      March
      25, 2005. The significant increase was primarily due to the stock-based
      compensation cost which was amounted to $2,320,000 and is non-cash in nature
      and
      non-recurring. The charge for stock-based
      compensation related to the granting of the stock options to purchase up to
      2,000,000 shares of Class A Common Stock on January 20, 2006. For the three
      months ended March 25, 2005, there were no such charges incurred. Should
      the stock-based compensation cost be excluded, we would have achieved a decrease
      of 24% in General and Administrative Expenses. The decrease for the first
      quarter of 2006 primarily resulted from the implementation in previous quarters
      of cost controls that were not in place in the comparable quarter of 2005.
      To
      control costs, the Company has focused on more effectively staffing our
      facilities and more effective use of office equipment and
      resources.




***Interest
      Expense***





In
      connection with the issuance of the Series A Preferred Stock and Series B
      Preferred Stock in 2005, the Company paid professional fees, placement agent
      fees and associated expenses amounting to $1.22 million, which were recorded
      as
      deferred financing costs and are being amortized over the term of both series
      of
      Preferred Stock as interest expense using the effective interest method. The
      Company also recorded $10.78 million related to the beneficial conversion
      feature and the fair value of warrants issued in connection with the sale of
      both series of Preferred Stock in 2005. These amounts were recorded as a
      contra-account to the preferred stock liability on the balance sheet and are
      being amortized over the term of both series of Preferred Stock as interest
      expense using the effective interest method. For the three months ended March
      25, 2006, the amortization of such costs charged to the statement of operations
      was $924,000.





For
      the
      three months ended March 25, 2005, we did not issue any mandatorily redeemable
      convertible preferred stock and there were no similar charges to the statement
      of operations.




***VAT
      Refunds***




VAT
      refund increased to $101,000 for the quarter ended March 25, 2006 as compared
      to
      $0 for the quarter ended March 25, 2005. This increase was primarily due to
      the
      tax refund from the municipal government to encourage foreign investment.




***Net
      Income***





We
      incurred a net loss of $2,516,000 for the quarter ended March 25, 2006 as
      compared to a net income of $588,000 for the quarter ended March 25, 2005.
      Such
      change was primarily due to (i) the amortization of the beneficial conversion
      feature, deferred financing cost and accretion of warrants related to issuance
      of the convertible preferred stock in 2005, which were mostly non-cash and
      (ii)
      the stock-based compensation charged in 2006 which was non-cash. Should the
      stock-based compensation be excluded in deriving the income from operations,
      we
      would have an increase of 49% in the income from operations.




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





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





15




Our
      working capital increased $120,000 to $26,800,000 at March 25, 2006 as compared
      to $26,680,000 at December 25, 2005, which is in line with our business
      growth.





Cash
      and
      cash equivalents were $14,889,000 as of March 25, 2006, an increase of $557,000
      from December 25, 2005, which is in line with our growth in business.





Net
      cash
      provided by operating activities for the three months ended March 25, 2006
      was
      $1,908,000, which was primarily due to the increase of sales in the first three
      months. Net cash provided by financing activities of $1,076,000 for the three
      months ended March 25, 2006 was mainly due to the additional capital derived
      from the exercise of stock options.





Net
      cash
      used in investing activities for the three months ended March 25, 2006 was
      $2,523,000, which primarily resulted from the acquisition of the Chengdu Plant.




***Off-Balance
      Sheet Arrangements***





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




***Contractual
      Obligations and Commercial Commitments***





As
      of
      March 25, 2006, we had long-term debt obligations that resulted from the
      mandatorily redeemable convertible preferred stock and had operating leases
      for
      manufacturing and warehouse facilities expiring at various dates through
      February 2009 and other commitments and long-term liabilities through August
      2049 as follows:




Payment
                Obligations By Period2006
                (a)
            
            2007
            
            2008
            
            2009
            
            2010
            
            Thereafter
            
            Total(In
                thousands)Mandatorily
                redeemable convertible
              preferred stock
            
            $
            --
            
            $
            730
            
            $
            4,143
            
            $
            4,143
            
            $
            4,241
            
            $
            --
            
            $
            13,257Operating
                lease obligations
            
            
            46
            
            
            62
            
            
            62
            
            
            10
            
            
            --
            
            
            --
            
            
            180Acquisition
                of property,
              plant and equipment
            
            
            128
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            128Pre-determined
                annual fee charged
              by
                joint venture partners
            
            
            83
            
            
            111
            
            
            111
            
            
            111
            
            
            111
            
            
            3,877
            
            
            4,404Total
            
            
            257
            
            
            903
            
            
            4,316
            
            
            4,264
            
            
            4,352
            
            
            3,877
            
            
            17,969




(a)
      Remaining 9 months in 2006.






***Recent
      Accounting Pronouncements***





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





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





16




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





In
      the
      first quarter of 2006, the Company adopted SFAS No. 154, “Accounting Changes and
      Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
      No.
      3.” SFAS No. 154 changed the requirements for the accounting for and reporting
      of a voluntary change in accounting principle. The adoption of this Statement
      did not affect the Company’s consolidated financial statements in the period of
      adoption. Its effects on future periods will depend on the nature and
      significance of any future accounting changes subject to this
      statement.




**RISK
      FACTORS**





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




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





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





We
        are
        controlled by our major shareholder, which is controlled by our Chairman,
        Mr.
        Lu. As of
        April 13, 2006, Mr. Lu 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. As
        a
        result, ,
        Mr. Lu
        has sole voting and dispositive control over the
        shares of us held by New Dragon Asia Food Ltd., which is our majority
        shareholder. As a result, Mr. Lu through his
        equity ownership ,
        effectively exercises control over all matters requiring shareholder approval,
        including the election of directors and approval of significant corporate
        transactions. This concentration of ownership might also have the effect
        of
        delaying or preventing a change in control of us that may not be viewed as
        beneficial by other shareholders.




**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.





17





***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.




18




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





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





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





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





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





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





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





-
            We
                will be able to capitalize on economic
                reforms;


-
            The
                Chinese government will continue its pursuit of economic reform
                policies;


-
            The
                economic policies, even if pursued, will be
                successful;


-
            Economic
                policies will not be significantly altered from time to time; and


-
            Business
                operations, in China will not become subject to the risk of
                nationalization.








***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.




19





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




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





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





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





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





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





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





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





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





***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.




20





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





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





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





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


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




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





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





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





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




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





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





-
            Government
                involvement


-
            Level
                of development


-
            Growth
                rate


-
            Control
                of foreign exchange; and


-
            Allocation
                of resource





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




21





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





-
            Changes
                in the rate or method of taxation


-
            Imposition
                of additional restrictions on currency conversion and remittances
                abroad


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


-
            Changes
                in the usage and costs of state-controlled transportation
                services








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





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




22




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





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





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





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




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





***Interest
      Rate Risk***





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





***Credit
      Risk***





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




**Item
      4. Controls and Procedures.**





***Disclosure
      Controls and Procedures***





Under
      the
      supervision and with the participation of the Company’s management, including
      our chief executive officer and the chief financial 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
      chief executive officer and chief financial 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.




***Changes
      in Internal Controls over Financial Reporting***





There
      were no significant changes in our internal controls over financial reporting
      (as defined in Rule 13a-15(f) under the Securities Exchange Art of 1934) that
      could significantly affect our internal controls over financial reporting during
      the quarter ended March 25, 2006.





***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.




23





**PART
      II: OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





None.





**Item
      1A. Risk Factors.**





On
        April
        13, 2006, as a result of a transfer of shares in one of our intermediate
        holding
        companies, our Chairman, Mr. Heng Jing Lu obtained direct control over the
        shares of our Class A Common Stock that he previously beneficially owned
        as a
        result of an oral understanding between Mr. Lu and Ms. Ling Wang, one of
        our
        Vice Presidents and a director. Accordingly, the risk factor in our
        Annual Report on Form 10-K for the year
        ended December 25, 2005
        relating to risks associated with the fact that Mr. Lu controls a significant
        number of our outstanding Class A Common Stock has been modified. Refer to
“Risk Factors” in Part I, Item 2 of this Quarterly Report on Form 10-Q for complete discussion
        of the Company’s risk factors.




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





None.




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





None.




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





On
        January 20, 2006, we sought and obtained the written consent, in lieu of
        a
        meeting of stockholders, of the holder of 70.6% of our outstanding voting
        stock,
        approving (i) the terms of a supplement to the employment agreement between
        the
        Company and Peter Mak, its Chief Financial Officer whereby the Company granted
        options to purchase up to 2,000,000 shares of our Class A Common Stock and
        (ii)
        the terms of an Equity Incentive Plan providing for the issuance of options
        to
        purchase up to 3,000,000 shares of Class A Common Stock from the Company.
        Further information relating to the matter is stated in the Company’s Definitive
        Information Statement on Schedule 14C, filed with the SEC on March 16,
        2006.





**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 Chief 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.




24




**SIGNATURES**








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





**NEW
                DRAGON ASIA CORP.**Dated:
                May 3, 2006
            By:
            /s/ *Li
              Xia Wang*Name: 
                Li Xia WangTitle:   
              Chief
              Executive Officer








Dated:
              May 3, 2006
            By:
            /s/ *Peter
              Mak*Name:Peter
                  MakTitle:   
              Chief
              Financial Officer




25