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

Critical Accounting Policies

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

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

Contractual Joint Ventures

A contractual joint venture is an entity established between us and another joint venture partner, with the rights and obligations of each party governed by a contract. Currently, we have established four contractual joint ventures with two Chinese partners in China - Shandong Longfeng Flour Co. Ltd. and Shandong Longfeng Group Co., with percentage of ownership ranging from 76.94% to 90%. Pursuant to each Chinese joint venture agreement, each Chinese joint venture partner is entitled to receive a pre-determined annual fee and is not entitled to receive any profits and is not responsible for any losses, regardless of the ownership in the contractual joint venture. In view of such contracted profit sharing arrangement, the contractual joint ventures are accounted for as wholly-owned by the Company. Accordingly, the Company's consolidated financial statements include the financial statements of the contractual joint ventures.

Revenue Recognition

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

Accounting for Derivative Instruments

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

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

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

Share-Based Payment

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

Allowance for Doubtful Accounts

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

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

Inventories Valuation

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

Recent Accounting Pronouncements

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

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

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

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

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

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

Overview

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

Operations

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

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

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

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

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

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

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

In addition to domestic sales, we export noodles to other countries such as South Korea, Australia, Malaysia, and Indonesia. We also obtained HACCP (Hazard Analysis Critical Control Point) certification from CCIC Conformity Assessment Services Co. Ltd., a Chinese quality assurance examination authority, enabling the company to begin exports of instant noodles and soybean powder to Europe. During the second quarter of the year 2006, we began export sales of noodles to Sweden and Greece. In early 2008, we began exporting noodles to Nigeria, Africa.

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

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

Strategy

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

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

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

Competition

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

The instant noodle segment in the PRC is also highly competitive. We compete against well-established foreign companies and many smaller companies. Our largest competitors are the "Master Kang" brand manufactured by Tingyi (Cayman Island) Holdings Corporation and the "President" brand manufactured by Uni-President Group, both based in Taiwan. Both are focused predominately in the more developed and competitive urban markets. We do not face substantial competition in the "high-quality" soybean powder market.

Employees

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

Currency Conversion and Exchange

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

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

Results of Operations

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

                                       Three months ended          Nine months ended
                                          September 25,              September 25,
                                        2008          2007         2008          2007

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

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

Net Revenue

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

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

Gross Profit

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

Selling and Distribution Expenses

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

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

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

General and Administrative Expenses

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

Income from Operations

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

Gain on Fair Value Adjustments to Embedded Derivatives

The Company issued Series A Redeemable Convertible Preferred Stock in July 2005, together with 3,157,895 warrants to purchase Class A Common Stock resulting in aggregate gross proceeds of $6 million. The Company also issued Series B Redeemable Convertible Preferred Stock in December 2005, together with 2,968,750 warrants to purchase Class A Common Stock resulting in aggregate gross proceeds of $9.5 million. The fair value of each instrument was recorded as a derivative liability on our balance sheet. The corresponding gain or loss, which was non-cash in nature, from changes in the fair values of these instruments was recorded in our statement of income. For the nine months ended September 25, 2008, the gain in this regard was $1,790,000. For the corresponding period of 2007, it was approximately $7.54 million. The determination of the change in the value of the derivatives requires the use of a complex valuation model and can fluctuate significantly between periods based on changes in the price of our shares and the time remaining in the life of the underlying financial instruments. Increase in our stock's market value increases the value of the derivative creating losses in our income statements and decrease in the stock's market value reduces the value of the derivatives creating gains in our income statements.

VAT Refunds

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

Net Income

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

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

Net Revenue

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

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

Gross Profit

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

Selling and Distribution Expenses

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

Selling and distribution expenses were $387,000 for the quarter ended September . . .