This report includes forward-looking statements. 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.

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.

The following discussion and analysis should be read in conjunction with "Item
6. Selected Financial Data" and our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.

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 more than 200 key distributors and 16 regional offices in 27 Chinese provinces. We have eight manufacturing plants in the PRC with an aggregate 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.

OPERATION PLAN

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.

ESTABLISHMENT AND ACQUISITIONS

Longyuan Packaging Plant

On January 10, 2006, the Company established New Dragon Asia (Long Kou) Packing Materials Company Limited ("NDAPM"), a wholly-owned subsidiary in Longkou, Shandong Province. NDAPM is principally engaged in the manufacturing and sale of packing materials, with a registered capital of $3,600,000. During the year ended December 25, 2008, the Company has spent approximately $2.20 million on the construction at the new plant and has committed to further capital expenditures of $1.46 million for the completion of the plant, which is scheduled to be completed in 2009.

YEAR ENDED DECEMBER 25, 2008 COMPARED TO YEAR ENDED DECEMBER 25, 2007

Selected Information from the Consolidated Statements of Operations (in
thousands)

                                                                   For the years ended December 25,
                                                                      2008                   2007

Net revenue                                                     $         49,340       $         55,738
Cost of goods sold                                                       (41,989 )              (45,427 )
Selling and distribution expenses                                         (1,275 )               (1,279 )
General and administrative expenses                                       (3,896 )               (2,606 )
Gain (loss) on fair value adjustments to embedded derivatives              2,047                  8,412
VAT refund                                                                    60                    952
Net income/(loss)                                                         (1,517 )               14,115

Net Revenue

Net revenue for the year ended December 25, 2008 was $ 49.34 million, a decrease of $6.40 million, or 11.48%, as compared to $55.74 million for the prior year. Revenues declined in all segments with instant noodles decreasing 13.2 %, Flour products decreasing 12.6% and Soybeans declining only 4.9%. The demand of our products decreased during the second half year of 2008. We believe our revenues were affected by the abrupt slowdown in the economy worldwide. The price of our products did not have significant fluctuation during the year ended December 25, 2008.

Cost of goods sold

For the year, ended December 25, 2008, cost of goods sold was $41.99 million, a decrease of $3.44 million, or 7.57%, as compared to $45.43 million for 2007. The decrease was in line with the decrease in sales of our products.

For the year ended December 25, 2008, as a percentage of revenue, cost of goods sold increased to 85.10% as compared to 81.50% for that of the prior year. For the year ended December 25, 2008, gross margin decreased to 14.90% as compared to 18.50% for the prior year as a result of the decrease of sales and 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.

For the year ended December 25, 2008, selling and distribution expenses decreased slightly 0.78% to $1.27 million from $1.28 million in 2007. The decrease was primarily due to the cost controls implemented by us.

General and administrative expenses

For the year ended December 25, 2008, general and administrative expenses increased $1.29 million to $3.90 million from $2.61 million of 2007. The increase was primarily due to severance compensation to former employees..

Gain/(loss) on Fair Value Adjustments to Embedded Derivatives

The Company issued Series A Redeemable Convertible Preferred Stock in July 2005, together with 3,157,895 warrants to purchase Class A Common Stock resulting in aggregate 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 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 year ended December 25, 2008, the gain in this regard was $2.05 million. For the corresponding period of 2007, the gain in this regard was $8.41 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 refund

VAT refund decreased $0.89 million to $0.06 million for the year ended December 25, 2008 as compared to $0.95 million for the year ended December 25, 2007. This primarily represents less tax refund from the municipal government during the current year.

Net income/(loss)

For the year ended December 25, 2008, net loss was $1.52 million, a decrease of $15.64 million, or 110.76% as compared to the net income of $14.12 million for 2007. As a percentage of revenue, net loss was 3.08% for the year ended December 25, 2008 as compared to net income of 25.33% for the prior year. The decrease was primarily due to (i) a reduction of revenue, which we attribute to the downturn in the economy in general, (ii) The $4.92 million asset impairment charged in 2008 (none in 2007), and (iii) the year to year decrease of $6.36 million in the gain on the fair value adjustment to embedded derivatives.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

On July 11, 2005, we issued 6,000 shares of Series A Preferred Stock, convertible into an aggregate of 6,315,789 shares of Class A Common Stock at a conversion price of $0.95 per share (subject to anti-dilution adjustments and interest payments), raising $6.0 million in gross proceeds.

On December 22, 2005, we issued 9,500 shares of Series B Preferred Stock, convertible into an aggregate of 5,937,500 shares of Class A Common Stock at a conversion price of $1.60 per share (subject to anti-dilution adjustments and interest payments), raising $9.5 million in gross proceeds.

The key terms of the Series A Preferred Stock and Series B Preferred Stock are as follows:

                          Series A Preferred Stock       Series B Preferred Stock

 Preferred Dividend     7% per annum, payable           7% per annum, payable
                        quarterly in arrears in cash    quarterly in arrears in
                        or, at the Company's option     cash or, at the Company's
                        subject to satisfaction of      option subject to
                        certain conditions, shares of   satisfaction of certain
                        Class A Common Stock valued     conditions, shares of Class
                        at 95% of the volume-weighted   A Common Stock valued at
                        current market price.           95% of the volume-weighted
                                                        current market price.

 Redemption             July 11, 2010                   December 22, 2010

                        Beginning on the 24th month     Beginning at the end of the
                        following closing and each      24th month following
                        month thereafter, the Company   closing and on each third
                        shall redeem 1/37th of the      monthly anniversary of that
                        face value of the Preferred     date (quarterly)
                        Stock in either cash or Class   thereafter, the Company
                        A Common Stock valued at 90%    shall redeem 1/13th of the
                        of the volume-weighted          face value of the Preferred
                        current market price.           Stock in either cash or
                                                        Class A Common Stock valued
                                                        at 90% of the
                                                        volume-weighted current
                                                        market price.

 Mandatory Conversion   The Company may at any time     The Company may at any time
                        force the conversion of the     force the conversion of the
                        Preferred Stock if the          Preferred Stock if the
                        volume-weighted current         volume-weighted current
                        market price of the Class A     market price of the Class A
                        Common Stock exceeds 300% of    Common Stock exceeds 200%
                        the then applicable             of its price at issuance of
                        conversion price.               the Preferred Stock.

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

 Anti-dilution          In the event the Company        In the event the Company
                        issues, at any time while       issues, at any time while
                        Preferred Stock are still       Preferred Stock are still
                        outstanding, Common Stock or    outstanding, Common Stock
                        any type of securities giving   or any type of securities
                        rights to Common Stock at a     giving rights to Common
                        price below the Issue Price,    Stock at a price below the
                        the Company agrees to extend    Issue Price, the Company
                        full-ratchet anti-dilution      agrees to extend
                        protection to the investors.    full-ratchet anti-dilution
                                                        protection to the
                                                        investors.

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

                                                       Payment Obligations By Period
                            2009        2010        2011        2012        2013        Thereafter       Total
                                                              (In thousands)
Redeemable convertible
preferred stock            $ 3,274     $ 3,227     $     -     $     -     $     -     $          -     $  6,501
Pre-determined annual
fee charged by joint
venture partners               129         129         129         129         129            4,528        5,173
Total                      $ 3,403     $ 3,356     $   129     $   129     $   129     $      4,528     $ 11,674

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

                                                               (In thousands)
Aggregated balance as of the issue date                        $        15,500
Partial redemption of Series A Preferred Stock in 2005                  (1,900 )
Partial redemption of Series A and B Preferred Stock in 2006            (3,438 )
Partial redemption of Series A Preferred Stock in 2007                    (728 )
Partial redemption of Series A and B Preferred Stock in 2008            (2,933 )
                                                               $         6,501

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

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

Our working capital increased $14,527,000 to $49,823,000 at December 25, 2008 as compared to $35,296,000 at December 25, 2007, which was primarily due to (i) the increase in inventory of $5.07 million, (ii) the assets held for disposal (none in 2007) and (iii) the fluctuation of the fair value of embedded derivatives (a decrease in current liabilities of $2.21 million).

Cash and cash equivalents were $4,383,000 as of December 25, 2008, an increase of $737,000 from December 25, 2007. The Company believes that it has enough cash available and expects to have enough income and cash flow from operations to operate for the next 12 months.

Off-balance sheet arrangements

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

INFLATION AND CHANGING PRICES

The Company does not foresee any material adverse effects on its earnings as a result of inflation or changing prices.

CRITICAL ACCOUNTING POLICIES

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

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably 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.

Revenue recognition

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

Accounting for Derivative Instruments

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

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

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

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

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 supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. 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, 2005, and recorded the compensation expense for all unvested stock options.

Contractual joint ventures

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

Recent accounting pronouncements

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

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," . . .