The Dragon was the first Nakamichi model with bidirectional[a] replay capability and the world's first production tape recorder with an automatic azimuth correction system; this feature, which was invented by Philips engineers and improved by Niro Nakamichi, continuously adjusts the azimuth of the replay head to minimize apparent head skew and correctly reproduce the treble signal present on the tape.

At the time of its introduction, the Dragon had the lowest-ever wow and flutter and the highest-ever dynamic range, losing marginally to the former Nakamichi flagship the 1000ZXL in frequency response.

[2][6] Nakamichi consistently refrained from copying its competitors' latest solutions and features, refused to employ adaptive biasing and Dolby S,[2] and did not make autoreversing decks until introduction of the Dragon.

[3] "Absolute azimuth", the angle between the gap and the direction of tape travel, must be set at precisely ninety degrees for correct replay of treble signals.

[12][15] Rotating assemblies cannot physically fit separate recording and replay heads; this drawback limits fidelity and rules out tape-source monitoring and tape calibration functionality.

Philips and Akai tested this approach in the early 1970s and it was abandoned until the introduction of Nakamichi UDAR (Unidirectional Auto Reverse) decks in 1984.

A DC motor governed by a servo regulator continuously adjusts the azimuth of the replay head to minimize the difference between two signals.

[20] In 1978,[f] Albert Rijckaert and Edmond de Niet of Philips patented an azimuth correction method that did not require dedicated reference tracks and could be retrofitted to any existing recording format.

[23] A practical, production-ready design of the Rijckaert – de Niet head for cassette recorders was patented by Niro Nakamichi in November 1981.

The patented servo system, which was soon commercialized as the Nakamichi Auto Azimuth Correction (NAAC), analyzed only treble signals in the 2–8 kHz range; the deadband of the control loop was set with a simple diode limiter.

The servomechanism was driven by an electric motor and used a complex gear train terminating in a wedge that pushed the pivoting replay head.

[12] According to Nakamichi, the left channel of a cassette tape is more prone to dropouts and wear, and should not be used for extracting azimuth information;[12] as a side benefit, a simplified control loop has to deal with only one error signal.

Niro Nakamichi and Kozo Kobayashi, lead designer of the Dragon, settled for a conventional three-head configuration with unidirectional recording only.

[37] The combination of sound quality, function set and technology attained by Nakamichi in 1982 remained the apex of the cassette deck industry.

The 'junior' line of Nakamichi autoreversing decks that was released from 1983 to 1985 used unidirectional transports that physically flipped the cassette but lacked azimuth correction.

[42] Any further improvements in analog tape equipment, if possible at all, required substantial research expense but by that time, corporate resources were already committed to digital.

[2][38] By 1996, rising costs of Japanese labor and a declining market forced Nakamichi to shut down cassette deck production.

[2] The company made a mistake by focusing all efforts on Digital Audio Tape (DAT), which failed to gain a substantial market presence, and in 1997 the Nakamichi family sold the dying business to Grande Holdings.

[44][43] The Dragon has a well-developed calibration panel and automated fader but otherwise its function set is minimal, assuming fully manual operation.

Once the NAAC reaches equilibrium, which takes up to 15 seconds, the user aligns recording channel gain ("level") to match the tape's sensitivity using a 400 Hz test tone.

[2] Next, they created a robust, double-capstan, "diffused resonance" tape transport and Nakamichi's pressure pad lifter – a tiny improvement that substantially reduced scrape flutter and modulation noise.

To prevent early formation of a wear groove, which usually destroys the left channel audio, the heads were pre-slotted at the tape edges.

[47] When the recorded signal has sufficient content, head alignment to 1 arc-minute precision takes from 1 to 5 seconds[48] and usually remains unnoticed by the listener.

[44] In the late 1980s ASC,[h] Onkyo, Studer and TEAC reached a similar level of wow and flutter but the Dragon's achievement was still the best in industry.

[53][i] According to Stereo Review's measurements, the Dragon's dynamic range for Type I, II and IV tapes equaled 54, 56.5 and 59 decibels (dB) respectively.

[53][44] Noel Keywood wrote that Dragon's brightness would benefit most tapes recorded on inferior decks but might be annoying or unpleasant at times.

[70] In comparative tests by Audio (West Germany, 1985) and Stereo Review (United States, 1988), only the Revox B215 equaled the Dragon in sound quality.

[40][58] The Revox surpassed the Dragon in mechanical aspects and probably in long-term durability[40][58] but lacked auto-reverse, automatic azimuth adjustment and the versatility of manual calibration.

Flagship decks by ASC, Harman Kardon, Onkyo, Tandberg and TEAC, and the auto-azimuth Marantz SD-930, were distinctly inferior to the Dragon.

[35] Barry Wilson of Stereophile compared Nakamichi to the status of Harley-Davidson among motorcyclists and the Gibson Les Paul among guitarists.