Edgar Filing: China Direct, Inc

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly report ended September 30, 2007

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT

For the transition period from ________ to _________

Commission File Number: 000-26415

CHINA DIRECT, INC.
------------------
(Exact name of small business issuer as specified in charter)

Florida 13-3876100
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5301 North Federal Highway, Suite 120
Boca Raton, Florida 33487
-------------------------------------
(Address of principal executive offices)

(561) 989-9171
--------------
(Issuer's telephone number)

not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]

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

APPLICABLE ONLY TO COPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: At November 14, 2007 there were
19,879,610 shares of common stock were issued and outstanding.

Transitional Small Business Disclosure Format (Check one) Yes [ ] No [X]

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

Certain statements in this report contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, the risk of doing business in the
People's Republic of China ("PRC"), our ability to implement our strategic
initiatives, our access to sufficient capital, the effective integration of our
subsidiaries in the PRC into a U.S. public company structure, economic,
political and market conditions and fluctuations, government and industry
regulation, Chinese and global competition, and other factors. Most of these
factors are difficult to predict accurately and are generally beyond our
control. You should consider the areas of risk described in connection with any
forward-looking statements that may be made herein. Readers are cautioned not to
place undue reliance on these forward-looking statements and readers should
carefully review this report in its entirety. Except for our ongoing obligations
to disclose material information under the Federal securities laws, we undertake
no obligation to release publicly any revisions to any forward-looking
statements, to report events or to report the occurrence of unanticipated
events. These forward-looking statements speak only as of the date of this
report and you should not rely on these statements without also considering the
risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

All share and per share information contained in this report gives
effect to the 100 for 1 (100:1) reverse stock split of our common stock
effective June 28, 2006.

When used in this report the terms "China Direct", "we", "us" or "our"
refers to China Direct, Inc., a Florida corporation formerly known as Evolve
One, Inc., and its subsidiaries. Other terms used in this report include:

o "China Direct Consulting" means China Direct Investments, Inc., a Florida
corporation and a wholly owned subsidiary of China Direct,

o "CDI China" means CDI China, Inc., a Florida corporation and a wholly
owned subsidiary of China Direct,

o "Lang Chemical" means Shanghai Lang Chemical Co., Ltd., a Chinese limited
liability company, and a majority owned subsidiary of CDI China,

o "Chang Magnesium" means Taiyuan Chang Magnesium Co., Ltd., a Chinese
limited liability company, and a majority owned subsidiary of CDI China,

o "Changxin Trading" means Taiyuan Changxin YiWei Trading Co., Ltd., a
Chinese limited liability company, and a wholly owned subsidiary of Chang
Magnesium,

o "CDI Shanghai Management" means CDI Shanghai Management Co., Ltd., a
Chinese limited liability company, and a wholly owned subsidiary of CDI
China,

o "Jinan" means Jinan Alternative Energy Group Corp. a Florida corporation,
and a wholly owned subsidiary of CDI China,

o "CDI Wanda" means CDI Wanda New Energy Co., Ltd., a Chinese limited
liability company formerly known as Jinan Wanda New Energy Co., Ltd., and
a majority owned subsidiary of Jinan,

o "CDI Magnesium" means CDI Magnesium Co., Ltd., a Brunei corporation, and a
majority owned subsidiary of CDI China,

o "Capital One Resource" means Capital One Resource Co., Ltd., a Brunei
corporation, and a wholly owned subsidiary of CDI Shanghai Management,

o "Excel Rise" means Excel Rise Technology Co., Ltd., a Brunei corporation,
and a wholly owned subsidiary of Chang Magnesium,

o "Asia Magnesium" means Asia Magnesium Co., Ltd., a Hong Kong company and a
wholly owned subsidiary of Capital One Resource,

o "Jinwei Magnesium" means Shanxi Gu Country Jinwei Magnesium Co., Ltd., a
Chinese limited liability company, and a majority owned subsidiary of Asia
Magnesium,

o "CDI Pan Asia" means CDI Pan Asia Magnesium Co., Ltd. a Chinese limited
liability company, and a majority owned subsidiary of CDI China,

o "CDI Jingkun Zinc" means CDI Jingkun Zinc Industry Co., Ltd. and a
majority owned subsidiary of CDI Shanghai Management,

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHINA DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2007
(Unaudited)

ASSETS

Current Assets:
Cash and cash equivalents .............................................. $ 17,348,091
Notes receivable ....................................................... 1,013,698
Investment in marketable securities held for sale ...................... 2,816,478
Investment in marketable securities held for sale-related party ........ 1,486,589
Accounts receivable, net of allowance for doubtful accounts of $8,606 .. 9,889,643
Accounts receivable-related party ...................................... 140,777
Inventories ............................................................ 4,393,364
Prepaid expenses and other assets ...................................... 11,991,830
Prepaid expenses-related party ......................................... 1,423,766
Other receivables ...................................................... 727,819
------------
Total current assets ................................................ 51,232,055

Restricted cash .......................................................... 608,347
Property, plant and equipment, net of accumulated depreciation of $406,353 5,709,747
Prepaid expenses ......................................................... 302,360
Property use rights, net ................................................. 66,666
------------

Total assets ........................................................ $ 57,919,175
============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Loans payable .......................................................... $ 3,159,021
Accounts payable and accrued expenses .................................. 7,483,812
Accounts payable-related party ......................................... 3,779,516
Liabilities in connection with acquisitions-related party .............. 100,000
Advances from customers ................................................ 4,514,230
Deferred revenues-short term ........................................... 834,886
Other payables ......................................................... 1,098,391
Taxes payable .......................................................... 267,038
------------
Total current liabilities ........................................... 21,236,894

Deferred revenues-long term .............................................. 124,475

Minority interest ........................................................ 9,672,279

Stockholders' Equity:
Preferred Stock: $.0001 par value, 10,000,000 authorized, no shares
issued and outstanding ............................................... -
Common Stock; $.0001 par value, 1,000,000,000 authorized, 18,458,297
issued and outstanding ............................................... 1,846
Additional paid-in capital ............................................. 20,652,389
Deferred compensation .................................................. (97,960)
Accumulated comprehensive loss ......................................... (1,420,091)
Retained earnings ...................................................... 7,749,343
------------

Total stockholders' equity .......................................... 26,885,527
------------

Total liabilities and stockholders' equity .......................... $ 57,919,175
============

See notes to unaudited consolidated financial statements
4

CHINA DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2007 2006 2007 2006
------------- ------------- ------------- -------------

Revenues ........................................... $ 43,996,248 $ 96,575 $ 114,508,158 $ 338,407
Revenues-related party ............................. 580,777 - 1,460,777 145,000
------------- ------------- ------------- -------------
Total revenues ................................ 44,577,025 96,575 115,968,935 483,407

Cost of revenues ................................... 39,786,743 198,913 103,996,138 347,707
------------- ------------- ------------- -------------

Gross profit ....................................... 4,790,282 (102,338) 11,972,797 135,700

Operating expenses:
Selling, general, and administrative ............. 1,115,513 250,191 2,800,439 1,092,279
Selling, general, and administrative-related party - 5,642 - 16,894
------------- ------------- ------------- -------------

Total operating expenses ...................... 1,115,513 255,833 2,800,439 1,109,173
------------- ------------- ------------- -------------

Operating income (loss) ....................... 3,674,769 (358,171) 9,172,358 (973,473)

Other income (expense):
Registration rights penalty ........................ - (13,013) - (13,013)
Other income ....................................... 158,611 - 539,980 -
Interest income .................................... 43,833 - 114,854 205
Unrealized gain (loss) on trading securities ....... - (39,352) - 234,148
Realized gain on sale of marketable securities ..... 494,605 36,700 700,841 80,045
Realized gain (loss) on sale of marketable
securities-related party ......................... (9,871) 38,515 (41,885) 38,515
------------- ------------- ------------- -------------

Net income (loss) before income taxes .............. 4,361,947 (335,321) 10,486,148 (633,573)

Income taxes (expenses) benefits ................... (262,367) 132,787 (1,017,098) 245,742
------------- ------------- ------------- -------------

Net income before minority interest ................ 4,099,580 (202,534) 9,469,050 (387,831)

Minority interest in income of subsidiaries ........ (1,119,003) - (2,349,862) -

Net income (loss) .................................. $ 2,980,577 $ (202,534) $ 7,119,188 $ (387,831)
------------- ------------- ------------- -------------

Foreign currency translation gain .................. 145,109 - 393,158 -

Unrealized gain (loss) on marketable securities held
for sale, net of income taxes ...................... (763,053) - (1,322,277) -

Unrealized gain (loss) on marketable securities held
for sale-related party, net of income taxes ........ (467,269) (952,387) (1,023,351) 442,853
------------- ------------- ------------- -------------

Comprehensive income (loss) ........................ $ 1,895,364 $ (1,154,921) $ 5,166,718 $ 55,022
============= ============= ============= =============

Basic earnings (loss) per common share ............. $ 0.18 $ (0.02) $ 0.49 $ (0.04)
============= ============= ============= =============

Diluted earnings (loss) per common share ........... $ 0.16 $ (0.02) $ 0.44 $ (0.04)
============= ============= ============= =============

Basic weighted average common shares outstanding ... 16,339,868 10,354,033 14,431,869 10,118,445
============= ============= ============= =============

Diluted weighted average common shares outstanding . 18,241,143 10,354,033 16,106,921 10,118,445
============= ============= ============= =============

See notes to unaudited consolidated financial statements
5

CHINA DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

For the Nine Months
Ended September 30,
2007 2006
------------ ------------

Cash flows from operating activities:
Net income (loss) ............................................................ $ 7,119,188 $ (387,831)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation ............................................................... 236,924 2,877
Bad debt recovery .......................................................... (102,005) -
Stock based compensation ................................................... 310,107 -
Realized gain on investment in marketable securities ....................... (700,841) (118,560)
Realized loss on investment in marketable securities-related party ......... 41,885 -
Unrealized (gain) on investment in trading securities ...................... - (234,148)
Fair value of shares received for services ................................. (4,240,725) (1,098,900)
Fair value of warrants received for services ............................... (121,550) -
Fair value of investments assigned to employees and consultants for services - 837,200
Fair value of options issued to consultants ................................ 131,250 403,405
Minority interest .......................................................... 2,349,862 -
Changes in operating assets and liabilities:
Prepaid expenses ........................................................... (8,016,058) (576,600)
Prepaid expenses-related party ............................................. (1,423,766) -
Inventories ................................................................ 1,941,206 -
Accounts receivable ........................................................ (7,094,648) -
Accounts receivable-related party .......................................... (140,777) -
Other receivables .......................................................... (724,284) -
Other assets ............................................................... - (30,000)
Accounts payable and accrued expenses ...................................... 2,874,967 57,086
Accounts payable-related party ............................................. 2,232,636 -
Advance from customers ..................................................... 1,943,502 -
Other payables ............................................................. 282,737 -
Deferred revenues .......................................................... (600,439) 824,175
Deferred income tax ........................................................ 5,027 (7,659)
Income tax payable ......................................................... (332,661) (293,083)
------------ ------------

Net cash (used in) operating activities ...................................... (4,028,463) (622,038)
------------ ------------

Cash flows from investing activities:
Cash acquired in acquisition ............................................... 2,229,742 -
Decrease in notes receivable ............................................... (71,581) -
Decrease in restricted cash ................................................ (160,634) -
Proceeds from the disposition of investment in trading securities .......... - 286,939
Proceeds from the sale of marketable securities ............................ 1,887,735 -
Purchases of property, plant and equipment ................................. (2,129,086) (5,059)
------------ ------------

Net cash provided by investing activities .................................... 1,756,176 281,880
------------ ------------

Cash flows from financing activities:
Proceeds from loans payable ................................................ 1,535,735 -
Proceeds from advances from related parties ................................ - 4,648
Repayments of advances to customers ........................................ (140,893) -
Capital contributed by officers ............................................ - 259,061
Proceeds from issurance of common stock .................................... - 919,974
Proceeds from exercises of warrants/options ................................ 14,908,028 -
------------ ------------

Net cash provided by financing activities .................................... 16,302,870 1,183,683
------------ ------------

EFFECT OF EXCHANGE RATE ON CASH .............................................. 287,163 -

Net increase in cash ......................................................... 14,317,746 843,525

Cash, beginning of year ...................................................... 3,030,345 39,983
------------ ------------

Cash, end of period .......................................................... $ 17,348,091 $ 883,508
============ ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for taxes ..................................................... $ 626,995 $ 55,000
============ ============

Cash paid for interest .................................................. $ 5,936 $ -
============ ============

See notes to unaudited consolidated financial statements
6

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

THE COMPANY

China Direct, Inc., a Florida corporation formerly known as Evolve One, Inc.,
and its subsidiaries are referred to in this report as the "Company", or "China
Direct". China Direct Investments, Inc., a Florida corporation and a wholly
owned subsidiary of China Direct, Inc. is referred to in this report as "China
Direct Consulting". CDI China, Inc., a Florida corporation and a wholly owned
subsidiary of China Direct is referred to in this report as "CDI China".

Evolve One, Inc. ("Evolve One"), a Delaware corporation, acquired 100% of China
Direct Consulting on August 16, 2006 (the "Transaction") in exchange for
10,000,000 shares of Evolve One common stock, after which the shareholders of
China Direct Consulting owned approximately 95% of the existing shares of Evolve
One. As a result of the Transaction, China Direct Consulting became a wholly
owned subsidiary of Evolve One. For financial accounting purposes, the
Transaction was treated as a recapitalization of Evolve One with the former
stockholders of Evolve One retaining approximately 5% of the outstanding stock.
The Transaction has been accounted for as a reverse acquisition under the
purchase method for business combinations, and accordingly, the Transaction has
been treated as a recapitalization of China Direct Consulting, with China Direct
Consulting as the acquirer. The shares issued in the Transaction are treated as
being issued for cash and are shown as outstanding for all periods presented in
the same manner as for a stock split. In September 2006 Evolve One changed its
name to China Direct, Inc. On June 21, 2007, we filed a Certificate of
Domestication with the Florida Department of State, resulting in a change of
domicile from the state of Delaware to the state of Florida.

China Direct is a diversified management and consulting company.

Our purpose is twofold: (i) acquire controlling interests in entities operating
within the Chinese economy and (ii) provide consulting services to Chinese
entities.

China Direct operates two wholly owned entities, China Direct Consulting and CDI
China. China Direct Consulting serves as a full service consulting and advisory
firm offering a suite of services.

CDI China operates as a management company for Chinese entities. CDI China seeks
to acquire a controlling interest in entities operating in China. We adhere to
PRC rules and regulations governing foreign investment and obtain all relevant
and necessary governmental approvals. Our predominant method of acquiring
Chinese entities is by infusing consideration in the form of cash to increase
the registered capital of a Chinese domestic company. This infusion of capital
serves to create a new foreign invested entity ("FIE") in which our equity
ownership percentage is represented by our percentage of contribution to the
total registered capital amount.

CDI China was incorporated under the laws of the State of Florida on August 25,
2006. CDI China was created to acquire a controlling interest in a variety of
Chinese entities engaged in operations which we believe will benefit from the
continued growth of the Chinese economy. Examples of industries in which we will
focus our efforts include manufacturing, technology, healthcare, packaging,
natural resources, as well as companies involved in importing and exporting
activities.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

THE COMPANY (CONTINUED)

On October 25, 2006, we entered into an agreement to contribute $701,250 to
increase the registered capital of Shanghai Lang Chemical Co., Ltd. ("Lang
Chemical") to $1,400,418. As a result, CDI China holds a 51% equity interest in
the restructured Lang Chemical. Lang Chemical is a distributor of industrial
grade synthetic chemicals within China.

In November 2006 we formed a new entity, CDI Shanghai Management Co., Ltd.,
("CDI Shanghai Management") as a wholly owned subsidiary of CDI China. CDI
Shanghai Management provides an operational infrastructure to subsidiaries of
CDI China, as well as providing consulting services to Chinese entities with
regard to mergers and acquisitions, business development, and financial
management. CDI Shanghai Management supervises and monitors the operations of
the CDI China subsidiaries based in China. CDI Shanghai Management commenced
operations in January 2007. On February 17, 2007, CDI Shanghai Management
created Capital One Resource Co., Ltd., a Brunei corporation, as a wholly owned
subsidiary ("Capital One Resource"). Capital One Resource provides consulting
services to entities doing business in China.

In November 2006, Big Tree Group Corp. ("Big Tree"), a Florida corporation,
formed a new entity Jieyang Big Tree Toy Enterprise Co., Ltd, a Chinese limited
liability company, as a wholly owned subsidiary of Big Tree ("Jieyang Big
Tree").

On December 22, 2006 we entered into an agreement to contribute $2,550,000 to
Chang Magnesium Co., Ltd. ("Chang Magnesium"). As a result, CDI China holds a
51% equity interest in the restructured Chang Magnesium. Chang Magnesium was
formed to operate a newly constructed magnesium plant that will process and
manufacture a variety of magnesium products, including magnesium powder,
magnesium scrap, and various grades of magnesium slabs. Taiyuan Changxin YiWei
Trading Co., Ltd., ("Changxin Trading") is a wholly owned subsidiary of Chang
Magnesium. In February 2007 Chang Magnesium formed a new entity, Excel Rise
Technology Co., Ltd., a Brunei corporation, as a wholly owned subsidiary ("Excel
Rise"). Excel Rise operates as an exporter of magnesium products; primary
exports include various forms of magnesium including but not limited to
magnesium powder, magnesium scrap, and various grades of ordinary magnesium
slabs.

On February 12, 2007 CDI China acquired a 60% equity interest in CDI Magnesium
Co., Ltd., a Brunei corporation ("CDI Magnesium"), in exchange for 25,000 shares
of our common stock valued at $100,000. The fair value of the common stock is
based on the value of the common stock of $4.00 per share on February 6, 2007.
The $100,000 worth of common stock is reflected in liabilities in connection
with acquisitions-related party in our consolidated balance sheet as of
September 30, 2007. CDI Magnesium was formed to operate a newly constructed
magnesium plant in Taiyuan, China. It is expected the plant will process and
manufacture a variety of magnesium alloy by-products. CDI Magnesium expects to
commence operations at the facility in January 2008. CDI Magnesium will operate
as an agent in the sale of magnesium until operations commence at the new
magnesium plant. SEE NOTE 6- ACQUISITIONS AND DISPOSITIONS.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

THE COMPANY (CONTINUED)

On February 12, 2007, and as amended on May 8, 2007, CDI China acquired a 60%
equity interest in Big Tree, in exchange for 53,654 shares of our common stock
valued at $268,272. The fair value of the common stock is based on the value of
the common stock of $5.00 per share on January 30, 2007. As a result, CDI China
acquired a 60% equity interest in Big Tree. On August 24, 2007, CDI China
entered into a material definitive agreement to sell its 60% equity interest in
Big Tree to Sense Holdings, Inc. ("Sense") in exchange for $400,000 cash
consideration and 20,000,000 shares of Sense's common stock, of which 10,000,000
were to be issued to us in four tranches of 2,500,000 shares on each of
September 30, 2007, December 31, 2007, March 31, 2008 and June 30, 2008 and we
are entitled to receive 10,000,000 shares of common stock if Big Tree meets
certain revenue thresholds beginning in fiscal 2008. The transaction closed on
August 31, 2007. As a result, CDI China has no equity interest in Big Tree as of
August 31, 2007. Currently, our wholly owned subsidiaries, China Direct
Consulting and CDI Shanghai Management are engaged as consultants to Sense.
Neither Big Tree nor Jieyang Big Tree had any operations for the period of
February 12, 2007, the date of acquisition, through August 31, 2007, the date of
disposition. SEE NOTE 6- ACQUISITIONS AND DISPOSITIONS.

On February 12, 2007 CDI China entered into an agreement to contribute $511,458
to increase the registered capital of Jinan Wanda New Energy Co., Ltd., a
Chinese limited liability company to $1,002,859 forming a new Chinese foreign
invested entity. As a result, CDI China holds a 51% equity interest in Jinan
Wanda New Energy Co., Ltd. On March 23, 2007 Jinan Wanda New Energy Co., Ltd.
changed its name to CDI Wanda New Energy Co., Ltd. ("CDI Wanda"). In April 2007,
CDI China contributed the $511,458 of investment capital to CDI Wanda. CDI Wanda
is located in Jinan, the capital city of Shandong Province. CDI Wanda is engaged
in the alternative energy and recycling industry. CDI Wanda develops
environmentally friendly recycling technological applications as well as
ancillary services related to the operations of refineries. SEE NOTE 6-
ACQUISITIONS AND DISPOSITIONS.

On April 3, 2007 Capital One Resource entered into an agreement to acquire a
100% equity interest in Asia Magnesium Industry Co., Ltd., a Hong Kong company.
This transaction closed on July 1, 2007. As a result, we acquired Asia
Magnesium's right to invest up to $3,380,000 to acquire a 52% equity interest in
Shanxi Gu County Jinwei Magnesium Co., Ltd., a Chinese limited liability company
("Jinwei Magnesium"). Jinwei Magnesium is erecting a magnesium refinery which
upon completion is designed to produce 18,000 tons of magnesium annually.
Construction is estimated to be completed by July 2008. During the third quarter
ended September 30, 2007 we contributed $3,380,000 of investment capital to
Jinwei Magnesium. Neither Asia Magnesium nor Jinwei Magnesium had any operations
for the period of July 1, 2007, the date of acquisition, through September 30,
2007. SEE NOTE 6-ACQUISITIONS AND DISPOSITIONS.

China Direct, Inc. common stock was approved for listing on the American Stock
Exchange (R) (AMEX(R)). China Direct's common stock commenced trading on the
American Stock Exchange under the ticker symbol CDS on Monday, September 24,
2007.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and the footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of
recurring accruals, considered for a fair presentation have been included. Our
year end is December 31, which is denoted herein as our "Fiscal" year. Operating
results for the nine months ended September 30, 2007 are not necessarily
indicative of the results that may be expected for Fiscal 2007. The consolidated
statements include the accounts of the Company and its controlled entities,
including its wholly owned and majority owned subsidiaries. All significant
inter-company balances and transactions have been eliminated.

As previously stated, we closed the acquisition of a majority interest of CDI
Wanda on February 12, 2007. Our consolidated statements of operations for the
nine months ended September 30, 2007 include the operations of CDI Wanda for the
period of February 12, 2007, the date of acquisition, through September 30,
2007. In this section we refer to that period as the "CDI Wanda Reporting
Period".

As previously stated we closed the acquisition of a majority interest of Big
Tree on February 12, 2007, and we closed the disposition of this majority
interest of Big Tree on August 31, 2007. Neither Big Tree nor Jieyang Big Tree
had operations for the period of February 12, 2007, the date of acquisition,
through August 31, 2007, the date of disposition.

As previously stated, we closed the acquisition of a majority interest of CDI
Magnesium on February 12, 2007. Our consolidated statements of operations for
the nine months ended September 30, 2007 include the operations of CDI Magnesium
for the period of February 12, 2007, the date of acquisition, through September
30, 2007. In this section we refer to that period as the "CDI Magnesium
Reporting Period".

As previously stated, we closed the acquisition of a majority interest of Jinwei
Magnesium on July 1, 2007. Our consolidated statements of operations did not
include the operations of Jinwei Magnesium for the period of July 1, 2007, the
date of acquisition, through September 30, 2007, as there were no operations.

ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in 2007 and
2006 include the allowance for doubtful accounts of accounts receivable,
stock-based compensation, and the useful life of property, plant and equipment.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

CASH AND CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents.

CONCENTRATION OF CREDIT RISKS

Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and trade accounts receivable. The Company
places its cash with high credit quality financial institutions in the United
States and China. As of September 30, 2007, bank deposits in the United States
exceeded federally insured limits by $10,827,218. At September 30, 2007, the
Company had approximately $5,931,039 in China bank deposits, which can not be
insured. In China, there is no equivalent to the Federal Deposit Insurance Corp.
("FDIC") as in United States. The Company has not experienced any losses in such
accounts through September 30, 2007.

At September 30, 2007, our bank deposits by geographic area are as follows:

United States ................. $11,417,052
China ......................... 5,931,039
-----------
Total cash and cash equivalents $17,348,091
===========

In an effort to mitigate any potential risk, the Company periodically evaluates
the credit quality of the financial institutions at which it holds deposits.

The Company categorizes securities as investment in marketable securities held
for sale and investment in marketable securities held for sale-related party.
One client, Dragon Capital Group Corp., a related party, accounted for all of
our investment in marketable securities held for sale-related party at September
30, 2007 of $1,486,589. These securities were issued by Dragon Capital Group
Corp., a related party, which is a non reporting company whose securities are
quoted on the Pink Sheets. Under Federal securities laws these securities cannot
be readily resold by us generally, absent a registration of those securities
under the Securities Act of 1933. Dragon Capital Group Corp., a related party,
does not intend to register the securities. Accordingly, while under generally
accepted accounting principles we are required to reflect the fair value of
these securities on our consolidated balance sheet, they are not readily
convertible into cash and we may never realize the carrying value of these
securities. We provide consulting services to Dragon Capital Group Corp., a
related party. Mr. Lisheng (Lawrence) Wang, the CEO and Chairman of the Board of
Dragon Capital Group Corp., is the brother of Dr. James Wang, our CEO and
Chairman.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

Five clients accounted for the Company's investment in marketable securities
held for sale of $2,816,478 held at September 30, 2007. These securities are
comprised as follows;

INVESTMENT IN MARKETABLE
SECURITIES HELD FOR SALE
NAME OF THE CLIENT AS OF SEPTEMBER 30, 2007 PERCENTAGE
------------------------------------------ ------------------------ ----------
Sense Holdings, Inc. ..................... $ 1,043,700 37%
Dragon International Group Corp. ......... 756,403 27%
Linkwell Corporation ..................... 524,875 19%
Sunwin International Neutraceuticals, Inc. 104,000 3%
MediaReady, Inc. ......................... 387,500 14%
----------- ----

$ 2,816,478 100%
=========== ====

CUSTOMER CONCENTRATION

China Direct Consulting, our wholly owned subsidiary, provides consulting
services pursuant to written agreements and receives securities as compensation
for services rendered. Five of the current clients and one former client of
China Direct Consulting accounted for approximately 78%, while one client,
Dragon Capital Group Corp., a related party, accounted for approximately 21% of
the total revenues of $6,421,081 for China Direct Consulting during the nine
months ended September 30, 2007.

CONSULTING REVENUES
NAME OF THE CLIENT AS OF SEPTEMBER 30, 2007 PERCENTAGE
------------------------------------------ ------------------------ ----------
Dragon International Group Corp. ......... $ 1,303,366 20%
Sunwin International Neutraceuticals, Inc. 1,150,719 18%
Dragon Capital Group Corp. ............... 1,320,000 21%
Shanghai Qinpu Investment Co., Ltd. ...... 580,000 9%
Linkwell Corporation ..................... 604,000 9%
Media READY, Inc. ........................ 595,100 9%
Sense Holdings, Inc. ..................... 825,875 13%
Others ................................... 42,021 1%
----------- ----

$ 6,421,081 100%
=========== ====

China Direct Consulting seeks to minimize its customer concentration risk by
diversifying its existing client base.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

CUSTOMER CONCENTRATION (CONTINUED)

Accounts receivable net of allowance for doubtful accounts of $8,606 at
September 30, 2007 was $9,889,643. Of this amount $4,759,580, $4,585,583,
$468,416, and $76,064 were associated with our Chang Magnesium, Lang Chemical,
China Direct Consulting, and CDI Wanda subsidiaries, respectively.

GuiZhou Crystal Chemical Co., Ltd., a client of Lang Chemical, accounted for
$1,879,734 or approximately 41% of the total accounts receivable of $4,585,583
related to Lang Chemical at September 30, 2007.

Three clients of Chang Magnesium accounted for $2,007,709 or approximately 42%
of the total accounts receivable of $4,759,580 related to Chang Magnesium at
September 30, 2007. These clients, Alcoa, TAK Trading Co., Ltd. and Hydro
Aluminum represented $766,620 or approximately 16%, $648,869 or approximately
14%, and $592,220 or approximately 12%, respectively.

Dragon International Group Corp. accounted for $456,666 or approximately 97% of
the total accounts receivable of $468,416 reflected for China Direct Consulting
at September 30, 2007.

At September 30, 2007 our consolidated balance sheet includes accounts
receivable-related party of $140,777. Accounts receivable-related party
represents $140,777 in sales to Ruiming YiWei Magnesium Industry Co., Ltd., a
related party, for payment which has not yet been collected by Chang Magnesium.
Taiyuan YiWei Magnesium Industry Co., Ltd., which owns the minority interest of
Chang Magnesium, holds a 40% equity interest in Ruiming YiWei Magnesium Industry
Co., Ltd.

ACCOUNTS RECEIVABLE

Accounts receivable are reported at net realizable value. The Company has
established an allowance for doubtful accounts based upon factors pertaining to
the credit risk of specific customers, historical trends, and other information.
Delinquent accounts are written off when it is determined that the amounts are
uncollectible. At September 30, 2007, the allowance for doubtful accounts was
$8,606.

INVENTORIES

Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
weighted average method.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, investments in marketable
securities held for sale, investment in marketable securities held for
sale-related party, accounts payable and accrued expenses, income tax payable
and due to related parties approximates their fair value due to their short term
maturities. The carrying value of securities held for sale is reflected at their
fair value based on the price of the security as quoted on national or inter
dealer stock exchanges.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

MARKETABLE SECURITIES

The Company classifies its existing investments in marketable securities held
for sale and investments in marketable securities held for sale-related party in
accordance with SFAS No. 115. Investments in marketable securities held for sale
and investments in marketable securities held for sale-related party consist of
marketable securities, and are stated at fair value. Unrealized gains or losses
on marketable securities held for sale and unrealized gains or losses on
marketable securities held for sale-related party are recognized as an element
of comprehensive income in our operations on a monthly basis based on
fluctuations in the fair value of the security as quoted on national or
inter-dealer stock exchanges. Realized gains or losses on marketable securities
held for sale and realized gains or losses on marketable securities held for
sale-related party are recognized in the consolidated statement of operations as
trading profits when securities are sold.

The Company receives securities which include common stock and common stock
purchase warrants from clients as part of its compensation for services. These
securities are stated at their fair value in accordance with SFAS #115
"Accounting for certain investments in debt and equity securities", and EITF
00-8 "Accounting by a grantee for an equity instrument to be received in
conjunction with providing goods or services". All of the securities are
received from companies whose common stock is listed either on the over the
counter bulletin board or pinks sheets. The common stock and the common stock
purchase warrants received as compensation are typically restricted as to
resale. The policy of China Direct Consulting is to sell securities it receives
as compensation when permitted rather than hold on to these securities as long
term investments, regardless of market conditions in an effort to satisfy our
current obligations. As these securities are often restricted, we are unable to
liquidate these securities until the restriction is removed. The Company
recognizes revenue for such common stock based on the fair value at the time
common stock is granted and for common stock purchase warrants based on the
Black-Scholes valuation model. Unrealized gains or losses on marketable
securities held for sale and unrealized gains or losses on marketable securities
held for sale-related party are recognized as an element of comprehensive income
in our consolidated statement of operations on a monthly basis based on changes
in the fair value of the security as quoted on national or inter-dealer stock
exchanges. Once liquidated, realized gains or losses on the sale of marketable
securities held for sale and realized gains or losses on the sale of marketable
securities held for sale-related party will be reflected in our net income for
the period in which the security was liquidated.

Net unrealized gains related to investments in trading securities for the nine
months ended September 30, 2007 and 2006 were $0 and $234,148, respectively. Net
realized gains related to investments in marketable securities for the nine
months ended September 30, 2007 and 2006 were $700,841 and $80,045,
respectively. Net realized gains (losses) on the sale of marketable
securities-related party for the nine months ended September 30, 2007 and 2006
were $(41,885) and $38,515, respectively.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

MARKETABLE SECURITIES (CONTINUED)

The unrealized gains or losses on marketable securities held for sale, net of
tax effect, for the nine months ended September 30, 2007 and September 30, 2006
were $(1,322,277) and $0 respectively. The unrealized gains or losses on
marketable securities held for sale-related party, net of tax effect, for the
nine months ended September 30, 2007 and September 30, 2006 were $(1,023,351)
and $442,853 respectively.

PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consist of the fair value of securities of
clients of China Direct Consulting which were assigned to officers of China
Direct Consulting as compensation, prepayment to vendors for merchandise that
had not yet been shipped, and value added tax refunds available from the Chinese
government. At September 30, 2007 our consolidated balance sheet includes
prepaid expenses and other assets of $11,991,830. Of this amount, $7,033,497 is
related to Chang Magnesium which represents prepayments to vendors for
merchandise that had not yet been shipped to Chang Magnesium; $224,866 reflects
value added tax refunds available from the Chinese government related to Chang
Magnesium; $462,018 relates to China Direct Consulting, which represents the
current portion of the fair value of client securities China Direct Consulting
received as payment for its services which were assigned to our executive
officers as compensation for their services to China Direct Consulting pursuant
to the terms of those consulting agreements; $2,336,124 relates to Jinwei
Magnesium which represents prepayments to vendors for merchandise that had not
yet been shipped to Jinwei Magnesium; $1,909,778 relates to Lang Chemical which
represents a prepayment to vendors for merchandise that had not yet been shipped
to Lang Chemical; and $25,547, relates to CDI Wanda which represents prepayments
to vendors for merchandise that had not yet been shipped to CDI Wanda.

At September 30, 2007 our consolidated balance sheet includes prepaid
expenses-related party of $1,423,766. Prepaid expenses-related party represents
$1,160,051 in payments to Taiyuan YiWei Magnesium Industry Co., Ltd., a related
party, for inventory which has not yet been received by Chang Magnesium. At
September 30, 2007, Lang Chemical prepaid NanTong LangYuan Chemical Co., Ltd.
$237,623 for the future delivery of inventory. NanTong LangYuan Chemical Co.,
Ltd. is a company owned by Jingdong Chen and Qian Zhu, the two minority
shareholders of Lang Chemical. At September 30, 2007, Jinwei Magnesium prepaid
Taiyuan YiWei Magnesium Industry Co., Ltd., a related party, of $26,092 for the
future delivery of inventory. SEE NOTE 9-RELATED PARTY TRANSACTIONS.

Non-current prepaid expenses represent the fair value of securities of China
Direct Consulting's clients which were assigned to China Direct Consulting's
officers for services to be rendered to such clients over the term of our
consulting agreements which will be amortized beyond the twelve month period.
Accordingly, at September 30, 2007 we reflect a non-current prepaid expense of
$302,360 on our consolidated balance sheet at September 30, 2007.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost and depreciated on a straight
line basis over their estimated useful lives of three to forty years.
Maintenance and repairs are charged to expense as incurred. Significant renewals
and improvements are capitalized.

ADVANCES FROM CUSTOMERS

Advances from customers represent prepayments to the Company for merchandise
that had not yet been shipped to the customer. The Company will recognize the
advances as revenue as customers take delivery of the goods, in compliance with
its revenue recognition policy. At September 30, 2007 our consolidated balance
sheet reflects advances from customers of $4,514,230 which consist of $3,985,228
related to Chang Magnesium, $461,786 related to Lang Chemical, and $67,216
related to CDI Wanda.

COMPREHENSIVE INCOME

The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
"Reporting Comprehensive Income". Comprehensive income is comprised of net
income and all changes to the statements of stockholders' equity, except those
due to investments by stockholders, changes in paid-in capital and distributions
to stockholders. For the Company, comprehensive income for the nine months ended
September 30, 2007 and 2006 included net income, foreign currency translation
adjustments, unrealized gains or losses on marketable securities held for sale,
net of income taxes, and unrealized gains or losses on marketable securities
held for sale-related party, net of income taxes.

FOREIGN CURRENCY TRANSLATION

Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation", and are included in
determining net income or loss.

For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining accumulated
comprehensive loss. As of September 30, 2007, the exchange rate for the local
currency, the Chinese dollar or Renminbi ("RMB") was $1 for 7.5176 RMB.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

FOREIGN CURRENCY TRANSLATION (CONTINUED)

The reporting currency is the U.S. dollar. The functional currency of the
Company's Chinese subsidiaries is the RMB. The financial statements of the
Chinese subsidiaries are translated into United States dollars using period end
rates of exchange for assets and liabilities, and average rates of exchange for
the period for revenues, costs, and expenses. Net gains and losses resulting
from foreign exchange transactions are included in the consolidated statements
of operations and were not material during the periods presented. The cumulative
translation adjustment and effect of exchange rate changes on cash at September
30, 2007 was $287,163.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
periodically reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount of the
asset. The amount of impairment is measured as the difference between the
asset's estimated fair value and its book value. The Company did not record any
impairment charges during the nine months ended September 30, 2007.

MINORITY INTEREST

Under generally accepted accounting principles when losses applicable to the
minority interest in a subsidiary exceed the minority interest in the equity
capital of the subsidiary, the excess is not charged to the majority interest
since there is no obligation of the minority interest to make good on such
losses. The Company, therefore, has included losses applicable to the minority
interest against its interest since the minority owners have no obligation to
make good on the losses. If future earnings do materialize, the Company shall be
credited to the extent of such losses previously absorbed.

As previously stated, we acquired a 51% equity interest of Lang Chemical
effective October 25, 2006.

As previously stated, we acquired a 51% equity interest of Chang Magnesium
effective December 22, 2006.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

MINORITY INTEREST (CONTINUED)

As previously stated, on February 12, 2007 as amended on May 8, 2007, CDI China
acquired a 60% equity interest in Big Tree in exchange for 53,654 shares of our
common stock of valued at $268,272. The fair value of the common stock is based
on the closing price of the common stock of China Direct on January 30, 2007. On
August 24, 2007, CDI China, entered into a material definitive agreement to sell
its 60% equity interest in Big Tree to Sense in exchange for $400,000 cash
consideration and 20,000,000 shares of Sense's common stock, of which 10,000,000
were to be issued to us in four tranches of 2,500,000 shares on each of
September 30, 2007, December 31, 2007, March 31, 2008 and June 30, 2008 and we
are entitled to receive 10,000,000 shares of common stock if Big Tree meets
certain revenue thresholds beginning in fiscal 2008.. The transaction closed on
August 31, 2007. As a result, CDI China has no equity interest in Big Tree as of
August 31, 2007. Currently, our wholly owned subsidiaries, China Direct
Consulting and CDI Shanghai Management are engaged as consultants to Sense.
Neither Big Tree nor Jieyang Big Tree had any operations for the period of
February 12, 2007, the date of acquisition, through August 31, 2007, the date of
disposition.

As previously stated, On February 12, 2007, CDI China acquired a 60% equity
interest in CDI Magnesium in exchange for 25,000 shares of our common stock
valued at $100,000. The fair value of the common stock is based on the value of
the shares as of the date of the agreement. The $100,000 worth of common stock
is reflected in liabilities in connection with acquisitions-related party in our
consolidated balance sheet as of September 30, 2007. As a result, CDI China
holds a 60% equity interest in CDI Magnesium.

As previously stated, on February 12, 2007 CDI China entered into an agreement
to contribute $511,458 to increase the registered capital of CDI Wanda to
$1,002,859. In April 2007 we contributed $511,458 to CDI Wanda. As a result CDI
China holds a 51% equity interest in CDI Wanda.

As previously stated, on April 3, 2007 Capital One Resource entered into an
agreement to acquire a 100% equity interest in Asia Magnesium Industry Co.,
Ltd., a Hong Kong company. This transaction closed on July 1, 2007. As a result,
we acquired Asia Magnesium's right to invest up to $3,380,000 to acquire a 52%
equity interest in Shanxi Gu County Jinwei Magnesium Co., Ltd., a Chinese
limited liability company ("Jinwei Magnesium"). Jinwei Magnesium is erecting a
new magnesium refinery which, upon completion is designed to produce 18,000 tons
of magnesium annually. Construction is estimated to be completed in March 2008.
During the third quarter ended September 30, 2007 we contributed $3,380,000 of
investment capital to Jinwei Magnesium. As a result Asia Magnesium holds a 52%
equity interest in Jinwei Magnesium.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

INCOME TAXES

Income taxes are accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
future benefits indicated by such assets. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some or the
entire deferred tax asset will not be realized.

BASIC AND DILUTED EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income by the weighted
average number of common stock outstanding during each period. Diluted earnings
per share are computed using the weighted average number of common and dilutive
common share equivalents outstanding during the period. Dilutive common share
equivalents consist of shares issuable upon the exercise of stock options and
warrants. At September 30, 2007, there were options to purchase 7,751,520 shares
of common stock and there were warrants to purchase 4,286,625 shares of common
stock, which could potentially dilute future earnings per share. At September
30, 2006, there were options and warrants to purchase 9,046,000 shares of common
stock, respectively, which could potentially dilute future earnings per share.

The following table sets forth the computation of basic and diluted earnings per
share:

SEPTEMBER 30, SEPTEMBER 30,
2007 2006
------------ ------------
Numerator:
Net income (loss) ............................... $ 7,119,188 $ (387,831)
============ ============

Denominator:
Denominator for basic earnings per share
Weighted average shares outstanding ............. 14,431,869 10,118,445
Effect of dilutive warrants and employee stock
options ....................................... 1,675,052 -
Denominator for diluted earnings per share
Weighted average shares outstanding ............. 16,106,921 10,118,445

Basic earnings (loss) per share ................. $ 0.49 $ (0.04)
============ ============
Diluted earnings (loss) per share ............... $ 0.44 $ (0.04)
============ ============

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

REVENUE RECOGNITION

Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 104 "Revenue Recognition".

China Direct Consulting provides its services pursuant to written agreements
which may vary in duration. Revenues are recognized over the terms of the
agreements. Revenues of China Direct Consulting are derived from a fee for
services rendered.

A significant portion of the services provided by China Direct Consulting are
compensated with securities which include common stock and common stock purchase
warrants from clients. These securities are classified as investment in
marketable securities held for sale and investment in marketable securities held
for sale-related party on the consolidated balance sheet, if still held at the
financial reporting date. These securities are stated at fair value in
accordance with the provision of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
No. 115") and EITF 00-8 "Accounting by a grantee for an equity instrument to be
received in conjunction with providing goods or services".

The securities received, whether in the form of common stock, or common stock
purchase warrants, are typically restricted as to resale. The policy of China
Direct Consulting is to sell securities it receives as compensation when
permitted rather than hold on to these securities as long term investments,
regardless of market conditions in an effort to satisfy our current obligations.
As these securities are often restricted, we are unable to liquidate these
securities until the restriction is removed. The Company recognizes revenue for
such common stock based on the fair value at the time common stock is granted
and for common stock purchase warrants based on the Black-Scholes valuation
model. Unrealized gains or losses on marketable securities held for sale and
unrealized gains or losses on marketable securities held for sale-related party
are recognized as an element of comprehensive income in our consolidated
statement of operations on a monthly basis based on changes in the fair value of
the security as quoted on national or inter-dealer stock exchanges. Once
liquidated, the realized gains or losses on the sale of marketable securities
held for sale and realized gains or losses on the sale of marketable securities
held for sale-related party are will be reflected in our net income for the
period in which the security was liquidated.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Realized gains or losses are recognized in the consolidated statement of
operations when the related common stock or common stock purchase warrants are
exercised and sold. China Direct Consulting recognized revenues amounting to
$6,421,081 and $483,407 for the nine months ended September 30, 2007 and 2006,
respectively, of which $5,375,155 and $274,725 were in connection with the
receipt of equity instruments for the nine months ended September 30, 2007 and
2006 respectively. Furthermore, of these amounts, Dragon Capital Group Corp., a
related party comprised $1,320,000 and $0 of our revenue in connection with the
receipt of equity instruments for the nine months ended September 30, 2007 and
2006, respectively.

SEPTEMBER 30, SEPTEMBER 30,
2007 2006
------------ ------------

Cash ............................................ $ 1,045,926 $ 63,682
Cash-related party .............................. - 145,000
------------ ------------
Total Cash ...................................... $ 1,045,926 $ 208,682

Marketable Securities ........................... $ 4,055,155 $ 274,725
Marketable Securities-related party ............. 1,320,000 -
------------ ------------
Total Marketable Securities ..................... $ 5,375,155 $ 274,725

------------ ------------
Total China Direct Consulting Revenues .......... $ 6,421,081 $ 483,407
============ ============

Additionally, the Company has deferred revenues of $959,361 in connection with
the receipt of securities at September 30, 2007. The fees due under the
contracts with our consulting clients are amortized over the term of the
agreement. Our consolidated balance sheet at September 30, 2007 appearing
elsewhere herein reflects both deferred revenues short term, which will be
recognized during the next twelve months, and deferred revenues-long term which
will be recognized beyond the twelve months period. China Direct Consulting
recorded $834,886 of deferred revenue-short term for the period ended September
30, 2007. This amount includes the following; securities of Sunwin International
Neutraceuticals, Inc. valued at $523,286, securities of Dragon International
Group Corp. valued at $311,600. Of the $959,361 of deferred revenues, at
September 30 2007, $124,475 will be realized during the year ended December 31,
2008 as the securities are recognized as revenues in accordance with the term of
the agreements.

Lang Chemical and Chang Magnesium record revenue when persuasive evidence of an
arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, products are
shipped, title passes, and collectibility is reasonably assured.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

STOCK BASED COMPENSATION

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
companies are required to measure the compensation costs of share based
compensation arrangements based on the grant date fair value and recognize the
costs in the financial statements over the period during which employees are
required to provide services. Share based compensation arrangements include
stock options, restricted share plans, performance based awards, share
appreciation rights and employee share purchase plans. In March 2005 the SEC
issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107 expresses views
of the staff regarding the interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides the staff's views regarding the valuation of
share based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
123R. Companies may elect to apply this statement either prospectively, or on a
modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods under SFAS 123. Effective January 1,
2006, the Company has fully adopted the provisions of SFAS No. 123R and related
interpretations as provided by SAB 107. As such, compensation cost is measured
on the date of grant as the excess of the current market price of the underlying
stock over the exercise price. Such compensation amounts, if any, are amortized
over the respective vesting periods of the option grant.

RECENT PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("FAS 157"). This Statement defines fair
value as used in numerous accounting pronouncements, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure related to the use of fair value measures in financial statements.
The Statement is to be effective for the Company's financial statements issued
in 2008; however, earlier application is encouraged. The Company is currently
evaluating the timing of adoption and the impact that adoption might have on its
financial position or results of operations.

In September 2006, the Staff of the SEC issued SAB No. 108: "Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements". SAB No. 108 provides guidance on the consideration
of the effects of prior year misstatements in quantifying current year
misstatements for the purpose of determining whether the current year's
financial statements are materially misstated. The SEC staff believes
registrants must quantify errors using both a balance sheet and income statement
approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. This Statement is effective for fiscal years ending
after November 15, 2006. The adoption of SAB No. 108 did not have a significant
impact on the company's consolidated financial statements.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

RECENT PRONOUNCEMENTS (CONTINUED)

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of FAS 115"
(Statement 159). Statement 159 allows entities to choose, at specified election
dates, to measure eligible financial assets and liabilities at fair value that
are not otherwise required to be measured at fair value. If a company elects the
fair value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. Statement
159 is effective for fiscal years beginning after November 15, 2007. We are
currently evaluating the potential impact of Statement 159 on our financial
statements. The Company is currently evaluating the timing of adoption and the
impact that adoption might have on its financial position or results of
operations.

NOTE 3 - INVENTORIES

At September 30, 2007, inventories consisted of the following:

Raw materials $2,592,574
Finished goods 1,800,790
----------
$4,393,364
==========

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

At September 30, 2007, property, plant and equipment consisted of the following:

Useful Life
-----------

Building ...................... 10-40 years $ 3,548,475
Manufacturing equipment ....... 10 years 2,249,705
Office equipment and furniture 3-5 years 209,145
Autos and trucks .............. 5 years 108,775
-----------

Total ......................... 6,116,100

Less: Accumulated Depreciation (406,353)
-----------
$ 5,709,747
===========

For the nine months ended September 30, 2007 and 2006, depreciation expense
amounted to $236,924 and $2,877, respectively.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 5 - PROPERTY USE RIGHTS

In connection with the acquisition of CDI Magnesium, the Company acquired
property use rights valued at $66,666, whereby the Company has rights to use
certain properties until February 12, 2010. The Company will begin amortizing
the property use rights when the magnesium refinery commences operations.

NOTE 6 - ACQUISITIONS AND DISPOSITIONS

As mentioned earlier, the acquisition of Big Tree closed February 12, 2007. The
operations of Jieyang Big Tree are located in China. Under the terms of the
agreement, we issued 53,654 shares of its common stock to acquire a 60% equity
interest in Big Tree. The 53,654 shares of its common stock were valued at
$268,272 based on the closing price of each share of $5.00 per share on January
30, 2007. The purchase price was determined based on arm's length negotiations
and no finder's fees or commissions were paid in connection with the
acquisition. The Company accounted for this acquisition using the purchase
method of accounting in accordance with SFAS No. 141. On August 24, 2007, CDI
China entered into a material definitive agreement to sell its 60% equity
interest in Big Tree to Sense in exchange for $400,000 cash consideration and
20,000,000 shares of Sense's common stock, of which 10,000,000 were to be issued
to us in four tranches of 2,500,000 shares on each of September 30, 2007,
December 31, 2007, March 31, 2008 and June 30, 2008 and we are entitled to
receive 10,000,000 shares of common stock if Big Tree meets certain revenue
thresholds beginning in fiscal 2008. The 20,000,000 shares of Sense common stock
were valued at $20,000 (Par value of $.001). The transaction closed on August
31, 2007. As a result, CDI China has no equity interest in Big Tree as of August
31, 2007. Currently, our wholly owned subsidiaries, China Direct Consulting and
CDI Shanghai Management are engaged as consultants to Sense. Neither Big Tree
nor Jieyang Big Tree had any operations for the period of February 12, 2007, the
date of acquisition, through August 31, 2007, the date of disposition.

The estimated purchase price and the preliminary adjustments to historical book
value of Big Tree as a result of the acquisition are as follows:

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 6 - ACQUISITIONS AND DISPOSITIONS (CONTINUED)

Purchase price ............................ $ 268,272
Net Assets Acquired (February 12, 2007):
Total Assets
Cash ...................................... $ 1,329
Prepaid expenses .......................... 3,464
Property and equipment, net ............... 3,100
Due from related parties .................. 438,421
---------
446,314
Total Liabilities ......................... -
Other comprehensive income ................ (806)
---------
Total net assets of Big Tree .............. 447,120
% acquired ................................ 60%
---------
Net Assets Acquired (February 12, 2007): 268,272
---------
Purchase price exceed net assets acquired . $ -
=========

The selling price, net of direct expenses (selling price at $420,000, net of
direct expenses of $50,100) and the preliminary adjustments to historical book
value of Big Tree as a result of the disposition are as follows:

Selling price, net of direct expenses ..... $ 369,900
Net Assets Disposed (August 31, 2007):
Total Assets
Cash ...................................... $ 11,500
Prepaid expenses .......................... 4,130
Due from related parties .................. 438,420
---------
454,050
Total Liabilities ......................... -
Other comprehensive income ................ 6,930
---------
Total net assets of Big Tree .............. 447,120
% acquired ................................ 60%
---------
Net Assets Disposed (August 31, 2007): 268,272
---------
Selling price exceeds net assets disposed of $ 101,628
=========

The selling price exceeded net assets disposed of $101,628 which was credited to
paid in capital.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 6 - ACQUISITIONS AND DISPOSITIONS (CONTINUED)

As mentioned earlier, on February 12, 2007 CDI China agreed to contribute
$511,458 to increase the registered capital of CDI Wanda to $1,002,859. As a
result CDI China holds a 51% equity interest in CDI Wanda. The Company's
previous sole shareholder, Dai Feng retained 49% equity interest in CDI Wanda,
and remained as an officer. In April 2007 CDI China contributed the $511,458 of
investment capital to CDI Wanda. The purchase price was determined based on
arm's length negotiations and no finder's fees or commissions were paid in
connection with the acquisition. Our consolidated statements of operations
include the operations of CDI Wanda for the period of February 12, 2007, the
date of acquisition, through September 30, 2007. In this section, we refer to
that period as the "CDI Wanda Reporting Period".

The estimated purchase price and the preliminary adjustments to historical book
value of CDI Wanda as a result of the acquisition are as follows:

Purchase price ............................ $ 511,458
Net Assets Acquired (February 12, 2007):
Total Assets:
Cash ...................................... $ 54,448
Accounts Receivable ....................... 3,028
Prepaid expenses and other receivable ..... 1,062,998
Inventory ................................. 663,898
Property and equipment, net ............... 983,936
----------
2,768,308
Total Liabilities:
Accounts Payable .......................... 14,265
Loans payable-short term .................. 64,429
Advance from customer ..................... 1,653,964
Other Payable ............................. 544,249
----------
2,276,907
Total net assets .......................... 491,401
Capital infusion .......................... 511,458
----------
Total net assets acquired ................. 1,002,859
% acquired ................................ 51%
----------
Net Assets Acquired (February 12, 2007): 511,458
----------

Net assets acquired exceed purchase price $ -
==========

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 6 - ACQUISITIONS AND DISPOSITIONS (CONTINUED)

As mentioned earlier, the acquisition of CDI Magnesium closed February 12, 2007.
The operations of CDI Magnesium are located in China. The Company acquired CDI
Magnesium as part of its ongoing desire to expand its interests in China. Under
the term of the agreement, the Company will issue common stock to acquire 60%
ownership interest in CDI Magnesium. The consideration is equal to 60% of the
shareholders' equity of CDI Magnesium of $166,666 as of February 12, 2007. The
Company agreed to issue 25,000 shares of its common stock, based on the fair
value of each share of $4.00 per share on February 6, 2007, representing
$100,000 or 60% equity interest of CDI Magnesium on the date of acquisition. Our
consolidated statements of operations include the operations of CDI Magnesium
for the period of February 12, 2007, the date of acquisition, through September
30, 2007. As of September 30, 2007, these shares are reflected as a liability in
connection with acquisition-related party. The purchase price was determined
based on arm's length negotiations and no finder's fees or commissions were paid
in connection with the acquisition. The Company accounted for this acquisition
using the purchase method of accounting in accordance with SFAS No. 141.

The estimated purchase price and the preliminary adjustments to historical book
value of CDI Magnesium as a result of the acquisition are as follows:

Purchase price ............................ $ 100,000

Net Assets Acquired (February 12, 2007):
Total Assets
Property use rights ....................... $ 66,666
Property and equipment, net ............... 100,000
----------
166,666
Total net assets Acquired ................. 166,666
----------
% acquired ................................ 60%
----------
Net Assets Acquired (February 12, 2007): 100,000
----------

Purchase price exceed net assets acquired $ -
==========

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 6 - ACQUISITIONS AND DISPOSITIONS (CONTINUED)

As mentioned earlier, on July 1, 2007 CDI China agreed to contribute $3,380,000
to increase the registered capital of Jinwei Magnesium to $6,500,000. As a
result CDI China holds a 52% equity interest in Jinwei Magnesium. Taiyuan YiWei
Magnesium Co., Ltd. and Shanxi Senrun Coal Chemistry Co., Ltd. retained 28% and
20% equity interest in Jinwei Magnesium, respectively. During the three months
ended September 30, 2007 CDI China contributed the $3,380,000 of investment
capital to Jinwei Magnesium. The purchase price was determined based on arm's
length negotiations and no finder's fees or commissions were paid in connection
with the acquisition. Neither Asia Magnesium nor Jinwei Magnesium had any
operations for the period of July 1, 2007, the date of acquisition, through
September 30, 2007.

The estimated purchase price and the preliminary adjustments to historical book
value of Jinwei Magnesium as a result of the acquisition are as follows:

Purchase price ............................ $3,380,000
Net Assets Acquired (July 1, 2007):
Total Assets:
Cash ...................................... $2,185,465
Other receivable .......................... 3,535
Prepaid expenses and other receivable ..... 1,194,279
Inventory ................................. 176,380
Property and equipment, net ............... 227,746
----------
3,787,405
Total Liabilities:
Accounts payable .......................... 77,226
Other payable ............................. 590,179
----------
667,405
Total net assets .......................... 3,120,000
Capital infusion .......................... 3,380,000
----------
Total net assets acquired ................. 6,500,000
% acquired ................................ 52%
----------
Net Assets Acquired (July 1, 2007): 3,380,000
----------

Net assets acquired exceed purchase price $ -
==========

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 7 - PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

The following unaudited pro forma combined financial information presented
below, gives effect to the acquisitions of Lang Chemical, Chang Magnesium and
CDI Wanda under the purchase method of accounting prescribed by FASB 141,
Business Combinations, as if it occurred as of the beginning of Fiscal 2007 and
the beginning of Fiscal 2006.

For the nine months ended September 30, 2007 (unaudited):

Nine Months Ended September 30, 2007
-----------------------------------------------------------------------------------------------------------
China Direct Lang Chang CDI CDI
Consulting Chemical Magnesium Wanda Magnesium Proforma
9/30/2007 9/30/2007 9/30/2007 9/30/2007 9/30/2007 Adjustment Total
------------ ------------ ------------ ----------- ----------- ------------ -------------

Sales ........ $ 6,421,081 $ 42,400,582 $ 63,871,109 $ 3,283,624 $ 66,799 $ - $ 116,043,195
Cost of Goods 987,783 41,529,911 58,842,201 2,318,467 66,827 - 103,745,189
------------ ------------ ------------ ----------- ----------- ------------ -------------
Gross Profit . 5,433,298 870,671 5,028,908 965,157 (28) 12,298,006
Operating
Expenses ..... 1,412,010 384,170 548,255 582,283 7,050 - 2,933,768
------------ ------------ ------------ ----------- ----------- ------------ -------------
Operating
Income (Loss) 4,021,288 486,501 4,480,653 382,874 (7,078) - 9,364,238
Other Income . 753,623 27,665 378,735 153,072 - - 1,313,095
------------ ------------ ------------ ----------- ----------- ------------ -------------
Income tax
expenses ..... (191,397) (135,281) (576,810) (487) - - (903,975)
------------ ------------ ------------ ----------- ----------- ------------ -------------
Net Income
(Loss) ....... 4,583,514 378,885 4,282,578 535,459 (7,078) (2,546,492) 7,226,866
============ ============ ============ =========== =========== ============ =============
Basic earning
per share .... $ 0.49 $ - $ - $ - $ - $ - $ 0.44
============ ============ ============ =========== =========== ============ =============
Diluted
earnings per
share ........ $ 0.44 $ - $ - $ - $ - $ - $ 0.40
============ ============ ============ =========== =========== ============ =============
Basic weighted
average common
shares ....... 14,431,869 - - - - - 16,339,868
============ ============ ============ =========== =========== ============ =============
Diluted
weighted
average common
shares ....... 16,106,921 - - - - - 18,241,143
============ ============ ============ =========== =========== ============ =============

The proforma adjustments reflect the minority interest of Lang Chemical, Chang
Magnesium, and CDI Wanda.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 7 - PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)

For the nine months ended September 30, 2006 (unaudited):

Nine Months Ended September 30, 2006
-------------------------------------------------------------------------------------------
China Direct Lang Chang CDI
Consulting Chemical Magnesium Wanda Proforma
9/30/2006 9/30/2006 9/30/2006 9/30/2006 Adjustment Total
------------ ------------ ------------ ----------- ------------ ------------

Sales ........ $ 483,407 $ 25,186,818 $ 15,957,667 $ 179,003 $ - $ 41,806,895
Cost of Goods 347,707 24,866,372 15,069,758 146,826 - 40,430,663
------------ ------------ ------------ ----------- ------------ ------------
Gross Profit . 135,700 320,446 887,909 32,177 - 1,376,232
Operating
Expenses ..... 1,109,173 297,214 314,339 29,944 - 1,750,670
------------ ------------ ------------ ----------- ------------ ------------
Operating
Income (Loss) (973,473) 23,232 573,570 2,233 - (374,438)
Other Income
(Loss) ....... 339,900 (7,791) (12,531) (7,716) - 311,862
------------ ------------ ------------ ----------- ------------ ------------
Income tax
expenses ..... 245,742 - (224,865) - - 20,877
------------ ------------ ------------ ----------- ------------ ------------
Net Income
(Loss) ....... (387,831) 15,441 336,174 (5,483) (172,291) (213,990)
============ ============ ============ =========== ============ ============
Basic earning
per share .... $ (0.04) $ - $ - $ - $ - $ (0.02)
============ ============ ============ =========== ============ ============
Diluted
earnings per
share ........ $ (0.04) $ - $ - $ - $ - $ (0.02)
============ ============ ============ =========== ============ ============
Basic weighted
average common
shares ....... 10,000,000 - - - - 10,000,000
============ ============ ============ =========== ============ ============
Diluted
weighted
average common
shares ....... 10,000,000 - - - - 10,000,000
============ ============ ============ =========== ============ ============

The proforma adjustments reflect the minority interest of Lang Chemical and
Chang Magnesium.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 8 - LOANS PAYABLE

Loans payable consisted of the following at September 30, 2007:

Loan due to China MingSheng Banking Co., Ltd., dated July 27,
2007, Due January 27, 2008. Non-interest bearing Secured by Lang
Chemical's restricted cash ...................................... $ 399,064

Loan due to Shanghai WuJin Chemical Co., Ltd., dated September
19, 2007, Due December 19, 2007. Non-interest bearing Secured by
Lang Chemical's restricted cash ................................. 538,736

Loan due to Agriculture Bank of China Shanghai Branch, dated
April 4, 2005, due in quarterly installments through January 4,
2008. Interest rate at 6.12% Secured by Lang Chemical's property 221,221

Loan due to Joyful Success Holdings Ltd., dated April 1, 2007,
Due March 31, 2008. Annual interest rate at 18% Secured by Chang
Magnesium's equipment ........................................... 2,000,000

Total ................................................. 3,159,021
Less: Current Portion ........................................... (3,159,021)
-----------

Loans payable, long-term-December 2008 .......................... $ -
===========

NOTE 9 - RELATED PARTY TRANSACTIONS

The Company currently leases approximately 2,450 square feet of office space for
its headquarters in the U.S. In August 2006, we were leasing approximately 1,171
square feet of office space. Prior to August 2006 we subleased this space from
two related parties, Dr. Wang, our CEO and Mr. Siegel, our President. The
Company incurred approximately $0 and $17,000 in rental expense pursuant to this
subleasing arrangement for the nine months ended September 30, 2007 and 2006,
respectively.

At September 30, 2007, Chang Magnesium prepaid Taiyuan YiWei Magnesium Industry
Co., Ltd., a related party, $1,160,051 for the future delivery of inventory. At
September 30, 2007, Lang Chemical prepaid NanTong LangYuan Chemical Co., Ltd., a
related party, $237,623 for the future delivery of inventory. Yuwei Huang, our
minority shareholder of Chang Magnesium, is the chairman of Taiyuan YiWei
Magnesium Industry Co., Ltd. NanTong LangYuan Chemical Co., Ltd. is owned by
Jingdong Chen, the CEO and shareholder of Lang Chemical. At September 30, 2007,
Jinwei Magnesium prepaid Taiyuan YiWei Magnesium Industry Co., Ltd., a related
party, $26,092 for the future delivery of inventory. At September 30, 2007,
Chang Magnesium had $3,779,516 of accounts payable-related party which
represents amounts due to Taiyuan YiWei Magnesium Industry Co., Ltd. for the
purchase of inventory. Taiyuan YiWei Magnesium Industry Co., Ltd. has 49% equity
interest in Chang Magnesium.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)

At September 30, 2007 our consolidated balance sheet includes accounts
receivable-related party of $140,777. Accounts receivable-related party
represents $140,777 in sales to Ruiming YiWei Magnesium Industry Co., Ltd., a
related party, for payment which has not yet been collected by Chang Magnesium.
Taiyuan YiWei Magnesium Industry Co., Ltd., which owns the minority interest of
Chang Magnesium, holds a 40% ownership interest in Ruiming YiWei Magnesium
Industry Co., Ltd.

At September 30, 2007, we held a liability in connection with acquisition-due to
related party of $100,000. This amount reflects the value of common stock due to
Wuliang Zhang, minority shareholder of CDI Magnesium, related to our acquisition
of a 60% interest in CDI Magnesium. CDI China acquired a 60% equity interest in
CDI Magnesium in exchange for 25,000 shares of our common stock valued at
$100,000. The fair value of the common stock is based on the value of the common
stock of $4.00 per share on February 6, 2007. The $100,000 worth of common stock
is reflected in Liabilities in connection with acquisitions-related party in our
consolidated balance sheet as of September 30, 2007.

NOTE 10 - STOCKHOLDERS' EQUITY

PREFERRED STOCK

China Direct has 10,000,000 shares of preferred stock, par value $.0001
authorized. At September 30, 2007 and 2006, there were no shares of preferred
stock issued and outstanding.

COMMON STOCK

For the nine months ended September 30, 2007 and 2006, amortization of stock
based compensation amounted to $310,107 and $0, respectively.

During the nine months ended September 30, 2007, the Company issued 53,654
shares of common stock in connection with the acquisition of Big Tree.

During the nine months ended September 30, 2007, the Company issued 37,500
shares of common stock to Alliance Advisors in connection with consulting
services provided to us.

We received proceeds pursuant to the reduction of the exercise price on our
Class B Warrants offered on July 6, 2007. On July 11, 2007 we concluded our
offer as the maximum was fully subscribed. Pursuant to the offer, we temporarily
reduced the exercise price of our Class B Warrants from $10.00 per share to
$3.00 per share. Holders purchased the maximum amount of 1,427,500 Class B
Warrants offered, resulting in gross proceeds to China Direct of $4,282,500 (net
proceeds of $4,130,378). The exercise price and all other terms of the remaining
2,000,000 Class B Warrants remain unchanged. The Company intends to use the
proceeds it received from this warrant exercise for capital commitments, general
working capital purposes as well as acquisitions.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)

COMMON STOCK (CONTINUED)

During the nine months ended September 30, 2007, the Company issued 2,191,460
shares of common stock in connection with the exercise of common stock options
for net proceeds of $3,466,650. Of these options, 50,000 were exercised at
$0.01, 1,000,000 were exercised at $0.30, 536,460 were exercised at $2.50 per
share, 400,000 were exercised at $2.00 per share, and 205,000 were exercised at
$5.00 per share.

During the three months ended September 30, 2007, holders of our Class A Common
Stock Purchase Warrant holders exercised, in the aggregate, 1,827,750 Class A
Common Stock Purchase Warrants with an exercise price of $4.00 per share. As a
result, China Direct has received $7,311,000 in proceeds from the exercise of
these warrants. This warrant exercise transaction was conducted in reliance on
section 4(2) of Securities Act of 1933, as amended. China Direct intends to
utilize these proceeds for general working capital purposes and acquisitions.

STOCK OPTION PLANS

During Fiscal 2006 the Company adopted the 2006 Stock Compensation Plan (the
"2006 Plan") under which the Company has reserved and authorized 2,000,000
shares of its common stock. Under the 2006 Plan, the purchase price for
incentive stock options must be at least 100% of the fair market value of our
common stock on the date the option is granted, except that the purchase price
of incentive options must be at least 110% of the fair market value in the case
of an incentive option granted to a person who is a "10% stockholder". A "10%
stockholder" is a person who owns (within the meaning of Section 422(b)(6) of
the Internal Revenue Code of 1986) at the time the incentive option is granted,
shares possessing more than 10% of the total combined voting power of all
classes of our outstanding shares. The purchase price for shares subject to a
non-qualified option must be at least the par value of our common stock.

Under the 2006 Plan, all incentive stock options shall expire on or before the
10th anniversary of the date the option is granted, except under limited
circumstances. In the case of incentive stock options granted to an eligible
employee owning more than 10% of the Company's common stock, these options will
expire no later than five years after the date of the grant. Non-qualified
options shall expire 10 years and one day from the date of grant unless
otherwise provided under the terms of the option grant.

Shares covered by plan options which terminate unexercised will again become
available for grant as additional options, without decreasing the maximum number
of shares issuable under the 2006 Stock Compensation Plan, although such shares
may also be used by us for other purposes.

For the year ended December 31, 2006, the Company granted 3,588,000 options to
consultants and employees with vesting periods not exceeding one year and with
exercise prices ranging from $0.01 to $10.00.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTION PLAN (CONTINUED)

For the nine months ended September 30, 2007, the Company granted an aggregate
99,000 options to compensate independent board members and employees. We granted
75,000 options to our independent board members which vest nine months from date
of grant and have an exercise price of $3.00 per share. The remaining 24,000
options granted to our employees have a one year vesting period and exercise
price of $5.00.

For the nine months ended September 30, 2007, option expenses of $181,227 were
recognized as sales and general and administrative expenses. These expenses were
related to options granted as compensation to employees, consultants and
directors, each with a 5 year term. Options granted to employees vest in 12
months. Options granted to consultants vest immediately. Options granted to
directors vest in 9 months. For the nine months ended September 30, 2007, the
amortization of deferred compensation expenses-options amounted to $33,000.

The following table sets forth the Company's stock option activity during the
nine months ended September 30, 2007:

Shares underlying Weighted average
options exercise price
----------------- ----------------

Outstanding at December 31, 2006 .... 9,843,980 $3.27
Granted .......................... 99,000 3.48
Exercised ........................ (2,191,460) 1.51
Expired or cancelled ............. - -
---------- -----
Outstanding at September 30, 2007 ... 7,751,520 4.37
---------- -----
Exercisable at September 30, 2007 ... 4,894,520 $6.95
---------- -----

Weighted-average exercise price of
options granted during the period ... $3.48
=====

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTION PLAN (CONTINUED)

The weighted average remaining contractual life and weighted average exercise
price of options outstanding at September 30, 2007, for selected exercise price
ranges, is as follows:

Options outstanding:

Weighted
Weighted average
average Weighted exercise
Number of remaining average price of
exercise options contractual exercise Options options
price outstanding life (Years) price Exercisable exercisable
-------- ----------- ------------ -------- ----------- -----------

$0.01 1,050,000 2.40 $0.01 1,050,000 $0.01
2.25 400 7.06 2.25 400 2.25
2.50 1,701,540 3.00 2.50 1,693,540 2.50
3.00 75,000 3.00 3.00 - -
5.00 1,414,000 4.00 5.00 1,390,000 5.00
7.50 1,375,000 5.00 7.50 - -
10.00 1,375,000 6.00 10.00 - -
15.00 500 0.69 15.00 500 15.00
30.00 760,000 5.00 30.00 760,000 30.00
56.25 80 7.18 56.25 80 56.25
----------- ------------ -------- ----------- -----------
7,751,520 4.37 7.54 4,894,520 $6.95
----------- ------------ -------- ----------- -----------

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)

COMMON STOCK PURCHASE WARRANTS

For the nine months ended September 30, 2007, the amortization of deferred
compensation expenses related to common stock purchase warrants amounted to
$95,880. These common stock purchase warrants granted to consultants are
exercisable immediately.

A summary of the status of the Company's outstanding common stock purchase
warrants granted as of September 30, 2007 and changes during the period is as
follows:

Shares underlying Weighted average
warrants exercise price
----------------- ----------------

Outstanding at December 31, 2005 ...... - $ -
Granted ............................ 7,361,875 6.78
Warrants assumed with reverse merger
transaction on August 16, 2006 .... 180,000 11.25
Exercised .......................... - -
Expired or cancelled ............... - -
---------- ------
Outstanding at December 31, 2006 ...... 7,541,875 $ 6.89
Granted ............................ - -
Exercised .......................... (3,255,250) 3.56
Expired or cancelled ............... - -
---------- ------
Outstanding at September 30, 2007 ..... 4,286,625 $ 7.09
---------- ------
Exercisable at September 30, 2007 ..... 4,286,625 $ 7.09
---------- ------

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)

COMMON STOCK WARRANTS (CONTINUED)

The following information applies to all warrants outstanding at September 30,
2007.

Warrants Warrants
Outstanding Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
price Shares Life (Years) Price Shares Price
-------- ----------- ------------ -------- ----------- --------

$2.50 50,000 4.17 $ 2.50 50,000 $ 2.50
$4.00 2,056,625 4.01 $ 4.00 2.056,625 $ 4.00
$7.50 90,000 0.64 $ 7.50 90,000 $ 7.50
$10.00 2,000,000 3.99 $10.00 2,000,000 $10.00
$15.00 90,000 0.64 $15.00 90,000 $15.00
----------- ------------ -----------
4,286,625 3.86 4,286,625
----------- ------------ -----------

NOTE 11 - MARKETABLE SECURITIES

China Direct Consulting receives securities which include common stock purchase
warrants and common stock from clients as part of its compensation for services.
The Company categorizes securities with restriction as investment in marketable
securities held for sale and investment in marketable securities held for
sale-related party. Unrealized gains or losses on marketable securities held for
sale and unrealized gains or losses on marketable securities held for
sale-related party are recognized as an element of comprehensive income in our
consolidated statement of operations on a monthly basis based on changes in the
fair value of the security as quoted on national or inter-dealer stock
exchanges. Once liquidated, the realized gains or losses on the sale of
marketable securities held for sale and realized gains or losses on the sale of
marketable securities held for sale-related party will be reflected in our net
income for the period in which the security was liquidated.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 11 - MARKETABLE SECURITIES (CONTINUED)

Their value at the date received and estimated fair market value at September
30, 2007 and 2006 are as follows:

For the nine months ended September 30, 2007

January 1, Amount Reclassifying Unrealized September 30,
2007 received/sold from/to trading gain 2007
----------- ------------- --------------- ----------- -------------

Investment in trading securities $ 2,166,603 $ - $(2,166,603) $ - $ -

Investment in trading
securities-related party ....... 311,611 (47,611) (264,000) - -
----------- ----------- ----------- ----------- -----------
Total Investment in trading
securities ..................... $ 2,478,214 $ (47,611) $(2,430,603) $ - $ -

Investment in marketable
securities held for sale ....... $ - $ 2,129,980 $ 2,166,603 $(1,480,105) $ 2,816,478

Investment in marketable
securities held for sale-related
party .......................... $ 1,325,400 $ 1,131,227 $ 264,000 $(1,234,038) $ 1,486,589

Total Investment in marketable
securities held for sale ....... $ 1,325,400 $ 3,261,207 $ 2,430,603 $(2,714,143) $ 4,303,067

For the nine months ended September 30, 2006

January 1, Amount Unrealized September 30,
2006 received/sold gain 2006
----------- ------------- ----------- -------------

Investment in trading securities $ 152,800 $ 141,921 $ 234,148 $ 528,869

Investment in marketable
securities held for sale-related
party .......................... $ 810,000 $ (48,600) $ 733,200 $ 1,494,600

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 12 - SEGMENT INFORMATION

The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. For the nine
months ended September 30, 2007, the Company operated in four reportable
business segments - (1) Chemical Segment: Shanghai Lang Chemical Co., Ltd.
("Lang Chemical"); (2) Magnesium Segment: Chang Magnesium Co., Ltd. ("Chang
Magnesium"), Taiyuan Changxin YiWei Trading Co., Ltd. ("Changxin Trading"), Asia
Magnesium Corp. ("Asia Magnesium"), Jinwei Magnesium ("Jinwei Magnesium"), CDI
Magnesium Co., Ltd. ("CDI Magnesium"); (3) Energy Segment: CDI Wanda New Energy
Co., Ltd. ("CDI Wanda"); and (4) Consulting Segment: China Direct Investments,
Inc. ("China Direct Consulting"). The Company's reportable segments are
strategic business units that offer different products and services. Each
business unit is managed separately based on the fundamental differences in
their operations. Condensed information with respect to these reportable for the
nine months ended September 30, 2007 and 2006 are as follows.

For the nine months ended September 30, 2007 (Unaudited):

(2) (4)
(1) Magnesium Segment China
Lang ----------------------------------------------------------- (3) Direct
Chemical Total CDI Wanda Consulting
(Chemical Chang Asia Jinwei CDI Magnesium (Energy (Consulting
Segment) Magnesium Magnesium Magnesium Magnesium Segment Segment) Segment) Consolidated
---------- ---------- --------- --------- --------- ---------- --------- ----------- ------------

Revenues . 42,400,582 63,730,332 - - 66,799 63,797,131 3,209,364 5,101,081 114,508,158

Revenues-
related
party .... - 140,777 - - - 140,777 - 1,320,000 1,460,777

Revenues . 42,400,582 63,871,109 - - 66,799 63,937,908 3,209,364 6,421,081 115,968,935

Cost of
Revenues . 41,529,911 58,842,201 - - 66,827 58,909,028 2,569,416 987,783 103,996,138

Interest
income
(expense) (1,670) 25,338 - - - 25,338 (3,232) 94,418 114,854

Net (loss)
income ... 240,750 2,184,115 - - (7,078) 2,177,037 117,887 4,583,514 7,119,188

Segment
Assets ... 8,577,879 19,258,853 - 3,530,723 71,179 22,860,755 1,394,923 25,085,618 57,919,175

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 12 - SEGMENT INFORMATION (CONTINUED)

For the nine months ended September 30, 2006:

The Company had one segment, the consulting segment, for the nine months ended
September 30, 2006. Accordingly a table is not presented for segment information
for the nine months ended September 30, 2006.

NOTE 13 - FOREIGN OPERATIONS

For the nine months ended September 30, 2007, the Company derived part of its
revenues from subsidiaries located in the People's Republic of China.
Identifiable assets by geographic areas as of September 30, 2007 are as follows:

Identifiable Assets at
September 30, 2007
----------------------
United States .......... $16,973,669
China .................. 40,945,506
-----------

Total .................. $57,919,175
===========

For the nine months ended September 30, 2007:

United People's Republic
States of China
----------- -----------------
Revenues ............... $ 5,080,735 $109,427,423
Revenues - related party $ 1,320,000 $ 140,777
Identifiable assets .... $16,973,669 $ 40,945,506

For the nine months ended September 30, 2006:

For the nine months ended September 30, 2006, all revenues and identifiable
assets were located in the United States; accordingly a table is not presented
for foreign operations for the nine months ended September 30, 2006.

NOTE 14 - OPERATING RISK

(a) Country risk

The majority of the Company's revenues will be derived from the sale of
magnesium and chemical products in the Peoples Republic of China ("PRC"). A
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 14 - OPERATING RISK (CONTINUED)

(b) Products risk

In addition to competing with other companies within the PRC, the Company could
have to compete with larger U.S. companies who have greater funds available for
expansion, marketing, research and development and the ability to attract more
qualified personnel if broader access occurs into the PRC market. If U.S.
companies continue to gain greater access to the PRC markets, they may be able
to offer products at a lower price. There can be no assurance that the Company
will remain competitive should this occur.

The Company cannot guarantee that the current exchange rate will remain steady.
Therefore, there is a risk the Company could post higher or lower profit
depending on the exchange rate of the Chinese Renminbi. The exchange rate could
fluctuate depending on changes in the political and economic environments
without notice.

(d) Political risk

Currently, the PRC is in a period of growth and amenable to business development
and foreign investment in the PRC. Additionally the PRC currently allows for
Chinese corporations in certain industries to be owned by a United States
corporation. If the laws or regulations are changed by the PRC government, the
Company's ability to operate its PRC subsidiaries could be affected.

(e) Key personnel risk

The Company's future success depends on the continued services of executive
management in China and the United States. The loss of any of their services
would be detrimental to the Company and could have an adverse effect on business
development. The Company maintains key-man insurance on the lives of the
executive management. Future success is also dependent on the ability to
identify, hire, train and retain other qualified managerial and other employees.
Competition for these individuals is intense and increasing.

(f) Performance of subsidiaries risk

The majority of the Company's revenues will be derived from the operations of
our majority owned Chinese subsidiaries. Economic, governmental, political,
industrial and other factors outside of the Company's control could affect each
of the subsidiaries. If the subsidiaries do not succeed, the value of the assets
and the price of our common stock could decline.

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007

NOTE 15 - SUBSEQUENT EVENTS

On September 28, 2007, CDI China entered into an agreement to contribute
$6,750,000 to increase the registered capital of Shanxi Jinyang Metal Chemical
Co., Ltd. ("Jinyang Metal) to $13,230,000. Jinyang Group and Runlian will
contribute assets valued at $6,480,000 to Jinyang Metal. As a result, CDI China
holds a 51% equity interest in Jinyang Metal. The transaction closed October 1,
2007. Effective November 1, 2007, Jinyang Metal changed its name to CDI Pan Asia
Magnesium Co., Ltd. Jinyang Group is the minority owner of CDI Magnesium. CDI
China acquired its majority interest in CDI Magnesium from Jinyang Group in
February 2007.

On October 15, 2007, CDI Shanghai Management's majority owned subsidiary CDI
Jingkun Zinc Industry Co., Ltd., a Chinese limited liability company ("CDI
Jingkun Zinc") was formed with total registered capital of $266,667 (RMB 2
million). CDI Shanghai Management contributed $253,671 (RMB 1.9 million) and Ms.
Yixin Wang, the General Manager of CDI Jingkun Zinc, contributed $13,351(RMB
100,000) representing 95% and 5% equity interests, respectively. CDI Jingkun
Zinc will operate as a distributor of zinc concentrate within China.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis of our consolidated financial
condition and results of operations for the nine months ended September 30, 2007
and 2006 should be read in conjunction with the unaudited consolidated financial
statements, including footnotes, and other information presented elsewhere in
this Form 10-QSB. The year ended December 31, 2006 is referred to as "Fiscal
2006", the year ended December 31, 2007 is referred to as "Fiscal 2007".

OVERVIEW

We are a U.S. company doing business in China through our subsidiaries.
For operational purposes, we organize our business into two divisions:

o our management division acquires controlling stakes in Chinese
companies and then provides capital and active management to enable
these companies to thrive as our subsidiaries in their respective
industries, and

o our consulting division which assists companies in China and the
U.S. in establishing and maintaining a presence in the U.S. capital
markets.

For accounting purposes, however, we report our operations in four
segments, including magnesium, chemical, consulting (which includes our parent
company operations) and energy.

Our consulting division was formed in January 2005 and in August 2006
it completed a reverse merger transaction. Thereafter, we began implementing our
management division's business model. This division seeks to acquire a
controlling interest in entities operating within China which are engaged in
businesses that we believe will benefit from the continuing growth of the
Chinese economy. Examples of industries in which we are focusing our efforts
include manufacturing, technology, healthcare, packaging, natural resources, as
well as companies involved in importing and exporting activities. We have
initially targeted medium sized entities, generally including companies with
less than $100 million in annual revenue, which we believe offer the greatest
opportunities for growth. We adhere to PRC rules and regulations governing
foreign investment and obtain all relevant and necessary local and/or national
governmental approvals. Our predominant method of acquiring controlling
interests of Chinese entities is by infusing cash consideration to increase a
target's registered capital. This infusion of capital into a Chinese domestic
company serves to create a new foreign invested entity ("FIE") in which our
equity ownership percentage is represented by our percentage of contribution to
the new total registered capital amount

The following chart provides a summary of our significant acquisitions,
new company formations and divestitures since we began implementing our current
business model.

DATE EVENT
---- -----

October 2006 Acquired a majority of Lang Chemical which sells and
distributes industrial grade synthetic chemicals.

November 2006 Formed CDI Shanghai Management which serves as the management
company for our PRC-based subsidiaries, providing operational
support and infrastructure as well as supervising and
monitoring the operations of those subsidiaries. CDI Shanghai
Management also markets the services of our consulting
division in China.

December 2006 Acquired a majority of Chang Magnesium which processes and
distributes various forms of magnesium. Chang Magnesium's
subsidiary Changxin Trading is an exporter of magnesium
products.

November 2006 Formed Big Tree.

February 2007 Big Tree acquired Jieyang Big Tree, a newly formed entity
created to distribute toys and related entertainment products
and acts as an agent of third party OEM manufacturers of toys
and related entertainment products.

February 2007 Formed Excel Rise an exporter of magnesium products to Europe,
Australia and Canada.

February 2007 Formed Capital One to serve as a marketing arm in the greater
Asia region outside of China.

February2007 Acquired a majority of CDI Magnesium, a company formed to
manage and operate a newly constructed magnesium alloy plant
in Taiyuan, China.

February 2007 Acquired a majority interest in CDI Wanda, a company engaged
in the energy and recycling industry.

July 2007 Acquired Asia Magnesium. This transaction resulted in our
acquisition of Asia Magnesium's right to invest up to
$3,380,000 to acquire a 52% interest in Jinwei Magnesium, a
newly formed company which will process and distribute
magnesium.

August 2007 Sold our interest in Big Tree.

October 2007 Acquired a majority interest in CDI Pan Asia, which will
process and distribute magnesium. CDI China will contribute
$6,750,000 to increase the registered capital to $13,230,000.

October 2007 Formed CDI Jingkun Zinc to operate as a distributor of Zinc
concentrate within China. CDI Shanghai Management contributed
$253,671 and the General Manager of CDI Jingkun Zinc
contributed $13,351 representing 95% and 5% equity interests,
respectively.

During the three months ended September 30, 2007 we entered into
agreements to expand our magnesium operations and we continue our efforts to
identify additional opportunities within the basic materials industry within
China. Currently our production capacity is approximately 26,000 tons annually
and we estimate that our total production capacity should reach approximately
43,000 tons annually by the end of July 2008. Jinwei Magnesium is constructing
an additional magnesium facility with an estimated production capacity of 6,000
tons annually which is presently scheduled to be operational by April 2008 and
CDI Pan Asia is completing the construction of two additional facilities, each
with a projected 6,000 tons of annual capacity, both of which are scheduled to
be fully operational in March 2008.

Magnesium can be applied in a variety of markets and applications, due
to the physical and mechanical properties of the element and its alloys. Global
production of magnesium is estimated to be approximately 600,000 tons per year
and industry sources indicate the annual production and demand should continue
to increase annually. We have made significant investments to gain market share
within the magnesium industry and expect to continue to pursue additional
opportunities within the magnesium industry since we believe that an opportunity
to benefit from this anticipated growth exists.

Since our acquisitions of Lang Chemical and Chang Magnesium during the
fourth quarter of Fiscal 2006 and CDI Wanda, CDI Magnesium, and Jinwei Magnesium
through September 30, 2007, we have provided those companies, in the aggregate,
with approximately $7,200,000 of working capital. As described later in this
section, we have commitments to additionally fund approximately $7,000,000 to
our subsidiaries over the next 12 months. This capital will be used to expand
their operations and increase their margins by, among other things, enabling
them to purchase raw materials on more favorable terms than were previously
available to them. We continue to expand our professional staff at China Direct
Consulting as well as CDI Shanghai Management to support growth in these
divisions. We believe we can bring Western-style business acumen and
efficiencies to each of our subsidiaries, which we expect will continue to
reduce operating expenses and increase our profits from these operations.

During the balance of Fiscal 2007 and beyond we face a number of
challenges in growing our business, such as the continuing integration of our
PRC-based subsidiaries. While we have raised approximately $16,000,000 in
capital during Fiscal 2007, we may need to secure additional working capital to
provide funds for our subsidiaries to enable each to grow its business and
operations. We continue to work with the management of our recent acquisitions
to identify strategies to maximize the potential of these subsidiaries. These
strategies may take the form of an investment for a new factory, increase in
manufacturing capacity, upgrades of existing facilities, marketing, hiring and
training of additional workforce personnel, or acquiring assets complimentary to
these companies. As a result of the rapid growth of our company since the third
quarter of Fiscal 2006, we also face challenges related to hiring and training
the necessary personnel to manage these operations.

Even though we are a U.S. company, many of our subsidiaries and their
operations are located in the PRC. As such we face certain risks associated with
doing business in that country. These risks include risks associated with the
ongoing transition from state business ownership to privatization, operating in
a cash-based economy, dealing with often vague and inconsistent government
policies, unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, challenges in staffing and managing operations
in a communist country, differences in technology standards, employment laws and
business practices, longer payment cycles and problems in collecting accounts
receivable, changes in currency exchange rates and currency exchange controls.
We are unable to control these risks which could result in significant declines
in our revenues and adversely affect our ability to continue to grow our
business.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2007 AS COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2006

TOTAL REVENUES, GROSS PROFIT AND TOTAL OPERATING EXPENSES

Consolidated

A direct comparison of our consolidated results of operations for the
nine months ended September 30, 2007 to the nine months ended September 30, 2006
may not be meaningful as a result of the aforedescribed acquisitions beginning
in the fourth quarter of Fiscal 2006 which have transformed our company.
Following is a table which provides certain key data which is presented on a
consolidated basis:

NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2007 2006
---- ----
(unaudited)
Cost of revenues as a % of total revenues ....... 89.7% 71.9%
Gross profit as a % of total revenues ........... 10.3% 28.1%
Total operating expenses as a % of total revenues 2.4% 229%

Our revenues for the nine months ended September 30, 2007 were
$115,968,935 as compared to $483,407 for the comparable nine month period in
Fiscal 2006. Approximately 55.1% of our total revenues for the nine months ended
September 30, 2007, were attributable to the magnesium division, approximately
36.6% were attributable to the chemical division, approximately 5.5% were
attributable to the consulting division and approximately 2.8% were attributable
to the energy division. During the nine months ended September 30, 2006 all of
our revenues were from our consulting division.

Our cost of revenues as a percentage of total revenues was
approximately 89.7% for the nine months ended September 30, 2007 as compared to
approximately 71.9% for the nine months ended September 30, 2006. As a result,
our gross profit as a percentage of total revenues was approximately 10.3% for
the nine months ended September 30, 2007 as compared to approximately 28.1% in
the comparable period in Fiscal 2006. This increase in our cost of revenues and
corresponding decrease in gross profit as a percentage of revenues is directly
attributable to the majority of our revenue being attributable to the operations
of the magnesium, chemical and energy divisions during the Fiscal 2007 period as
opposed to all of our revenue during the nine months ended September 30, 2006
being attributable to our consulting division which typically is a higher margin
segment.

Our total operating expenses increased approximately 153% for the nine
months ended September 30, 2007 as compared to the nine months ended September
30, 2006. This increase in total operating expenses is attributable to increased
operational expenses at all of our operating segments as a result of the growth
of our company.

By Segment

The following table provides unaudited comparative information by
reporting segment:

NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2007 2006 2007 2006 2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
MAGNESIUM CHEMICAL CONSULTING ENERGY CONSOLIDATED
--------- -------- ---------- ------ ------------

Revenues ....... $63,937,908 $ - $42,400,582 $ - $6,421,081 $ 483,407 $3,209,364 $ - $115,968,935 $ 483,407
Cost of revenues 58,909,028 - 41,529,911 - 987,783 347,707 2,569,416 - 103,996,138 347,707
----------- ---- ----------- ---- ---------- ----------- ---------- ---- ------------ -----------
Gross profit ... 5,028,880 - 870,671 - 5,433,298 135,700 639,948 - 11,972,797 135,700

Total operating
expenses ....... 555,305 - 384,170 - 1,412,010 1,109,173 448,954 - 2,800,439 1,109,173
----------- ---- ----------- ---- ---------- ----------- ---------- ---- ------------ -----------
Operating
(loss) income .. 4,473,575 - 486,501 - 4,021,288 (973,473) 190,994 - 9,172,358 (973,473)

MAGNESIUM DIVISION

Revenues from the magnesium division represented approximately 55.1% of
our total revenues for the nine months ended September 30, 2007. During the nine
months ended September 30, 2007 the results for our magnesium division includes
the operations of:

o Chang Magnesium, which generates revenues from the processing and
distribution of various forms of magnesium including magnesium
powder, magnesium scrap, magnesium alloy and various grades of
ordinary magnesium slabs, and

o Chang Magnesium's wholly owned subsidiaries, Changxin Trading,
formed in 2003, and Excel Rise, formed in February 2007, both of
which are exporters of magnesium products.

We acquired our interest in Chang Magnesium during the fourth quarter
of Fiscal 2006 which was our first subsidiary involved in the processing,
distribution and export of magnesium. Accordingly, we did not have any
operations in our magnesium division during the nine months ended September 30,
2006. As set forth in Note 7 Pro Forma Financial Information (unaudited) to the
consolidated financial statements appearing elsewhere in this quarterly report,
for the nine months ended September 30, 2006 Chang Magnesium, whose operations
for that period were limited to solely export sales generated by Changxin
Trading as the refinery had yet to commence operations, had total revenues of
$15,957,667.

The increase in revenues from the nine months ended September 30, 2006
as compared to the nine months ended September 30, 2007 is attributable to the
commencement of operations of the refinery as well as the addition of Excel Rise
and CDI Magnesium. We anticipate that revenues in the magnesium division will
continue to increase during the balance of Fiscal 2007 from these operations as
well as new sales related to Jinwei Magnesium as discussed earlier in this
section.

The magnesium division's cost of revenues includes the cost of goods it
sells. Approximately 45% of the magnesium sold within the three months ended
September 30, 2007 was purchased from third party magnesium refineries. As
disclosed, recently we have acquired a 52% equity interest in Jinwei Magnesium
and a 51% equity interest in CDI Pan Asia. As a result, our manufacturing
capacity should increase during the remainder of Fiscal 2007 with our total
production capacity approaching 43,000 tons annually in March 2008. In the event
we sell all of our capacity we will continue to purchase from third parties to
satisfy demand. For the nine months ended September 30, 2007 the cost of
revenues as a percentage of total revenues was approximately 92.1%, as compared
to approximately 94.4% for the nine months ended September 30, 2006 as set forth
in Note 7 Pro Forma Financial Information (unaudited) to the consolidated
financial statements appearing elsewhere in this quarterly report. This
reduction in cost of revenues as a percentage of revenues is attributable to
reduced cost of goods on inventory levels maintained at December 31, 2006 which
were purchased at a time when market prices of magnesium had decreased.

We anticipate the magnesium division will continue to report gross
profit margins ranging from 6% to 8% during the balance of Fiscal 2007.
Furthermore we anticipate gross margins at Chang Magnesium could improve should
it be able to increase the revenues contributed from the manufacturing of
magnesium in relation to the revenues generated by Changxin Trading. In general
producers can earn a higher gross profit on the manufacturing of magnesium as
opposed to the trading of magnesium. If we continue to acquire additional
magnesium producing operations, and increase revenues related to the
manufacturing of magnesium, we estimate gross profit could improve.

Operating expenses for the magnesium division were approximately 0.87%
of its total revenues, and consisted of selling expenses of $407,041 and general
and administrative expenses of $148,264. As set forth in Note 7 Pro Forma
Financial Information (unaudited) to the consolidated financial statements
appearing elsewhere in this quarterly report, for the nine months ended
September 30, 2006 Chang Magnesium had total operating expenses of $314,339, or
approximately 1.9% of its total revenues, and included selling expenses of
$233,164 and general and administrative expenses of $81,175. During the nine
months ended September 30, 2006 shipping expenses were included as a component
of selling expenses while for nine months ended September 30, 2007 Chang
Magnesium passed the shipping expenses along to its customers resulting in a
decrease in selling expenses. This decrease was offset by an expected increase
in general and administrative expenses as the magnesium division expanded its
operations.

CHEMICAL

Revenues from our chemical division, which includes the operations of
Lang Chemical, represented approximately 37% of our total revenues for the nine
months ended September 30, 2007. Lang Chemical specializes in the sale and
distribution of industrial grade synthetic chemicals, maintaining a relationship
with both the supplier and the customer, and managing the logistics of the
distribution channel. Lang Chemical acts as a third party agent in the sale of
synthetic chemicals from the supplier to the customer, as well as a distributor
of synthetic chemicals to customers. The majority of Lang Chemical's customers
are industrial manufacturing facilities and trading companies. We acquired our
51% equity interest in Lang Chemical during the fourth quarter of Fiscal 2006
and, accordingly, did not have any operations in our Lang Chemical division
during the nine months ended September 30, 2006. As set forth in Note 7 Pro
Forma Financial Information (unaudited) to the consolidated financial statements
appearing elsewhere in this quarterly report, for the nine months ended
September 30, 2006 Lang Chemical had total revenues of $25,186,818. The increase
in revenues from the nine months ended September 30, 2006 as compared to the
nine months ended September 30, 2007 is primarily attributable to the expansion
of products offered by Lang Chemical. We anticipate that the chemical division's
revenues will continue to increase in the remaining periods of Fiscal 2007 since
Lang Chemical has sufficient working capital to operate more efficiently.

Cost of revenues in the chemical division includes the cost of goods it
sells and it generates revenues through a commission ranging from 3% to 5% of
the sale, with the amount of commission varying depending on the product sold.
For the nine months ended September 30, 2007, cost of revenues were
approximately 97.9% of its total revenues as compared to approximately 98.7%
during the nine months ended September 30, 2006 as set forth in Note 7 Pro Forma
Financial Information (unaudited) to the consolidated financial statements
appearing elsewhere in this quarterly report. We believe operating margins at
Lang Chemical could improve if it were to manufacture the products it sells.
Therefore, although we are not contractually committed to investing the
additional working capital as set forth above, our capital commitments for
Fiscal 2007 and beyond include approximately $3,000,000 to construct a
manufacturing facility for our chemical division. Until such time, if ever, that
this facility is completed and operational, we anticipate gross margins in our
chemical segment will remain consistent with those historically reported.

Operating expenses include selling expenses as well as general and
administrative expenses. Operating expenses as a percentage of the division's
total revenues were approximately 0.9% for the nine months ended September 30,
2007 as compared to approximately 1.2% for the nine months ended September 30,
2006. Included in operating expenses for the nine months ended September 30,
2007 were approximately $336,731 of selling expenses and approximately $150,932
of general and administrative expenses. Actual general and administrative
expenses during the nine months ended September 30, 2007 were reduced by a bad
debt recovery of $103,493; without giving effect to this one time gain in the
nine months ended September 30, 2007 the division's operating expenses as a
percentage of its total revenues would have been 1.2%. We anticipate that the
operating expenses at this division for the balance of Fiscal 2007 will be
consistent with those historically reported.

CONSULTING

Revenues from our consulting division represented approximately 5.5% of
our total revenues for the nine months ended September 30, 2007. Our consulting
division includes the operations of China Direct Consulting and CDI Shanghai
Management. China Direct Consulting and its wholly foreign owned entity CDI
Shanghai Management generate revenues by providing consulting services to its
client companies. The consulting fees vary based upon the scope of the services
to be rendered. Historically, a significant portion of the fees earned by the
consulting division have been paid in shares of its client's securities which
are valued at fair market value for the purposes of our revenue recognition.
Depending upon the particular client, we may receive either unregistered
securities or a client may issue securities directly to our employees. Our
policy is to sell the securities we receive as compensation when permitted
rather than hold these securities as long term investments, regardless of market
conditions, in an effort to satisfy our current obligations.

Primarily all of the securities the consulting division receives are
from small public companies and are typically restricted as to resale. The
consulting division recognizes revenue from such securities based on the fair
value at the time common stock is granted and for stock purchase warrants based
on the Black-Scholes valuation model. The fees due under the contracts with our
consulting clients are amortized over the term of the agreement. Our
consolidated balance sheet at September 30, 2007 appearing elsewhere herein
reflects both deferred revenues short term, which will be recognized by us
during the next 12 months, and deferred revenues - long term which will be
recognized beyond the 12 month period. In instances where the securities
accepted for payment are issued directly to employees, we recognize the revenue
represented by those securities consistent with our revenue recognition policy
and the net value of those securities, after deduction of any costs of those
revenues, are then deemed compensation paid to the particular employee.

The consulting division's revenues for the nine months ended September
30, 2007 increased approximately 1,228%, as compared to the nine months ended
September 30, 2006. This increase is primarily attributable to revenues from new
consulting contracts and additional services rendered to existing clients.
Included in revenues for September 30, 2007 are cash revenues of $1,045,926 and
revenues attributable to the value of securities received as compensation for
services of $5,375,155. Of this amount, $5,101,081 is related to compensation
for services from third party clients and $1,320,000 is related to the value of
securities received by a client company which is a related party. While we
recognize revenues based upon the value of the securities we receive as
compensation, our revenue model for this division creates a risk that we will
not have sufficient cash resources to satisfy our tax obligations as they become
due. We expect that the revenues from our consulting division will continue to
increase during the balance of Fiscal 2007. However, while we expect gross
revenues will increase, as a percentage of total revenues, the contribution from
our consulting division will be reduced as compared to our total revenues.

Cost of revenues includes direct costs we incur in rendering services
to our client companies, which include marketing, business development, legal,
auditing and accounting fees directly related to the particular client. In
addition, our consulting division may engage certain third party consultants to
assist in providing the contracted services to the client company; the costs of
those third party consultants are included in our cost of revenues. The
consulting division's arrangements with our clients generally provide that the
fee will cover the cost of attorneys, accounting personnel, and auditors working
on behalf of the client company. As these professionals generally will not
provide services on a fixed fee basis, and the scope of the services necessary
for a particular client company can vary from project to project, cost of
revenues in this division can ultimately be significantly higher than initially
projected, which can adversely impact our gross profit margins. The consulting
division's cost of revenues as a percentage of revenues was approximately 15.4%
for the nine months ended September 30, 2007 as compared to approximately 71.9%
for the nine months ended September 30, 2006. These costs of revenues in future
periods will be expensed as incurred and, accordingly, while the revenues from
contracts will be recognized ratably over the term of the agreement, the gross
profit margin on revenues from these deferred revenues can vary from period to
period, as evidenced by the change from the nine months ended September 30, 2007
to the comparable period in Fiscal 2006.

We include the corporate operating expenses with the operating expenses
of this division. Operating expenses in this division generally consist of
selling, general and administrative expenses, including officers' and employees'
compensation, professional fees, such as legal, accounting, and third party
consultants, and travel expenses. Operating expenses increased $302,837, or
approximately 27.3% for the nine months ended September 30, 2007 from the
comparable period in Fiscal 2006, and were approximately 22.0% of our total
revenues for this division as compared to approximately 229.4% for the nine
months ended September 30, 2006. The decrease for the nine months ended
September 30, 2007 reflects the consulting division's reduced dependence on
external consultants as we have increased our infrastructure to support the
expansion of our business model. We anticipate operating expenses for this
division will increase as we expand our operations.

In addition, to comply with the enactment of Section 404 of the
Sarbanes-Oxley Act of 2002 as it relates to small business issuers such as our
company, in connection with our annual report for our fiscal year ending
December 31, 2007 our management will be required to provide an assessment of
the effectiveness of our internal controls over financial reporting, including a
statement as to whether or not internal controls over financial reporting are
effective. In order to comply with this requirement we have engaged a third
party consulting firm to undertake an analysis of our internal controls as we do
not have the expertise to conduct the necessary evaluation. We expect the costs

associated with the development of the necessary documentation and testing
procedures required will be significant due to the diversity of our operations
and the number of subsidiaries located outside the U.S.

ENERGY

Revenues from our energy division represented approximately 2.8% of our
total revenues for the nine months ended September 30, 2007. Our energy division
includes the operations of CDI Wanda. In January 2007 we formed Jinan and in
February 2007 Jinan acquired a 51% equity interest in CDI Wanda. The energy
division is engaged in the energy and recycling industry and provides ancillary
services to oil refineries. Our consolidated statement of operations for the
nine months ended September 30, 2007 include the operations of the energy
division for the period from February 12, 2007, the date of acquisition, through
September 30, 2007 (the "Energy Reporting Period"). We did not have any
operations from this division during the nine months ended September 30, 2006.

As set forth in Note 7 Pro Forma Financial Information (unaudited) to
the consolidated financial statements appearing elsewhere in this quarterly
report, our energy division had revenues of $179,003 for the nine months ended
September 30, 2006. The increase in revenues from the nine months ended
September 30, 2006 is attributable to increased market acceptance of energy and
recycling applications such as those provided by CDI Wanda. For the Energy
Reporting Period, this division had non-recurring revenues of approximately
$1,240,000 from an energy company in Australia and revenues of approximately
$415,000 from an energy company in Russia. Based upon information known to us at
this time, we reasonably believe this division will report increasing revenues
for the remaining periods of Fiscal 2007.

The energy division's cost of revenues includes the cost of goods it
sells. For the Energy Reporting Period, its cost of revenues was approximately
80% of its total revenues as compared to approximately 82% for the nine months
ended September 30, 2006 as set forth in Note 7 Pro Forma Financial Information
(unaudited) to the consolidated financial statements appearing elsewhere in this
report. This decrease in the cost of revenues as a percentage of revenues and
the corresponding increase in gross margin for the nine months ended September
30, 2007 is attributable to increased costs associated with the design of new
equipment in 2006 for which there were no comparable costs for the nine months
ended September 30, 2007. As CDI Wanda gains experience in the construction
process certain efficiencies have been realized which have served to reduce the
cost of goods sold. We expect that the energy division will generate gross
margins of 10% to 15% during the balance of Fiscal 2007.

Operating expenses generally consist of selling expenses and general
and administrative expenses. Operating expenses as a percentage of total
revenues for this division for the nine months ended September 30, 2007 were
14.0%, and included approximately $210,578 of selling expenses and approximately
$238,376 of general and administrative expenses. As set forth in Note 7 Pro
Forma Financial Information (unaudited) to the consolidated financial statements
appearing elsewhere in this report, operating expenses for the energy division
for the nine months ended September 30, 2006 were $29,944 or approximately 16.7%
of revenues. We anticipate operating expenses within this division for the
balance of Fiscal 2007 will be consistent with those recognized for the 12
months ended December 31, 2006.

OTHER INCOME (EXPENSE)

Our total other income for the nine months ended September 30, 2007
increased approximately 286.5% from the comparable period in Fiscal 2006. The
increase is primarily attributable to a one time gain of $374,635 representing
accrued income taxes related to Chang Magnesium together with a realized gain on
the sale of marketable equity securities of $658,956. We did not have comparable
income items during the nine months ended September 30, 2006.

INCOME TAX BENEFIT (EXPENSE)

Our income tax expense increased approximately 514% for the nine months
ended September 30, 2007 from the nine months ended September 30, 2006 primarily
as a result of the incremental revenue generated from the acquisitions made by
our company.

NET INCOME (LOSS)

Our net income for the nine months ended September 30, 2007 increased
approximately 1,936% from the comparable period in Fiscal 2006 which is
primarily attributable to net income of $2,177,037 from our magnesium division,
adjusted for our 51% interest in Chang Magnesium and 60% interest in CDI
Magnesium, approximately $240,750 from our chemical division, adjusted for our
51% ownership interest in Lang Chemical, and approximately $117,887 from our
energy division, adjusted for our 51% ownership interest of CDI Wanda, and
$4,583,514 from our consulting division.

FOREIGN CURRENCY TRANSLATION GAIN (LOSS)

The functional currency of our Chinese subsidiaries is the RMB. The
financial statements of our subsidiaries are translated to U.S. dollars using
period-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the consolidated
statements of operations. As a result of this non-cash gain, we reported
comprehensive income of $393,158 for the nine months ended September 30, 2007 as
compared to $0 for comparable period in Fiscal 2006.

UNREALIZED GAIN ON MARKETABLE SECURITIES HELD FOR SALE, NET OF INCOME TAX

The unrealized gain on marketable securities held for sale, net of
income tax, represents the change in the fair value of these securities as of
the end of the financial reporting period. Unrealized gains or losses on
marketable securities held for sale and unrealized gains or losses on marketable
securities held for sale-related party are recognized as an element of
comprehensive income in our consolidated statement of operations on a monthly
basis based on changes in the fair value of the security as quoted on national
or inter-dealer stock exchanges. Once liquidated, the realized gain or loss on
the sale will be reflected in our net income for the period in which the
security is liquidated. At September 30, 2007 and September 30, 2006 the total
amount of marketable securities held for sale reflect securities of Dragon
Capital Group Corp., a related party, and this figure represents the value of
securities we received as compensation. The unrealized loss is a result of
fluctuations in the market price of underlying securities. These non cash
charges, whether gains or losses, can have a significant impact, positive or
negative, on our results of operations and there are no assurances that we will
ever be able to liquidate these securities.

COMPREHENSIVE INCOME

Comprehensive income is the sum of our net income plus unrealized gains
or losses on marketable securities held for sale, net of income tax plus
unrealized gains or losses on marketable securities held for sale-related party,
net of income tax.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis.

We maintain cash balances in the United States and China. At September
30, 2007 our cash position by geographic area are as follows:

United States $11,417,052
China ....... 5,931,039
-----------
Total $17,348,091

A substantial portion of our cash reserves are in the form of Renminbi
held in bank accounts at financial institutions located in the PRC. The value of
cash on deposit in China at September 30, 2007 has been translated based on the
period end rate of exchange. Although the Chinese government introduced
regulations in 1996 to allow greater convertibility of the Renminbi for current
account transactions, significant restrictions still remain, including primarily
the restriction that foreign-invested enterprises may only buy, sell or remit
foreign currencies after providing valid commercial documents at those banks
authorized to conduct foreign exchange business. In addition, conversion of
Renminbi for capital account items, including direct investment and loans, is
subject to government approval in China, and companies are required to open and
maintain separate foreign exchange accounts for capital account items. We cannot
be certain that the Chinese regulatory authorities will not impose more
stringent restrictions on the convertibility of the Renminbi, especially with
respect to foreign exchange transactions. Accordingly, cash on deposit in banks
in the PRC is not readily deployable by our company for purposes outside of
China.

Our current assets at September 30, 2007 increased $33,919,379, or
approximately 195.9%, from December 31, 2006 and reflects increases in cash and
cash equivalents, accounts receivables, and prepaid expenses and other assets
which were offset by decreases in investments in trading securities, investments
in trading securities-related party, and inventory. Our current liabilities
increased by $10,712,856, or approximately 102%, at September 30, 2007 from
December 31, 2006; this reflects increases in accounts payable and accrued
expenses, accounts payable-related party, advances from customers, and other
payables which were offset by decreases in amounts due to executive officers,
income taxes payable, and deferred taxes payable. Our current assets and current
liabilities by operating divisions at September 30, 2007 are set forth in the
following table:

$ OF CURRENT $ OF CURRENT
DIVISION ASSETS LIABILITIES
-------- ----------- -----------

Magnesium ............ $18,204,124 $12,200,191
Chemical ............. 7,472,383 7,272,532
Consulting ........... 24,753,263 1,143,608
Energy ............... 802,285 620,563
----------- -----------
Totals .... $51,232,055 $21,236,894

Accounts receivable, net of allowance for doubtful accounts, increased
$7,119,581, or approximately 257%, at September 30, 2007 from December 31, 2006.
At September 30, 2007, our accounts receivable by division are as follows:

DIVISION AMOUNT
-------- ------

Magnesium ............ $4,759,580
Chemical ............. 4,585,583
Consulting ........... 468,416
Energy ............... 76,064
----------
Total ..... $9,889,643

Each of our magnesium, chemical and energy divisions generally offer
payment terms of 90 days. For the nine months ended September 30, 2007, the
average turn on accounts receivable for the magnesium division was 14 days, the
average turn on accounts receivable for chemical division was 19 days, and the
average turn on accounts receivable for energy division was 2 days. The
consulting division generally receives payment in full for its services at the
time of contract.

Inventories at September 30, 2007 decreased $1,100,928, or
approximately 20%, from December 31, 2006. The following table provides
information on our inventories by division at September 30, 2007:

DIVISION AMOUNT
-------- ------

Magnesium ............ $3,204,462
Chemical ............. 1,050,848
Consulting ........... -
Energy ............... 138,054
----------
Total ..... $4,393,364

For the nine months ended September 30, 2007, the average turn on
inventory for the magnesium division was 20 days, the average turn on inventory
for chemical division was 9 days, and the average turn on inventory for energy
division was 20 days. The consulting division does not hold inventory.

Prepaid expenses and other assets increased $10,719,584, or an increase
of approximately 843%, at September 30, 2007 from December 31, 2006. The
following table provides information on this asset by division at September 30,
2007:

DIVISION AMOUNT DETAIL
-------- ------ ------

Magnesium .. $ 9,594,487 prepayments to vendors for merchandise ($9,369,621)
and VAT tax refunds available from the Chinese
government ($224,866)

Chemical ... 1,909,778 prepayments to vendors for merchandise

Consulting . 462,018 current portion of the fair value of securities
received as payment for services assigned to
executive officers as compensation

Energy ..... 25,547 prepayments to vendors for merchandise
-----------
Total .. $11,991,830

Accounts payable and accrued expenses increased $2,966,458, or
approximately 65.7%, at September 30, 2007 from December 31, 2006. At September
30, 2007, our accounts payable and accrued expenses by division are as follows:

DIVISION AMOUNT
-------- ------

Magnesium ............ $1,863,670
Chemical ............. 5,414,486
Consulting ........... 157,543
Energy ............... 48,113
----------
Total ..... $7,483,812

Advances from customers increased $3,597,466, or approximately 393% at
September 30, 2007 from December 31, 2006. Advances from customers represent
prepayments for product which has not yet been shipped. These amounts will be
reduced when the corresponding order is shipped. At September 30, 2007, these
liabilities by division are as follows:

DIVISION AMOUNT
-------- ------

Magnesium ............ $3,985,228
Chemical ............. 461,786
Consulting ........... -
Energy ............... 67,216
----------
Total ..... $4,514,230

Other payables increased $1,052,768, or approximately 2,308%, at
September 30, 2007 from December 31, 2006. At September 30, 2007, these
liabilities by division are as follows:

DIVISION AMOUNT DETAIL
-------- ------ ------

Magnesium .. $ 571,777 Refund of advance on purchases, VAT tax payable
Chemical ... 105,324 VAT tax payable
Consulting . 31,559 Employee payroll tax payable
Energy ..... 389,731 VAT tax payable
-----------
Total .. $ 1,098,391

From time to time we engage in transactions with related parties,
including:

o At September 30, 2007 Chang Magnesium owed Taiyuan YiWei Magnesium
Industry Co. Ltd. approximately $3,779,516 for raw materials it had purchased.
Taiyuan YiWei Magnesium Industry Co., Ltd. is a diversified magnesium
organization which owns interests in seven subsidiary magnesium factories, a
magnesium alloy factory and a magnesium powder desulphurization reagent factory,
all located in China. In June 2006 Taiyuan YiWei Magnesium contributed property,
plant and equipment to Chang Magnesium which was valued at $2,567,353, which
represented all the assets related to the magnesium plant. Following our
acquisition of Chang Magnesium, Mr. Yuwei Huang, Taiyuan YiWei Magnesium's
Chairman, now also serves as Chang Magnesium's CEO and Executive Vice President
for CDI Shanghai Management.

o At September 30, 2007, Chang Magnesium prepaid Taiyuan YiWei
Magnesium Industry Co., Ltd., a related party, $1,160,051 for the future
delivery of inventory, and at September 30, 2007, Jinwei Magnesium has prepaid
Taiyuan YiWei Magnesium Industry Co., Ltd. of $26,092 for the future delivery of
inventory. Yuwei Huang, our minority shareholder of Chang Magnesium, is the
chairman of Taiyuan YiWei Magnesium Industry Co., Ltd.

o At September 30, 2007, Lang Chemical prepaid NanTong LangYuan
Chemical Co., Ltd., a related party, $237,623 for the future delivery of
inventory. NanTong LangYuan Chemical Co., Ltd. is owned by Jingdong Chen, the
CEO and minority shareholder of Lang Chemical.

At September 30, 2007 our consolidated balance sheet reflects a total
minority interest of $9,672,279 which represents the equity of the minority
shareholders' portion in our subsidiaries. The following table provides
information regarding the minority interest by division:

DIVISION AMOUNT
-------- ------
Magnesium ............ $8,107,496
Chemical ............. 960,118
Consulting ........... -
Energy ............... 604,665
----------
Total ..... $9,672,279

For the nine months ended September 30, 2007, our net increase in cash
was $14,317,746 and consisted of $4,028,463 used in operating activities,
$1,756,176 provided by investing activities, $16,302,870 provided by financing
activities, and the effect of prevailing exchange rates on cash of $287,163.

Net cash used in operating activities for the nine months ended
September 30, 2007 was $4,028,463 as compared to net cash used in operating
activities of $622,038 for the nine months ended September 30, 2006. For the
nine months ended September 30, 2007, we used cash in operating activities to
fund increases in inventory of $1,941,206, increases in accounts payable of
$2,874,967, increases in accounts payable-related party of $2,232,636, and
increases in other payables of $282,737, while we received advances from
customers of $1,943,502,. These increases were primarily offset by non-cash
expenses totaling $2,095,093, a decrease of prepaid expenses of $8,016,058, a
decrease of prepaid expenses-related party of $1,423,766, a decrease of accounts
receivable of $7,094,648, and a decrease of other receivables of $724,284.

Net cash provided by investing activities was $1,756,176 for the nine
months ended September 30, 2007 as compared to $281,880 for the nine months
ended September 30, 2006, an increase of $1,474,296. This change is primarily
attributable to an increase of $1,887,735 realized on the sale of marketable
securities held for sale, a decrease of $71,581 in notes receivable, cash of
$2,229,742 received in conjunction with our acquisitions, a decrease of $160,634
in restricted cash, and the purchase of $2,129,086 in property, plant and
equipment.

Net cash provided by financing activities for the nine months ended
September 30, 2007 was $16,302,870 as compared to $1,183,683 for the nine months
ended September 30, 2006. This increase includes $14,908,028 of proceeds from
exercises of options, and proceeds from loans payable of $1,535,735. These
increases were offset by repayment of advances in the amount of $140,893 made by
our executive officers during the nine months ended September 30, 2007.

During the balance of Fiscal 2007 in addition to general working
capital, we have the following cash commitments:

o At September 30, 2007 Lang Chemical had short term obligations
totaling $1,159,021 due December, 2007 and January, 2008 which are secured by
Lang Chemical property, and Chang Magnesium had short term obligations totaling
$2,000,000 which are due in March, 2008. We intend to satisfy these obligations
from cash on hand.

o we agreed to provide an aggregate of approximately $7,000,000 as a
contribution to various subsidiaries, including $6,750,000 to acquire a 51%
equity interest in CDI Pan Asia, and $253,671 to acquire a 95% equity interest
in CDI Jingkun Zinc. These contributions will be made from our cash reserves. We
have sufficient cash reserves available to provide these funds.

Furthermore we intend to commit capital to construct a manufacturing
facility for our Lang Chemical segment. The anticipated cost of completing this
facility is approximately $3,000,000 and we will need to provide additional
working capital to Lang Chemical to complete construction of the facility. While
we currently have sufficient cash reserves available to satisfy this investment
we may need secure additional working capital to provide funds to complete
construction of the facility. We are not contractually committed to invest this
additional working capital to construct the new manufacturing facility for Lang
Chemical; however, we believe operating margins at Lang Chemical could improve
if it were to manufacture, sell and distribute their own product.

Our cash reserves at September 30, 2007 were approximately $17,348,091.
However, to fully pursue the expansion of our business plan which includes
investing capital to augment the growth of our current subsidiaries and expand
our business through new accretive acquisitions, we may be required to raise
additional working capital through private or public financing, although at this
time, we have no specific plans to do so.

While we would prefer to raise capital through the sale of equity, we
could also engage in a debt offering. If we raise additional working capital
through the issuance of equity securities, existing stockholders may experience
significant dilution. If we raise additional working capital through the
issuance of debt, our interest expense will increase and adversely affect our
ability to report profitable operations in future periods. Furthermore,
notwithstanding the engagement of a banking firm, we may not be able to obtain
additional financing when needed or on terms favorable to us. Since we have no
commitment for additional capital, we cannot guarantee that we will be
successful in securing such additional funds. If we are unable to generate
sufficient cash when and as needed, we would be unable to fully implement our
business model to expand our operations and acquire additional companies. In
this event, we could be forced to curtail our plans to acquire additional
companies and or continue to expand per our business model.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of
operations are 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 and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and on various other assumptions that are believed to be
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 under different assumptions or conditions.

A summary of significant accounting policies is included in Note 1 to
the unaudited consolidated financial statements included in this report.
Management believes that the application of these policies on a consistent basis
enables us to provide useful and reliable financial information about our
company's operating results and financial condition.

We record property and equipment at cost. Depreciation and amortization
are provided using the straight-line method over the estimated economic lives of
the assets, which are from 3 to 40 years. Expenditures for major renewals and
improvements which extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. We review the carrying value of long-lived assets for impairment at
least annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of long-lived
assets are measured by a comparison of its carrying amount to the undiscounted
cash flows that the asset or asset group is expected to generate. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the property, if any, exceeds its
fair market value.

We classify our existing investments in trading securities, investments
in marketable securities held for sale-related party in accordance with SFAS No.
115. Investments in trading securities, investments in marketable securities
held for sale-related party, consisting of marketable equity securities, are
stated at fair value. Unrealized gains or losses are recognized in the
consolidated statement of operations on a monthly basis based on fluctuations in
the fair value of the security as quoted on national or inter-dealer stock
exchanges. Realized gains or losses are recognized in the consolidated statement
of operations as trading profits when the securities are sold.

As mentioned above, we receive securities which include common stock
and common stock purchase warrants from companies as part of our compensation
for services. These securities are stated at fair value in accordance with SFAS
No. 115 "Accounting for certain investments in debt and equity securities" and
EITF 00-8 "Accounting by a grantee for an equity instrument to be received in
conjunction with providing goods or services". Primarily all of the securities
are received from small public companies. The stock and the stock purchase
warrants received are typically restricted as to resale. Our policy is to sell
securities we receive as compensation rather than hold on to these securities as
long term investments, regardless of market conditions in an effort to satisfy
our current obligations. We recognize revenue for such common stock based on the
fair value at the time common stock is granted and for stock purchase warrants
based on the Black-Scholes valuation model. Unrealized gains or losses are
recognized in the consolidated statement of operations on a monthly basis based
on changes in the fair value of the security as quoted on national or
inter-dealer stock exchanges. Unrealized gains or losses on marketable
securities held for sale-related party are recognized as an element of
comprehensive income in our consolidated statement of operations on a monthly
basis based on changes in the fair value of the security as quoted on national
or inter dealer stock exchanges.

Stock Based Compensation

dates for SFAS 123R. Companies may elect to apply this statement either
prospectively, or on a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods under SFAS 123. Effective
January 1, 2006, we fully adopted the provisions of SFAS No. 123R and related
interpretations as provided by SAB 107. As such, compensation cost is measured
on the date of grant as the excess of the current market price of the underlying
stock over the exercise price. Such compensation amounts, if any, are amortized
over the respective vesting periods of the option grant.

We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based
Compensation- -Transition and Disclosure", which permits entities to provide pro
forma net income (loss) and pro forma earnings (loss) per share disclosures for
employee stock option grants as if the fair-valued based method defined in SFAS
No. 123 had been applied. We account for stock options and stock issued to
non-employees for goods or services in accordance with the fair value method of
SFAS 123. In December 2004, the FASB issued FASB Statement No. 123R,
"Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R").
FAS No. 123R requires companies to recognize in the statement of operations the
grant- date fair value of stock options and other equity-based compensation
issued to employees. We adopted FAS No.123R in the first quarter of fiscal year
2006.

Revenue Recognition

Revenue is recognized when earned. Our revenue recognition policies are
in compliance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 104 "Revenue Recognition".

China Direct Consulting provides services pursuant to written
agreements which vary in duration. Revenues are recognized in accordance with
the terms of the agreements. Revenues for China Direct Consulting are derived
from a predetermined fixed fee for the services it provides to clients. The fee
will vary based on the scope of the services to be provided.

A significant portion of the services China Direct Consulting provides
are paid in shares and other equity instruments issued by our clients. These
instruments are classified as marketable securities on the consolidated balance
sheet, if still held at the financial reporting date. These instruments are
stated at fair value in accordance with the provision of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No.115) and EITF 00-8 "Accounting by a grantee for an
equity instrument to be received in conjunction with providing goods or
services". Primarily all of the equity instruments are received from small
public companies.

The securities received, whether in the form of stock, or stock
purchase warrants, are typically restricted as to resale. China Direct
Consulting recognizes revenue for such stock purchase warrants when received
based on the Black-Scholes valuation model. China Direct Consulting recognizes
unrealized gains or losses in the consolidated statement of operations based on
fluctuations in value of the stock purchase warrants as determined by the
Black-Scholes valuation model. Realized gains or losses are recognized in the
consolidated statement of operations when the related stock purchase warrant is
exercised and sold.

Lang Chemical and Chang Magnesium record revenue when persuasive
evidence of an arrangement exists, services have been rendered or product
delivery has occurred, the sales price to the customer is fixed or determinable,
products are shipped, title passes, and collectibility is reasonably assured.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FAS 157"). This Statement defines
fair value as used in numerous accounting pronouncements, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure related to the use of fair value measures in financial
statements. The Statement is to be effective for our financial statements issued
in 2008; however, earlier application is encouraged. We are currently evaluating
the timing of adoption and the impact that adoption might have on our financial
position or results of operations.

In September 2006, the staff of the SEC issued SAB No. 108:
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements". SAB No. 108 provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of determining whether
the current year's financial statements are materially misstated. The SEC staff
believes registrants must quantify errors using both a balance sheet and income
statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. This Statement is effective for fiscal years ending
after November 15, 2006. The adoption of SAB No. 108 did not have a significant
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-including an amendment of FAS
115" (Statement 159). Statement 159 allows entities to choose, at specified
election dates, to measure eligible financial assets and liabilities at fair
value that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that item's fair
value in subsequent reporting periods must be recognized in current earnings.
Statement 159 is effective for fiscal years beginning after November 15, 2007.
We are currently evaluating the timing of adoption and the impact that adoption
might have on our financial position or results of operations.

ITEM 3. CONTROLS AND PROCEDURES

Our management, which includes our CEO and our Vice President of
Finance who serves as our principal financial and accounting officer, have
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-14(c) promulgated under the Securities and
Exchange Act of 1934, as amended) as of a date (the "Evaluation Date") as of the
end of the period covered by this report. Our management does not expect that
our disclosure controls and procedures will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions.

As of the evaluation date, our CEO and Vice President of Finance
concluded that we maintain disclosure controls and procedures that are effective
in providing reasonable assurance that information required to be disclosed in
our reports under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods prescribed by SEC rules and
regulations, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Vice President of Finance,
to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial
reporting identified in connection with the evaluation that occurred during the
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

On October 15, 2007, CDI Shanghai Management's majority owned
subsidiary CDI Jingkun Zinc was formed with total registered capital of $266,667
(RMB 2 million). CDI Shanghai Management contributed $253,671 (RMB 1.9 million)
and Ms. Yixin Wang, the General Manager of CDI Jingkun Zinc, contributed
$13,351(RMB 100,000) representing 95% and 5% equity interests, respectively. CDI
Jingkun Zinc will seek to operate as a distributor of zinc concentrate within
China.

On August 24, 2007, CDI China entered into a material definitive
agreement to sell its 60% equity interest in Big Tree Toys, Inc, a Florida
corporation ("Big Tree") to Sense Holdings, Inc. a Florida corporation
("Sense"). Under the terms of the agreement, we sold Big Tree for $400,000 in
cash and an aggregate of 20,000,000 shares of Sense's common stock, of which
10,000,000 were to be issued to us in four tranches of 2,500,000 shares on each
of September 30, 2007, December 31, 2007, March 31, 2008 and June 30, 2008 and
we are entitled to receive 10,000,000 shares of common stock if Big Tree meets
certain revenue thresholds beginning in fiscal 2008. In October 2007 Sense
issued us an aggregate of 8,250,000 shares, which represented the September 30,
2007, December 31, 2007 and March 31, 2008 tranches, as well as a portion of the
June 30, 2008 tranche. As of the date of this report Sense is obligated to issue
our company the remaining 1,750,000 shares under the terms of the agreement on
March 31, 2008. In October 2007 we sold 8,250,000 shares of Sense's common stock
to purchasers residing in China, including the minority owners of Chang
Magnesium and Lang Chemical, in a private transaction. We received gross
proceeds of $495,000 from these sales.

ITEM 6. EXHIBITS

Exhibit
No. Description
------- -----------

10.1 CDI Pan Asia Magnesium Co., Ltd. Joint Venture Agreement dated
September 28, 2007

31.1 Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer

31.2 Rule 13a-14(a)/15d-14(a) certificate of Vice President of Finance

32.1 Section 1350 certification of Chief Executive Officer

32.2 Section 1350 certification of Vice President of Finance

SIGNATURES

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

China Direct, Inc.

November 14, 2007 By: /s/ Yuejian (James) Wang
------------------------
Yuejian (James) Wang, CEO,
principal executive officer

By: /s/ Yi (Jenny) Liu
------------------
Yi (Jenny) Liu, Vice President of Finance,
principal accounting and financial officer