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 March 31, 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)

Delaware 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 May 9, 2007 there were 13,573,433
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' Republic of China, 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 Delaware 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 "Luma Logistic" means Luma Logistic (Shanghai) Co., Ltd., a Chinese
limited liability company, and a majority owned subsidiary of CDI China,
o "Big Tree" means Big Tree Group Corporation, a Florida corporation, and a
majority owned subsidiary of CDI China,
o "Jieyang Big Tree" means Jieyang Big Tree Toy Enterprise Co., Ltd, a
Chinese limited liability company, and a majority 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, and
o "Excel Rise" means Excel Rise Technology Co., Ltd., a Brunei corporation,
and a wholly owned subsidiary of Chang Magnesium.

PART I - FINANCIAL INFORMATION

CHINA DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2007
(Unaudited)

ASSETS

Current Assets:
Cash and cash equivalents ................................................................. $ 5,408,626
Notes receivable .......................................................................... 44,751
Investment in marketable securities held for sale ......................................... 2,191,400
Investment in marketable securities held for sale-related party .. ........................ 1,410,800
Accounts receivable, net of allowance for doubtful accounts $8,358 ........................ 6,132,446
Inventories ............................................................................... 2,713,748
Prepaid expenses and other assets ......................................................... 3,531,506
Prepaid expenses-related party ............................................................ 3,611,243
Other receivable .......................................................................... 58,510
Due from related party .................................................................... 1,435,204
------------
Total current assets ................................................................... 26,538,234

Property and equipment, net of accumulated depreciation of $226,250 ......................... 3,835,375
Prepaid expenses ............................................................................ 222,728
Property use right, net ..................................................................... 66,666
------------

Total assets ........................................................................... $ 30,663,003
============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Loan payable-short term ................................................................... $ 395,014
Accounts payable and accrued expenses ..................................................... 3,462,680
Accounts payable-related party ............................................................ 2,755,759
Liabilities in connection with acquisitions-related party ................................. 368,272
Advances from customers ................................................................... 6,132,222
Deferred revenues-short term .............................................................. 779,900
Other payable ............................................................................. 2,264,652
Income tax payable ........................................................................ 608,889
------------
Total current liabilities ............................................................... 16,767,388

Other payable-long term ..................................................................... 718
Deferred revenues-long term ................................................................. 584,925

Minority interest ........................................................................... 4,935,370

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, 13,273,433 issued and outstanding 1,327
Additional paid-in capital ................................................................ 6,392,591
Deferred compensation ..................................................................... (183,880)
Accumulated comprehensive loss ............................................................ (336,460)
Retained earnings ......................................................................... 2,501,024
------------

Total stockholders' equity ............................................................. 8,374,602
------------

Total liabilities and stockholders' equity ............................................. $ 30,663,003
============

See notes to unaudited consolidated financial statements

-3-

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

For the Three Months
Ended March 31,
2007 2006
------------ ------------

Revenues ............................................................. $ 30,498,940 $ 106,415
Revenues-related party ............................................... 440,000 100,000
------------ ------------
Total revenues .................................................. 30,938,940 206,415

Cost of revenues ..................................................... 27,467,014 15,260
------------ ------------

Gross profit ......................................................... 3,471,926 191,155

Operating expenses:
Selling, general, and administrative-related party .............. - 5,700
Selling, general, and administrative ............................ 837,509 338,440
------------ ------------

Total operating expenses ........................................ 837,509 344,140
------------ ------------

Operating (loss) income ......................................... 2,634,417 (152,985)

Other income (expense):
Other income ......................................................... 9,936 -
Interest income ...................................................... 29,166 -
Unrealized gain on trading securities ................................ - 411,675
Realized loss on sale of marketable securities ....................... (15,973) -
------------ ------------

Net income before income taxes ....................................... 2,657,546 258,690

Income taxes expense ................................................. (232,572) (102,441)
------------ ------------

Net income before minority interest .................................. 2,424,974 156,249

Minority interest in income of subsidiary ............................ (554,105) -

Net income ........................................................... $ 1,870,869 $ 156,249
------------ ------------

Foreign currency translation gain .................................... 80,158 -

Unrealized (loss) gain on marketable securities held
for sale, net of income taxes ........................................ (607,539) -

Unrealized (loss) gain on marketable securities held
for sale-related party, net of income taxes .......................... (341,458) 1,141,560
------------ ------------

Comprehensive income ................................................. $ 1,002,030 $ 1,297,809
============ ============

Basic earnings per common share ...................................... $ 0.14 $ 0.02
============ ============

Diluted earnings per common share .................................... $ 0.12 $ 0.01
============ ============

Basic weighted average common shares outstanding ..................... 13,043,826 10,000,000
============ ============

Diluted weighted average common shares outstanding ................... 16,216,384 10,874,521
============ ============

See notes to unaudited consolidated financial statements

-4-

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

For the Three Months
Ended March 31,
2007 2006
----------- -----------

Cash flows from operating activities:
Net income ..................................................................... $ 1,870,869 $ 156,249
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation ................................................................. 56,821 959
Bad debts recoveries ......................................................... (102,253) -
Stock based compensation ..................................................... 83,248 -
Realized loss on investment in trading securities ............................ 15,973 -
Unrealized loss (gain) on investment in trading securities ................... - (411,675)
Fair value of shares received for services ................................... (1,208,000) (1,098,900)
Fair value of warrants received for services ................................. (103,950) -
Fair value of investments assigned to employees and consultants for services . - 837,200
Minority Interest ............................................................ 554,105 -
Changes in operating assets and liabilities:
Prepaid expenses ............................................................. (4,705,222) (730,208)
Inventory .................................................................... 3,444,443 -
Accounts receivables ......................................................... (3,337,203) -
Other receivables ............................................................ (58,510) -
Accounts payable and accrued expenses ........................................ (1,068,939) 17,044
Accounts payable-related party ............................................... 1,208,879 -
Advance from customers ....................................................... 3,561,494 -
Other payable ................................................................ 1,675,498 -
Deferred revenues ............................................................ (194,975) 1,007,325
Deferred income tax .......................................................... 61,995 397,575
Income tax payable ........................................................... 9,190 (350,134)
----------- -----------

Net cash provided by (used in) operating activities ............................ 1,763,463 (174,565)
----------- -----------

Cash flows provided by investing activities:
Due from related party ....................................................... (996,783) -
Cash acquired in acquisition ................................................. 55,777 -
Decrease in notes receivable ................................................. 897,366 -
Decrease in restricted cash .................................................. 447,713 -
Proceeds from the sale of trading securities ................................. 125,638 -
Purchases of property and equipment .......................................... (23,480) (3,171)
----------- -----------

Net cash provided by (used in) investing activities ............................ 506,231 (3,171)
----------- -----------

Cash flows from financing activities:
Repayment of loans payable ................................................... (1,228,272) -
Repayment of advances from executive officers ................................ (140,893) -
Proceeds from advances from customers ........................................ - 17,301
Capital contributed by officers .............................................. - 154,875
Proceeds from exercises of warrants/options .................................. 1,425,000 -
----------- -----------

Net cash provided by financing activities ...................................... 55,835 172,176
----------- -----------

EFFECT OF EXCHANGE RATE ON CASH ................................................ 52,752 -

Net increase (decrease) in cash ............................................... 2,378,281 (5,560)

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

Cash, end of period ............................................................ $ 5,408,626 $ 34,423
=========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for taxes ....................................................... $ 165,161 $ 55,000
=========== ===========

Cash paid for interest .................................................... $ 3,025 $ -
=========== ===========

See notes to unaudited consolidated financial statements

-5-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

THE COMPANY

China Direct, Inc., a Delaware 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, Inc. 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 August 16, 2006 Transaction, China Direct Consulting
became a whole owned subsidiary of Evolve One. For financial accounting
purposes, the Transaction was treated as a recapitalization of Evolve One with
the former stockholders of the Evolve One retaining approximately 5% of he
outstanding stock. This 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 their name to China Direct, Inc.

China Direct is a diversified management and consulting company.

Our purpose is twofold; (i) offer turn key consulting services to Chinese
entities and (ii) acquire controlling interest in companies operating within the
Chinese economy. China Direct seeks to provide an infrastructure for
development.

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. CDI China was
incorporated under the laws of the State of Florida on August 25, 2006. The goal
of CDI China is to acquire a majority 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, mining, healthcare, packaging, food and
beverage, as well as companies involved in importing and exporting activities.

-6-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 net assets of Shanghai Lang Chemical Co., Ltd. ("Lang Chemical") to
$1,400,418. As a result, CDI China holds a 51% majority interest in the
restructured Shanghai Lang Chemical Co., Ltd. ("Lang Chemical"). Lang Chemical
is a distributor of industrial grade synthetic chemicals within China.

On December 22, 2006 we entered into an agreement to contribute $2,550,000 to
increase the net assets of Chang Magnesium Co., Ltd. ("Chang Magnesium") to
$5,471,162. As a result CDI China holds a 51% majority interest in the
restructured Chang Magnesium Co., Ltd. ("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 Co., Ltd. formed a new entity, Excel
Rise Technology Co., Ltd., a Brunei corporation, as a wholly owned subsidiary.
Excel Rise will seek to operate as an exporter of magnesium products; primary
exports will include various forms of magnesium including but not limited to
magnesium powder, magnesium scrap, and various grades of ordinary magnesium
slabs.

In October 2006, we formed a new entity, Luma Logistic (Shanghai) Co., Ltd.,
("Luma Logistic") a Chinese limited liability company, as a 60% majority owned
subsidiary of CDI China. Luma Logistic intends to operate in two business
segments; logistics management and as a commodity wholesaler. As a logistics
management firm, Luma Logistic will seek to operate as a consolidator and
shipment manager for various manufacturers for the shipment of goods and
merchandise to the Port of Shanghai. Luma Logistic had no operations for the
three months ended March 31, 2007. We presently seek to identify a business
partner in China to develop the operations of Luma Logistic.

In November 2006 we formed a new entity, CDI (Shanghai) Management Co., Ltd.,
("CDI Shanghai Management") as a wholly owned subsidiary of CDI China, Inc. CDI
Shanghai Management will provide an operational infrastructure to subsidiaries
of CDI China, as well as providing consulting services to Chinese entities in
regards to merger, and acquisition, business development and financial
management. CDI Shanghai Management will supervise and monitor 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.

In November 2006, we formed a new entity, Big Tree Group Corp. ("Big Tree"), a
Florida corporation, as a 60% majority owned subsidiary of CDI China.

-7-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

THE COMPANY (CONTINUED)

On February 12, 2007, as amended on May 8, 2007 CDI China acquired a 60%
interest in Jieyang Big Tree Toy Enterprise Co., Ltd., a Chinese limited
liability company, ("Jieyang 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. The
$268,272 worth of common stock is reflected in Liabilities in connection with
acquisitions-related party in our consolidated balance sheet as of March 31,
2007. As a result Jieyang Big Tree is a wholly owned subsidiary of CDI China.
Jieyang Big Tree will seek to be a reseller and distributor of toys and related
entertainment products within China. Neither Big Tree nor Jieyang Big Tree had
any operations for the three months ended March 31, 2007. Under the terms of the
agreement, we agreed to make capital infusions of an aggregate of $1,000,000 to
Jieyang Big Tree between March 31, 2007 and October 31, 2007 provided that
Jieyang Big Tree meets the following benchmarks: revenues of $12.5 million and
net income of $625,000 for the six month period ended June 30, 2007; and
revenues of $18.75 million and net income of $937,500 for the nine months ended
September 30, 2007. If made, it is expected the additional investment capital
will be advanced in the form of a loan, 12% per annum, secured by the 53,654
shares of the our common stock issued in the transaction. We anticipate that
Jieyang Big Tree will commence operations in June 2007. SEE NOTE 6-
ACQUISITIONS.

On February 12, 2007 CDI China, Inc. acquired a 60% majority 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 March 31, 2007. CDI Magnesium was formed to operate a newly constructed
magnesium plant in Taiyuan, China. It is expected that the plant will process
and manufacture a variety of magnesium alloy by-products. CDI Magnesium had no
operations for the three months ended March 31, 2007. CDI Magnesium expects to
commence operations in July 2007. SEE NOTE 6- ACQUISITIONS.

-8-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

THE COMPANY (CONTINUED)

Jinan Alternative Energy Group Corp. was incorporated in Florida as a wholly
owned subsidiary of CDI China on January 18, 2007 as Wonderful Tech Group Inc.
("Jinan") On February 7, 2007 Wonderful Tech Group Inc. changed its name to
Jinan Alternative Energy Group Corp. On February 12, 2007 CDI China agreed to
contribute $511,458 to increase the net assets of Jinan Wanda Alternative Energy
Co., Ltd., to $1,002,859. As a result Jinan holds a 51% majority interest in
Jinan Wanda Alternative 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 $530,000 of working capital to CDI
Wanda. CDI Wanda New Energy Co., Ltd., ("CDI Wanda") established in 1996, 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 safe recycling technological applications. SEE NOTE 6-
ACQUISITIONS.

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.
Operating results for the three months ended March 31, 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 wholly 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
three months ended March 31, 2007 include the operations of CDI Wanda for the
period of February 12, 2007, the date of acquisition, through March 31, 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 Jieyang
Big Tree on February 12, 2007. Our consolidated statements of operations did not
include the operations of Jieyang Big Tree for the period of February 12, 2007,
the date of acquisition, through March 31, 2007 as there were no operations.

-9-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

BASIS OF PRESENTATION (CONTINUED)

As previously stated we closed the acquisition of a majority interest of CDI
Magnesium on February 12, 2007. Our consolidated statements of operations did
not include the operations of CDI Magnesium for the period of February 12, 2007,
the date of acquisition, through March 31, 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.

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 principally 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 March 31, 2007, bank deposits in the United
States exceeded federally insured limit by $2,602,260. At March 31, 2007, the
Company had approximately $2,406,366 in China bank deposits, which can not be
insured. In China, there is no equivalent federal insurance as the United
States. The Company has not experienced any losses in such accounts through
March 31, 2007.

At March 31, 2007, our bank deposits by geographic area are as follows:

United States .................... $3,002,260
China ............................ 2,406,366
----------
Total cash and cash equivalents .. $5,408,626
==========

-10-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

CONCENTRATION OF CREDIT RISKS (CONTINUED)

To reduce its risk, the Company periodically evaluates the credit quality of the
financial institutions at which it holds deposits.

China Direct Consulting receives securities which include common stock and
common stock purchase warrants from companies as part of its compensation for
services. These securities are stated at 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". Primarily all of the securities are received
from small public companies. The securities received 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 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 gain or loss on
the sale will be reflected in our net income for the period in which the
security was liquidated.

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 March
31, 2007 of $1,410,800. These securities were issued to us 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., the
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.

-11-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

CONCENTRATION OF CREDIT RISKS (CONTINUED)

Four clients accounted for the Company's investment in marketable securities,
held for sale of $2,191,400 held at March 31, 2007. These securities are
comprised as follows; Dragon International Group Corp. accounted for $805,300,
or approximately 37% of the Company's investment in marketable securities held
at March 31, 2007. Linkwell Corporation accounted for $805,000, or approximately
36% of the Company's investment in marketable securities held at December 31,
2006. Sunwin International Neutraceuticals, Inc. accounted for $366,100, or
approximately 17% of the Company's investment in marketable securities held at
March 31, 2007 and Sense Holdings, Inc. accounted for $215,000, or approximately
10% of the Company's investment in marketable securities held at March 31, 2007.

CUSTOMER CONCENTRATION

Our subsidiary, China Direct Consulting, provides consulting services pursuant
to written agreements and receives securities as compensation for services
rendered. Four of China Direct Consulting's clients accounted for approximately
78%, and one client, Dragon Capital Group Corp., a related party, accounted for
approximately 21% of the total revenues of $2,109,130 for China Direct
Consulting during the three months ended March 31, 2007.

Dragon International Group Corp. accounted for $690,900, or approximately 33%,
Sunwin International Neutraceuticals, Inc. accounted for $631,055, or
approximately 30%, Dragon Capital Group Corp., a related party, accounted for
$440,000, or approximately 21%, Shanghai Qinpu Investment Co., Ltd. accounted
for $250,000, or approximately 12%, and Linkwell Corporation accounted for
$70,500, or approximately 3% of China Direct Consulting's revenues at March 31,
2007. China Direct Consulting seeks to minimize its customer concentration risk
by diversifying its existing client base.

Three clients accounted for $932,707 or approximately 58% of the total accounts
receivable of $1,618,494 reflected for Lang Chemical at March 31, 2007. These
amounts are comprised as follows; GuiZhou Crystal Chemical Co., Ltd. of $388,651
or approximately 24%, Shanghai ShanFu Chemical Co., Ltd. of $380,912 or
approximately 24%, and Shanghai WeiJiang Chemical Co., Ltd. of $163,144 or
approximately 10%.

Three clients accounted for $1,980,187 or approximately 45% of the total
accounts receivable of $4,435,051 reflected for Chang Magnesium at March 31,
2007. These amounts are comprised as follows; TAK Trading of $ 757,306 or
approximately 17%, CMC Co Metals of $ 654,166 or approximately 15%, and Alcoa
Australia of $568,715 or approximately 13%.

Three clients accounted for the total amount of $37,175 of accounts receivable
reflected for China Direct Consulting at March 31, 2007.

-12-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

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 March 31, 2007, the allowance for doubtful accounts was
$8,358.

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 executive officers 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.

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 equity securities, 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 consolidated statements of operations
and are valued 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 are recognized in the consolidated statement
of operations as trading profits when the securities are sold.

-13-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

MARKETABLE SECURITIES (CONTINUED)

As mentioned above, the Company receives securities which include common stock
and Common stock purchase warrants and common from companies as part of its
compensation for services. These securities are stated at 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". Primarily all of
the securities are received from small public companies. The common stock and
the common stock purchase warrants received 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 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 and are valued based on changes in the fair value of the security as
quoted on national or inter-dealer stock exchanges. Once liquidated, we will
include the realized gain or loss on the sale on marketable securities will be
reflected in our net income for the period in which the security was liquidated.

Net unrealized gains or (losses) related to investments on trading securities
for the three months ended March 31, 2007 and 2006 are $0 and $411,675,
respectively. Net realized gains or (losses) related to investments in
marketable securities for the three months ended March 31, 2007 and 2006 are
$(15,973) and $0, respectively.

Unrealized loss on marketable securities, held for sale, net of tax effect for
the three months ended March 31, 2007 and March 31, 2006 were $(607,539) and $0
respectively.

Unrealized (loss) gains on marketable securities, held for sale-related party,
net of tax effect for the three months ended March 31, 2007 and March 31, 2006
were $(341,458) and $1,141,560 respectively

-14-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

PREPAID EXPENSES

Prepaid expenses and others consist of the fair value of securities of China
Direct Consulting's clients which were assigned to China Direct Consulting's
officers as compensation pursuant to employment agreements, repayment to vendors
for merchandise that had not yet been shipped, and value added tax refunds
available from the Chinese government. The fair value of securities of China
Direct Consulting's clients which were assigned to China Direct Consulting's
officers as compensation reflects advance payment for services to be rendered to
such clients over the term of the agreements which will be amortized during the
next twelve months. Accordingly at March 31, 2007, we reflect prepaid expenses
and others under our current assets of $3,531,506; this represents the fair
value of securities of China Direct Consulting's clients which were assigned to
China Direct Consulting's officers of $425,000, $28,770 of prepaid expenses
related to China Direct Consulting, $401,350 of prepaid expenses related to Lang
Chemical, $1,798,285 of prepaid expenses related to Chang Magnesium, $3,464 of
prepaid expenses related to Jieyang Big Tree, $181,510 of prepaid expenses
related to CDI Wanda, and other current assets of $693,127 which reflect value
added tax refunds available from the Chinese government related to Chang
Magnesium. At March 31, 2007, we reflect prepaid expenses-related party under
our current assets of $3,611,243, $3,148,335 related to Chang Magnesium and
$462,908 related to Lang Chemical. 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 March 31, 2007 we reflect a non-current prepaid expense of
$222,728 on our consolidated balance sheet at March 31, 2007.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated on a straight
line basis over their estimated useful lives of five to forty years. Maintenance
and repairs are charged to expense as incurred. Significant renewals and
betterments 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 March 31, 2007 our consolidated balance sheet
reflects advances from customers of $6,132,222 which consist of $217,586 related
to Lang Chemical, $5,907,531 related to Chang Magnesium and $7,105 related to
CDI Wanda.

-15-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

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
three months ended March 31, 2007 and 2006 included net income, foreign currency
translation adjustments, unrealized gain (loss) on marketable securities, held
for sale, net of income taxes, and unrealized gain (loss) 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 comprehensive loss. As
of March 31, 2007, the exchange rate for the Chinese Renminbi (RMB) was $1 for
7.7409 RMB.

The functional and reporting currency is the U.S. dollar. The functional
currency of the Company's Chinese subsidiaries, Lang Chemical and Chang
Magnesium, is the local currency, the Chinese dollar or Renminbi ("RMB"). The
financial statements of the subsidiaries are translated into United States
dollars using year 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 March 31, 2007 was $52,752.

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 three months ended March 31, 2007.

-16-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

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, as of October 25, 2006 we hold a 51% majority interest of
Lang Chemical.

As previously stated as of December 22, 2006, we hold a 51% majority interest of
Chang Magnesium.

As previously stated in November 2006, we formed a new entity, Big Tree Group
Corporation ("Big Tree"), a Florida corporation, as a 60% majority owned
subsidiary of CDI China. On February 12, 2007, as amended on May 8, 2007 CDI
China acquired a 60% interest in Jieyang Big Tree Toy Enterprise Co., Ltd., a
Chinese limited liability company, ("Jieyang 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 shares as of January 30, 2007. The $268,272
worth of common stock is reflected in Liabilities in connection with
acquisitions-related party in our consolidated balance sheet as of March 31,
2007. As a result Jieyang Big Tree is a 60% majority owned subsidiary of CDI
China.

-17-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 2007, there were options to purchase 9,438,980 shares of
common stock and there were warrants to purchase 7,541,875 shares of common
stock, which could potentially dilute future earnings per share. At March 31,
2006, there were options to purchase 5,500,000 shares of common stock,
respectively, which could potentially dilute future earnings per share.

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

March 31, 2007 March 31, 2006
-------------- --------------
Numerator:
Net income .................................. $ 1,870,869 $ 156,249
=========== ===========

Denominator:
Denominator for basic earnings per share
Weighted average shares outstanding ......... 13,043,826 10,000,000
Effect of dilutive employee stock options ... 3,172,558 874,521
----------- -----------
Denominator for diluted earnings per share
Weighted average shares outstanding ......... 16,216,384 10,874,521

Basic earnings per share .................... $ 0.14 $ 0.02
=========== ===========
Diluted earnings per share .................. $ 0.12 $ 0.01
=========== ===========

-18-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. China Direct Consulting's revenues are derived from a fee for
services rendered.

A significant portion of the services China Direct Consulting provides are paid
with securities which include stock purchase warrants and common and preferred
stock from clients as part of its compensation for services. 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 stock purchase warrants based on the Black-Scholes valuation model.
China Direct Consulting receives securities from clients as compensation for
consulting services, which are typically restricted as to resale. 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 was liquidated.

-19-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 stock purchase warrant is exercised
and sold. China Direct Consulting recognized revenues amounting to $2,109,130
and $206,415 for three months ended March 31, 2007 and 2006, respectively, of
which $1,572,925 and $91,575 were in connection with the receipt of equity
instruments for the three months ended March 31, 2007 and 2006 respectively.
Furthermore of these amounts, Dragon Capital Group Corp., a related party
comprised $440,000 and $0 of our revenue in connection with the receipt of
equity instruments for three months ended March 31, 2007 and 2006, respectively.

March 31, 2007 March 31, 2006
-------------- --------------

Cash ..................................... $ 536,205 $ 14,840
Cash-related party ....................... - 100,000
---------- ----------
Total Cash ............................... $ 536,205 $ 114,840

Securities ............................... $1,132,925 $ 91,575
Securities-related party ................. 440,000 -
---------- ----------
Total Securities ......................... $1,572,925 $ 91,575

---------- ----------
Total China Direct Consulting Revenues ... $2,109,130 $ 206,415
========== ==========

-20-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

REVENUE RECOGNITION (CONTINUED)

Additionally, the Company has deferred revenues of $1,364,825 in connection with
the receipt of securities at March 31, 2007. The fees due under the contracts
with our consulting clients are amortized over the term of the agreement. Our
consolidated balance sheet at March 31, 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 month period. China Direct Consulting recorded $779,900 of deferred
revenue for the period ended March 31, 2007. This amount includes the following;
securities of Sunwin International Neutraceuticals, Inc. valued at $186,300,
securities of Dragon International Group Corp. valued at $311,600, and
securities of Linkwell Corp. valued at $282,000. $584,925 will be realized in
the year ended December 31, 2008 as the securities are recognized as revenues in
accordance with the term of the agreements.

Lang Chemical, Chang Magnesium, and CDI Wanda 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,
and collectibility is reasonably assured. Revenues from the sale of products are
recorded when the goods are shipped, title passes, and collectibility is
reasonably assured.

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.

-21-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

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.

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.

-22-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 3 - INVENTORIES

At March 31, 2007, inventories consisted of the following:

Raw materials ... $ 538,363
Finished goods .. 2,175,385
----------
$2,713,748
==========

NOTE 4 - PROPERTY AND EQUIPMENT

At March 31, 2007, property and equipment consisted of the following:

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

Buildings ........................ 10-40 years $2,004,221
Manufacturing equipment .......... 10 years 1,914,177
Office equipment and furniture ... 3-5 years 108,659
Autos and trucks ................. 5 years 34,568
----------

Total ............................ 4,061,625

Less: Accumulated Depreciation .. (226,250)
----------
$3,835,375
==========

For the three months ended March 31, 2007 and 2006, depreciation expense
amounted to $56,821 and $959, respectively.

NOTE 5 - PROPERTY USE RIGHT

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
this property use right over the three years beginning April 1, 2007.

-23-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 6 - ACQUISITIONS

As mentioned earlier, the acquisition of Jieyang Big Tree closed February 12,
2007. The Company plans to consolidate substantially all of the operations of
Jieyang Big Tree. The operations of Jieyang Big Tree are located in China. The
Company acquired Jieyang Big Tree 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 100% ownership interest in Jieyang Big Tree. The Company
agreed to issue 53,654 shares of its common stock, based on the fair value of
each share of $5.00 per share on January 30, 2007; the equivalent of $268,272.
As of March 31, 2007, the value of these shares is reflected as liability in
connection with acquisition-related party on our consolidated balance sheet. 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. Our consolidated statements of operations did not
include the operations of Jieyang Big Tree for the period of February 12, 2007,
the date of acquisition, through March 31, 2007 as there were no operations. We
expect Jieyang Big Tree to commence operations in June 2007. Under the terms of
the agreement, we agreed to make capital infusions of an aggregate of $1,000,000
to Jieyang Big Tree between March 31, 2007 and October 31, 2007 provided that
Jieyang Big Tree meets the following benchmarks: revenues of $12.5 million and
net income of $625,000 for the six month period ended June 30, 2007; and
revenues of $18.75 million and net income of $937,500 for the nine months ended
September 30, 2007. If made, it is expected the additional investment capital
will be advanced in the form of a loan, 12% per annum, secured by the 53,654
shares of the our common stock issued in the transaction.

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

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 Jieyang Big Tree ................. 447,120

% acquired ........................................... 60%
----------
Net Assets Acquired(February 12, 2007): .......... $ 268,272
----------

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

-24-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 6 - ACQUISITIONS (CONTINUED)

As mentioned earlier, on February 12, 2007, as amended on May 8, 2007 CDI China
agreed to contribute $511,458 to increase the shareholder equity of Jinan Wanda
New Energy Co., Ltd., to $1,002,859. As a result Jinan holds a 51% majority
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
New Energy Co., Ltd., ("CDI Wanda") established in 1996, 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 safe recycling
technological applications. The Company's shareholder, Dai Feng retained 49%
equity interest in CDI Wanda, and remained as an officer. In April 2007 CDI
China contributed $530,000 of working 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 March 31, 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
Due from related party ............................... -
----------
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 ............ $ 0
==========

-25-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 6 - ACQUISITIONS (CONTINUED)

As mentioned earlier, CDI China, Inc. acquired a majority interest in CDI
Magnesium Co., Ltd., ("CDI Magnesium") in February 2007. The Company plans to
consolidate substantially all of the operations of CDI Magnesium. 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, equivalent to
$100,000 equity of 60% CDI Magnesium on the date of acquisition. As of March 31,
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. Our consolidated
statements of operations did not include the operations of CDI Magnesium for the
period of February 12, 2007, the date of acquisition, through March 31, 2007 as
there were no operations through March 31, 2007. CDI Magnesium expects to
commence operations in July 2007.

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 ..................................... 166,666
----------
166,666
% acquired ........................................... 60%
----------
Net Assets Acquired(February 12, 2007): .......... 100,000
----------

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

-26-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 Accounting
Principles Board Opinion No.16, Business Combinations, as if it occurred as of
the beginning of Fiscal 2007 and the beginning of Fiscal 2006.

For the three months ended March 31, 2007 (unaudited):

For Three Months Ended March 31, 2007
-------------------------------------------------------------------------------------
China
Direct Lang Chang CDI
Consulting Chemical Magnesium Wanda Proforma
3/31/2007 3/31/2007 3/31/2007 3/31/2007 Adjustment Total
------------ ------------ ------------ ------------ ---------- ------------

Sales .................... $ 2,109,130 $ 12,394,612 $ 14,416,451 $ 2,092,094 $ - $ 31,012,287
Cost of Goods ............ 281,168 12,098,500 13,496,206 1,293,225 - 27,169,099
------------ ------------ ------------ ------------ ---------- ------------
Gross Profit ............. 1,827,962 296,112 920,245 798,869 - 3,843,188
Operating Expenses ....... 427,144 36,118 84,406 434,762 - 982,430
------------ ------------ ------------ ------------ ---------- ------------
Operating Income (Loss) .. 1,400,818 259,994 835,839 364,107 - 2,860,758
Other Income ............. 4,283 7,229 12,990 (2,061) - 22,441
------------ ------------ ------------ ------------ ---------- ------------
Income tax expenses ...... (207,930) (24,642) - - - (232,572)
------------ ------------ ------------ ------------ ---------- ------------
Net Income (Loss) ........ 1,197,171 242,581 848,829 362,046 (712,193) 1,938,434
============ ============ ============ ============ ========== ============
Basic earning per share .. $ 0.09 $ - $ - $ - $ - $ 0.15
============ ============ ============ ============ ========== ============
Diluted earnings per share $ 0.07 $ - $ - $ - $ - $ 0.12
============ ============ ============ ============ ========== ============
Basic weighted average
common shares ............ 13,043,826 - - - - 13,043,826
============ ============ ============ ============ ========== ============
Diluted weighted average
common shares ............ 16,216,384 - - - - 16,216,384
============ ============ ============ ============ ========== ============

-27-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

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

For the three months ended March 31, 2006 (unaudited):

For Three Months Ended March 31, 2006
-------------------------------------------------------------------------------------
China
Direct Lang Chang CDI
Consulting Chemical Magnesium Wanda Proforma
3/31/2006 3/31/2006 3/31/2006 3/31/2006 Adjustment Total
------------ ------------ ------------ ------------ ---------- ------------

Sales .................... $ 206,415 $ 6,678,140 $ 5,315,805 $ 20,265 $ - $ 12,220,625
Cost of Goods ............ 15,260 6,584,602 5,287,298 11,886 - 11,899,046
------------ ------------ ------------ ------------ ---------- ------------
Gross Profit ............. 191,155 93,538 28,507 8,379 - 321,579
Operating Expenses ....... 344,140 92,226 78,090 27,720 - 542,176
------------ ------------ ------------ ------------ ---------- ------------
Operating Income (Loss) .. (152,985) 1,312 (49,583) (19,341) - (220,597)
Other Income ............. 411,675 277 (2,152) (1,891) - 407,909
------------ ------------ ------------ ------------ ---------- ------------
Income tax expenses ...... (102,441) - - - - (102,441)
------------ ------------ ------------ ------------ ---------- ------------
Net Income (Loss) ........ 156,249 1,589 (51,734) (21,232) (779) 84,093
============ ============ ============ ============ ========== ============
Basic earning per share .. $ 0.02 $ - $ - $ - $ - $ 0.008
============ ============ ============ ============ ========== ============
Diluted earnings per share $ 0.01 $ - $ - $ - $ - $ 0.007
============ ============ ============ ============ ========== ============
Basic weighted average
common shares ............ 10,000,000 - - - - 10,000,000
============ ============ ============ ============ ========== ============
Diluted weighted
average common shares .... 10,874,521 - - - - 10,874,521
============ ============ ============ ============ ========== ============

-28-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 8 - LOANS PAYABLE

Loans payable consisted of the following at March 31, 2007:

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 building located
in Shanghai ........................................................ $ 136,646

Note to Shanghai WuJin Chemical Company, due on April 30, 2007 ..... 193,776

Loan due to JiNan Commercial Bank due on August 3, 2007, Interest
rate at 7.605%, Guaranteed by JiNan WuFa Boiler Company-a
non-related third party ............................................ 64,592

Total .................................................... 395,014
Less: Current Portion .............................................. (395,014)
---------

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

NOTE 9 - RELATED PARTY TRANSACTIONS

The Company leases approximately 1,300 square feet of office space for its
headquarters in the U.S. In August 2006, we began 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 $5,552 in rental expense pursuant to this
subleasing arrangement for the three months ended March 31, 2007 and 2006,
respectively.

At March 31, 2007, Lang Chemical prepaid NanTong LangYuan Chemical Co., Ltd.
$462,908 for the future delivery of inventory. At March 31, 2007, Chang
Magnesium prepaid Taiyuan YiWei Magnesium Industry Co., Ltd. $3,148,335 for the
future delivery of inventory. At March 31, 2007, Chang Magnesium had $2,755,759
in accounts payable - related party which represents amounts due to Taiyuan
YiWei Magnesium Industry Co., Ltd. for the purchase of inventory.

At March 31, 2007, we held a due from related party in the amount of $1,435,204.
Included in the amount is a loan of approximately $996,783 due Chang Magnesium
by YaZhou Magnesium Industry Co., Ltd., $438,421 of that amount reflects a loan
due from Shantou Dashu to Jieyang Big Tree.

At March 31, 2007, we held a liability in connection with acquisition-due to
related party of $368,272. Included in the amount is $268,272 worth of common
stock due to Guihong Zheng. CDI China acquired a 60% interest in Jieyang Big
Tree Toy Enterprise Co., Ltd., a Chinese limited liability company, ("Jieyang
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. The $268,272 worth of common stock is
reflected in Liabilities in connection with acquisitions-related party in our
consolidated balance sheet as of March 31, 2007.

-29-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)

The remainder of $100,000 reflects the value of common stock due to Wuliang
Zhang, related to our acquisition of a 60% interest in CDI Magnesium. CDI China,
Inc. acquired a 60% majority 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 March 31, 2007.

NOTE 10 - STOCKHOLDERS' EQUITY

COMMON STOCK

For the three months ended March 31, 2007 and 2006, amortization of stock based
compensation amounted to $ 83,248 and $0, respectively.

During the three months ended March 31, 2007, the Company issued 405,000 shares
of common stock in connection with the exercise of common stock options for net
proceeds of $1,425,000. Of these options, 205,000 were exercised at $5.00 per
share, while 200,000 were exercised at $2.00 per share.

STOCK OPTION PLAN

During Fiscal 2006 the Company adopted the 2006 Stock Compensation Plan (the
"2006 Plan"). The Company has reserved and authorized 2,000,000 shares of their
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.

-30-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTION PLAN (CONTINUED)

There were no options granted under the 2006 Plan for three months ended March
31, 2007.

For Fiscal 2006, the Company granted 3,588,000 options to consultants and
employees. These options vested over a period not exceeding one year and had
exercise price ranging from $0.01 to $10.00. For the three months ended March
31, 2007, the option expenses of $40,288 were recognized as sales and general
and administrative expenses as the options were granted as compensation to
employees pursuant to employment agreements. These options were exercisable upon
vesting. These options granted to employees have a life of 5 years. The options
granted to consultants are exercisable immediately. The consultants commence
services for these options for three years. The consultant contracts are for
three years. For the three months ended March 31, 2007, the amortization of
deferred compensation expenses related to options amounted to $11,000.

The following table sets forth the Company's stock option activity during the
three months ended March 31, 2007 and Fiscal 2006:

Weighted
Shares average
underlying exercise
options price
---------- --------
Outstanding at December 31, 2006 ................ 9,843,980 $ 3.27
Granted .............................. - -
Exercised ............................ (405,000) 3.52
Expired or cancelled ................. - -
---------- ------
Outstanding at March 31, 2007 ................... 9,438,980 $ 6.37
---------- ------
Exercisable at March 31, 2007 ................... 5,504,980 $ 5.51
---------- ------

Weighted-average exercise price of
options granted during the period ............... $ 0.00
======

-31-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 2007, for selected exercise price
ranges, is as follows:

Options outstanding:

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

$ 0.01 1,100,000 2.96 $ 0.01 1,100,000 $ 0.01
0.30 1,000,000 4.76 0.30 1,000,000 0.30
2.00 200,000 4.09 2.00 200,000 2.00
2.25 400 7.56 2.25 400 2.25
2.50 2,238,000 4 2.50 2,154,000 2.50
5.00 1,390,000 5 5.00 290,000 5.00
7.50 1,375,000 6 7.50 - -
10.00 1,375,000 7 10.00 - -
15.00 500 1.19 15.00 500 15.00
30.00 760,000 5 30.00 760,000 30.00
56.25 80 7.68 56.25 80 56.25
----------- ------------ -------- ----------- -----------
9,438,980 4.84 $ 6.37 5,504,980 $ 5.51
----------- ------------ -------- ----------- -----------

-32-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)

COMMON STOCK WARRANTS

For the three months ended March 31, 2007, the amortization of deferred
compensation expenses-warrants amounted to $31,960. These options granted to
consultants are exercisable immediately.

A summary of the status of the Company's outstanding stock purchase warrants
granted as of March31, 2007 and changes during the period is as follows:

Weighted
Shares average
underlying exercise
warrants 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 ............................ - -
Expired or cancelled ................. - -
--------- ------
Outstanding at March 31, 2007 ................... 7,541,875 $ 6.89
--------- ------

Exercisable at March 31, 2007 ................... 7,541,875 $ 6.89
--------- ------

-33-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)

COMMON STOCK WARRANTS (CONTINUED)

The following information applies to all warrants outstanding at March 31, 2007.

Warrants Warrants
Outstanding Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
prices Shares Life (Years) Price Shares Price
-------- ----------- ------------ -------- ----------- --------

$ 2.50 50,000 4.67 $ 2.50 50,000 $ 2.50
$ 4.00 3,884,375 4.50 $ 4.00 3,884,375 $ 4.00
$ 7.50 90,000 1.14 $ 7.50 90,000 $ 7.50
$10.00 3,427,500 4.48 $10.00 3,427,500 $10.00
$15.00 90,000 1.14 $15.00 90,000 $15.00
----------- ------------ -----------
7,541,875 4.41 7,541,875

NOTE 11 - MARKETABLE SECURITIES

China Direct Consulting receives securities which include common stock and
common stock purchase warrants from companies 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 of 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 and are valued 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 of marketable securities will be reflected in
our net income for the period in which the security was liquidated. At March 31,
2007 all securities are reflected as investment in marketable securities, held
for sale, and investment in marketable securities, held for sale-related party.

-34-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 11 - MARKETABLE SECURITIES (CONTINUED)

For three months ended March 31, 2007

Reclassification
Amount from trading
January 1, received/ securities to held Unrealized March 31,
2007 sold for sale securities loss 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 .... - 952,050 2,166,603 (927,253) 2,191,400

Investment in marketable
securities, held for
sale-related party ........... 1,325,400 346,000 264,000 (524,600) 1,410,800
----------- ---------- ----------- ----------- -----------
Total Investment in marketable
securities, held for sale .... $ 1,325,400 $ 1,298,050 $ 2,430,603 $(1,451,853) $ 3,602,200

For three months ended March 31, 2006

Amount
January 1, received/ Unrealized March 31,
2006 sold gain 2006
---------- ---------- ---------- ----------

Investment in trading securities ... $ 152,800 $ 261,700 $ 411,675 $ 826,175

Investment in marketable securities,
held for sale-related party ........ $ 810,000 $ - $1,890,000 $2,700,000

-35-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
three months ended March 31, 2007, the Company operated in six reportable
business segments - (1) Shanghai Lang Chemical Co., Ltd. ("Lang Chemical"). Lang
Chemical is a distributor of industrial grade synthetic chemical products; (2)
Chang Magnesium Co., Ltd., ("Chang Magnesium"). Chang Magnesium and its wholly
owned subsidiary Taiyuan Changxin YiWei Trading Co., Ltd. ("Changxin Trading")
process and distribute various forms of magnesium including but not limited to
magnesium powder, magnesium scrap, magnesium alloy and various grades of
ordinary magnesium slabs; (3) Jieyang Big Tree Toy Enterprise Co., Ltd.
("Jieyang Big Tree") will seek to be a reseller and distributor of toys and
related entertainment products within China; (4) CDI Magnesium Co., Ltd., ("CDI
Magnesium") is expected that the plant will process and manufacture a variety of
magnesium alloy by products; (5) CDI Wanda Alternative Energy Co., Ltd., ("CDI
Wanda") develops environmentally safe recycling technological applications; and
(6) China Direct Investments, Inc. ("China Direct Consulting") serves as a full
service consulting and advisory firm offering a comprehensive suite of services
critical to the success of Chinese entities seeking to access the U.S. capital
markets. The Company's reportable segments are strategic business units that
offer different products. They are managed separately based on the fundamental
differences in their operations. Condensed information with respect to these
reportable for three months ended March 31, 2007 and 2006 are as follows.

For the three months ended March 31, 2007 (Unaudited):

Lang
Chemical Chang
(chemical Magnesium China
distribution (magnesium Jieyang CDI CDI Direct
segment) segment) Big Tree Magnesium Wanda Consulting Consolidated
------------ ----------- -------- --------- ---------- ---------- ------------

Revenues ......... $12,394,612 $14,416,451 $ - $ - $2,018,748 $1,669,130 $ 30,498,940

Revenues - related
party ............ - - - - - 440,000 440,000

Interest income
(expense) ........ (3,025) 13,309 - - (1,374) 20,256 29,166

Net (loss) income 171,235 432,903 - - 69,560 1,197,171 1,870,869

Segment Assets ... $ 3,577,439 $17,530,830 $446,314 $ 166,666 $1,605,406 $7,336,348 $ 30,663,003

For the three months ended March 31, 2006:

The Company had only one segment for the three months ended March 31, 2006 that
being their consulting advisory services segment, accordingly a table is not
presented for segment information for the three months ended March 31, 2006.

-36-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 13 - FOREIGN OPERATIONS

For the three months ended March 31, 2007, the Company derived part of its
revenue from its subsidiaries located in the People's Republic of China.
Identifiable assets by geographic areas as of March 31, 2007 are as follows:

Identifiable Assets at March 31, 2007
-------------------------------------
United States ........... $ 7,336,348
China ................... 23,326,655
-----------

Total ................... $30,663,003
===========

Three months ended March 31, 2007:

United States People's Republic of China
------------- --------------------------
Revenues ................. $ 1,669,130 $ 28,829,810
Revenues - related party . $ 440,000 $ -
Identifiable assets ...... $ 7,336,348 $ 23,326,655

Three months ended March 31, 2006:

For the three months ended March 31, 2006, all revenues and identifiable assets
were located in the United States, accordingly a table is not presented for
foreign operations for the three months ended March 31, 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). The
Company hopes to expand its operations to countries outside the PRC, however,
such expansion has not been commenced and there are no assurances that the
Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.

(b) Products risk

In addition to competing with other companies, the Company could have to compete
with larger US companies who have greater funds available for expansion,
marketing, research and development and the ability to attract more qualified
personnel if access is allowed into the PRC market. If US companies do gain
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.

-37-

CHINA DIRECT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

NOTE 14 - OPERATING RISK (CONTINUED)

The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Renminbi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.

(d) Political risk

Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation 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
the 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 via the operations of the
Company's majority owned Chinese subsidiaries. Economic, governmental,
political, industry and internal company factors outside of the Company's
control 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.

NOTE 15 - SUBSEQUENT EVENTS

On April 24, 2007, Jinan Alternative Energy Group Corp. entered into an
agreement to form a new entity in coordination with Guangdong Qingyuan Changxin
Waste Material Renewable Processing Co., Ltd. Pursuant to a joint venture
agreement entered on April 24, 2007, Jinan has the option to contribute capital
to acquire an ownership interest in a new entity to be created by Guangdong
Qingyuan Changxin Waste Material Renewable Processing Co., Ltd. Under the terms
of the agreement Jinan has the option to invest up to $1,310,000 to acquire a
51% equity ownership of the new entity to be formed.

In May 2007 China Direct Investments, Inc. entered into a lease agreement for an
additional 1,273 square feet of office space for a monthly lease payment of
approximately $3,106 per month, expiring on October 31, 2007.

-38-

On May 8, 2007 we entered into an amended agreement related to our
acquistion of 51% of CDI Wanda in February 2007. The revised terms provide that
we are tendering $511,458 on or before April 30, 2007 to acquire a 51% majority
interst in CDI Wanda. As well in the future should CDI China permit other
shareholders to contribute capital to CDI Wanda; CDI China shall have the option
to contribute capital and/or acquire additional interest from other shareholders
to maintain its 51% majority interest in CDI Wanda. In the aggregate CDI China
shall not issue in excess of 337,500 shares of common stock valued at $4.00 per
share on February 6, 2007, as mutually agreed upon by and among the parties to
the agreement in February 2007, and shall not contribute in excess of
$1,350,000, inclusive of the $511,458 capital commitment due on or before April
30, 2007, to maintain its 51% majority stake in CDI Wanda.

On May 8, 2007 we entered into an amended agreement related to our
acquistion of 60% of Jieyang Big Tree in February 2007. The revised terms
provide that we are tendering $268,272 worth of commons tock valued at $5.00 per
share on January 30, 2007, as mutually agreed upon by and amongst the parties to
the agreement to acquire a 60% majority interst in Jieyang Big Tree from
exisitng sharehodlers. As well in the future should CDI China permit other
shareholders to contribute capital to Jieyang Big Tree; CDI China shall have the
option to contribute capital and/or acquire additional interest from other
shareholders to maintain its 60% majority interest in Jieyang Big Tree. In the
aggregate CDI China shall not issue in excess of 240,000 shares of common stock
valued at $5.00 per share on January 30, 2007, as mutually agreed upon by and
among the parties to the agreement to maintain its 60% majority stake in Jieyang
Big Tree.

-39-

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 three months ended March 31, 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.

OVERVIEW

On August 16, 2006 we acquired 100% of the issued and outstanding stock
of China Direct Consulting in exchange for 10,000,000 shares of our common stock
which, at closing, represented approximately 95% of our issued and outstanding
shares of our common stock. Prior to the transaction we were a shell company for
a limited period of time immediately prior to the acquisition, and previously
had conducted various business operations. As a result, China Direct Consulting
became a wholly owned subsidiary of our company. For financial accounting
purposes, the transaction was treated as a recapitalization of our company with
the former stockholders of our company retaining approximately 5% of the
outstanding stock. As such, our consolidated financial statements have been
prepared as if China Direct Consulting was the acquiror. As a result, the
business of China Direct Consulting became the business of our company.

China Direct Consulting

China Direct Consulting was organized in January 2005 and provides
specialized business consulting services exclusively to Chinese entities seeking
access to the U.S. capital markets. China Direct Consulting enters into
agreements with clients to provide services for a fixed consulting fee. The
amount of the consulting fee varies based upon the scope of the services to be
rendered. Historically, a significant portion of the fees earned by China Direct
Consulting 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, China Direct Consulting may receive either unregistered
securities with registration rights or a client may issue securities directly to
our employees. 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.

China Direct Consulting currently has five client companies, including
one client which is a related party. Accordingly China Direct Consulting is
dependent on revenues generated from these five clients. For the three months
ended March 31, 2007, four of the clients represented approximately 87% of the
revenues of China Direct Consulting. Revenues from China Direct Consulting
represented approximately 6.8% of our consolidated revenues for the three months
ended March 31, 2007.

The fees due under the contracts with our consulting clients are
amortized over the term of the agreement. Our consolidated balance sheet at
March 31, 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.

-40-

Our cost of revenues include direct costs we incur in rendering the
services to our client companies, which include fees paid to professional
resources including but not limited to marketing, legal and accounting services
directly related to each particular client. In addition, we may engage certain
third party professionals to assist in providing the contracted services to a
client company. The costs associated with these third party professionals are
included in our cost of revenues.

Our arrangements with our consulting clients generally provide that
fees paid to China Direct Consulting will cover the costs of various
professional resources including but not limited to attorneys, accounting
personnel and auditors providing services 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, our cost of revenues can ultimately be significantly
higher than initially projected which can adversely impact our gross profit
margins. Furthermore fees for professional services cannot be satisfied with
securities. As such 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, due in part, to these professional
resources.

While it is not our policy to hold securities we accept as payment for
services as long term investments, we are not always able to immediately
liquidate such securities as a result of either market conditions or
restrictions on resale imposed by Federal securities laws. Primarily all of the
securities are received from small public companies. The securities received 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. China Direct Consulting recognizes 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. China Direct Consulting
receives securities from clients as compensation for consulting services, which
are typically restricted as to resale. Unrealized gains or losses on marketable
securities held for sale as well as 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, we will include the realized
gain or loss on the sale in our net income for the period in which the security
was liquidated. Fluctuations in the value of securities can significantly
increase or decrease our comprehensive income, if the price of the securities
increases from the original value assigned to it at the time the related revenue
was recognized. Conversely, if the price were to decline, such decreases could
negatively impact our comprehensive income.

Based upon both the experiences of its management during its first year
of operation as well as the professional experience of its principals, during
the third quarter of fiscal 2006 we expanded the scope of our company through
the establishment of an additional operating division known as CDI China. The
primary focus of our operations is CDI China.

-41-

CDI China

CDI China operates as a management company for Chinese entities. CDI
China seeks to acquire a majority, controlling interest in entities operating
within China which are engaged in businesses that we believe could benefit from
the continuing growth of the Chinese economy. Examples of industries in which
are focusing our efforts include manufacturing, technology, mining, healthcare,
packaging, food and beverage, 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.

The business model for CDI China is to acquire a majority interest in
Chinese entities, thereby creating a diversified portfolio of subsidiaries
operating within the Chinese economy. CDI China utilizes resources available to
us by virtue of our public company status to provide working capital and
financial and operation support to augment our subsidiaries' growth. The
acquisition of a majority interest of a Chinese entity will be achieved either
via a share exchange or a purchase of stock or a combination of both. The
consideration for the acquisition will be directly related to the shareholder
equity of the acquisition target. We then utilize resources available to us by
virtue of our public company status to provide working capital enabling our
portfolio companies to grow its business and operations. In order to increase
the likelihood that we can raise capital as necessary, in January 2007 we
engaged Roth Capital Partners, LLC, a broker-dealer and member of the National
Association of Securities Dealers, Inc., to serve as our exclusive financial
advisor and investment banker.

During fiscal 2006 we closed the acquisitions of Lang Chemical and
Chang Magnesium. Lang Chemical specializes in the sale and distribution of
industrial grade synthetic chemicals. Chang Magnesium was formed by Taiyuan
YiWei Magnesium Co. Ltd. to operate a newly constructed magnesium plant that
processes and manufactures a variety of magnesium by-products, including
magnesium powder, magnesium scrap and various grades of magnesium slabs. Taiyuan
YiWei Magnesium 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. Following our
acquisition of Chang Magnesium, Mr. Yuwei Huang, Taiyuan YiWei Magnesium's
Chairman, now also serves as Chang Magnesium's CEO and an Executive Vice
President for CDI Shanghai Management. In June 2006, prior to our acquisition of
Chang Magnesium, it acquired 100% of Changxin Trading, an exporter of magnesium
products which was formed in November 2003.

During fiscal 2006 we also formed several companies, including:

o In October 2006 we formed Luma Logistic in which CDI China holds a
60% interest. Mr. Yonghua Cai is the minority holder of Luma Logistic.

o In November 2006 we formed CDI Shanghai Management and it commenced
operations in January 2007. CDI Shanghai Management serves as the management
company for our subsidiaries based in China, providing operational support and
infrastructure as well as supervising and monitoring the operations of those
subsidiaries. CDI Shanghai Management also markets the services of both China
Direct Consulting and CDI China in China.

o In November 2006 we formed Big Tree in which CDI China holds a 60%
interest. Ms. Guihong Zheng, vice president of Big Tree, holds the remaining 40%
interest. Big Tree intends to enter into the toy and entertainment industry
within China. Initially Big Tree intends to be a reseller and distributor of
toys and related entertainment products within China. Big Tree will attempt to
focus its efforts towards smaller manufacturers who lack a proprietary sales or
distribution network.

-42-

In February 2007, as amended CDI China acquired a 60% interest in
Jieyang Big Tree, a Sino-American joint venture which was formed in January
2007. Jieyang Big Tree, which is located in Shantou City, China, will seek to
operate in two business segments within the toy and related entertainment
products industry in China; including the distribution of toys and related
entertainment products and as an agent of third party OEM manufacturing of toys
and related entertainment products. Jieyang Big Tree expects to commence
operations in June 2007.

During the first quarter of fiscal 2007, we have further expanded CDI
China's operations through the following transactions:

o In January 2007 we formed Jinan. In February 2007 CDI China acquired
51% of CDI Wanda. CDI Wanda, organized in 1996 and located in Jinan, the capital
city of Shandong Province, PRC, is engaged in the alternative energy and
recycling industry. The current management of CDI Wanda, Messrs. Dai Feng and
Zhou Zaigen, continue to operate the company following this transaction. Our
consolidated statement of operations for the three months ended March 31, 2007
include the operations of CDI Wanda for the period of February 12, 2007, the
date of acquisition, through March 31, 2007 (the CDI Wanda Reporting Period").

In April 2007 Jinan entered into an oral agreement to form a new entity
in coordination with Guangdong Qingyuan Changxin Waste Material Renewable
Processing Co., Ltd. Pursuant to a joint venture agreement, Jinan has the option
to contribute capital up to $1,310,000 to acquire a 51% ownership interest in a
new entity to be created by Guangdong Qingyuan Changxin Waste Material Renewable
Processing Co., Ltd. Jinan is currently reviewing the opportunity and has not
made the determination to exercise its option, nor have the terms of the
investment been determined.

o In February 2007 CDI Shanghai Management formed Capital One which
will serve as a marketing arm for our company in the greater Asia region outside
of China. Capital One will seek to market to Hong Kong and Southeast Asia,
leveraging relationships of CDI Shanghai Management within local business
communities as well as with local provincial government officials to assist in
identifying business opportunities. Mr. Xiaowen (Robert) Zhuang, general manager
of CDI Shanghai Management, will supervise and monitor the operations of Capital
One. Mr. Zhuang is the brother of Dr. James Wang, our CEO and Chairman.

o In February 2007, CDI China acquired a 60% majority interest in CDI
Magnesium, a company incorporated in Brunei in February 2007 by Shanxi Jinyang
Coal and Coke Group Co., Ltd. CDI Magnesium was formed to operate a newly
constructed magnesium alloy plant in Taiyuan, China. It is expected that the
plant will process and manufacture a variety of magnesium alloy products. CDI
Magnesium expects to commence operations in July 2007.

o In February 2007 Chang Magnesium formed Excel Rise as a wholly owned
subsidiary. Excel Rise operates as an exporter of magnesium products to Europe,
Australia and Canada. The major suppliers will be Taiyuan Tongxiang Magnesium
Co. Ltd, Taiyuan Qingchen YiWei Magnesium Industry Co. Ltd., Taiyuan YiWei
Magnesium Factory, Taiyuan YiWei Magnesium Co. Ltd. and Shanxi Nichimen YiWei
Magnesium Industry Co., Ltd., all related parties.

As a result of the foregoing, during the three months ended March 31,
2007 our consolidated revenues including revenues from Lang Chemical, Chang
Magnesium, and CDI Wanda. In the aggregate, revenues from CDI China, as the
majority owner of Lang Chemical, Chang Magnesium, and CDI Wanda, represented
approximately 93.2% of our consolidated revenues. We did not report any revenues
related to Luma Logistics, Big Tree, Jieyang Big Tree, or CDI Magnesium during
the first quarter of fiscal 2007.

-43-

As described later in this section, during the first three months of
fiscal 2007 China Direct Consulting, Lang Chemical, Chang Magnesium and CDI
Wanda have all significantly increased their revenues from the comparable
periods in fiscal 2006. Since our acquisitions of Lang Chemical and Chang
Magnesium during the fourth quarter of fiscal 2006 through March 31, 2007 we
have provided those companies with approximately $2 million of additional
working capital. In order to support those revenue increases, as well as to
further increase their market shares, we expect to provide additional working
capital to each entity by the end of fiscal 2008, including approximately
$1,350,000 to CDI Wanda and approximately $1,250,000 to Chang Magnesium. We also
continue our efforts to expand our professional staff at China Direct Consulting
to support growth at that division. We believe we can bring a more Western-style
business acumen and bring efficiencies to each of our subsidiaries, which may
reduce unnecessary operating expenses and increase our profits from these
operations. Finally, subject to the availability of sufficient working capital,
during fiscal 2007 we hope to further expand our operations through revenues
from Big Tree, Jieyang Big Tree and CDI Magnesium.

During the balance of fiscal 2007 and beyond we also face a number of
challenges in growing our business, including continuing the integrating the
operations of our subsidiaries based in China, as well as developing the
operations of our newly formed subsidiaries. We will need to secure additional
working capital to provide funds for our subsidiaries to enable each to grow its
business and operations. During fiscal 2007 we will also work with the
management of the recent acquisitions to identify strategies to maximize the
potential of the subsidiaries. These strategies may take the form of an
investment for a new factory, increase in manufacturing capacity, upgrading 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 China. 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 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
the vast majority of these risks associated both with our operations and the
country in which they are located and these risks could result in significant
declines in our revenues and adversely affect our ability to continue as a going
concern.

-44-

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2007 AS COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2006

THREE MONTHS ENDED MARCH 31, INCREASE/DECREASE
2007 2006 $(2007 VS 2006)
------------ ------------ -----------------
(UNAUDITED)

Revenues .................................................. $ 30,498,940 106,415 30,392,525
Revenues-related party .................................... 440,000 100,000 340,000
------------ ------------
Total revenues ............................................ 30,938,940 206,415 30,732,525
Cost of revenues .......................................... 27,467,014 15,260 27,451,754
------------ ------------
Gross profit .............................................. 3,471,926 191,155 3,280,771
Selling, General, and administrative expenses-related party - 5,700 (5,700)
Selling, General, and administrative expenses ............. 837,509 338,440 499,069
------------ ------------
Total operating expenses ............................. 837,509 344,140 493,369
------------ ------------
Operating (loss) income .............................. 2,634,417 (152,985) 2,787,402
Other income .............................................. 9,936 - 9,936
Interest income ........................................... 29,166 - 29,166
Unrealized gain on trading securities ..................... - 411,675 (411,675)
Realized loss on sale of marketable securities ............ (15,973) - (15,973)
------------ ------------
Total other income ........................................ 23,129 411,675 (388,546)
------------ ------------
Net income before income taxes ............................ 2,657,546 258,690 2,398,856
Income taxes expense ...................................... (232,572) (102,441) (130,131)
------------ ------------
Net income before minority interest ....................... 2,424,974 156,249 2,268,725
Minority interest in income of subsidiary ................. (554,105) - (554,105)
------------ ------------
Net income ................................................ $ 1,870,869 $ 156,249 1,714,620
Foreign currency translation gain ......................... 80,158 - 80,158
Unrealized (loss) gain on marketable securities held
for sale, net of income taxes ............................. (948,997) 1,141,560 (2,090,557)
------------ ------------
Comprehensive income ...................................... $ 1,002,030 $ 1,297,809 (295,779)
============ ============

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REVENUES

Our revenues for the three months ended March 31, 2007 were $30,938,940
as compared to revenues of $206,415 for the three months ended March 31, 2006.
Included in revenues for the three months ended March 31, 2007 were revenues of
$2,109,130 attributable to China Direct Consulting (approximately 6.8% of total
revenues), revenues of $12,394,612 attributable to Lang Chemical (approximately
40.1% of total revenues), revenues of $14,416,451 attributable to Chang
Magnesium (approximately 46.6% of total revenues), and revenues of $2,018,748
attributable to CDI Wanda (approximately 6.5% of total revenues). For the period
ending March 31, 2006 our revenues were solely from the operations of China
Direct Consulting.

China Direct Consulting generates revenues from the provision of
consulting services to its client companies. China Direct Consulting's revenues
for the first quarter of fiscal 2007 increased $1,902,715, or approximately
922%, from the first quarter of fiscal 2006. This increase is primarily
attributable to revenues from new consulting contracts or additional services
rendered to existing clients.

Included in China Direct Consulting's revenues for March 31, 2007 are
cash revenues of $536,205 and revenues attributable to the value of marketable
securities received as compensation for its services of $1,572,925. Of the
$1,572,925 in revenues attributable to the value of marketable securities
received as compensation, $1,132,925 is related to compensation for services
from non-affiliated third party clients and $440,000 is related to the value of
marketable securities received by a client company which is a related party.
Included in China Direct Consulting's revenues for March 31, 2006 are cash
revenues of $14,840 and cash revenues from a related party of $100,000 and
revenues attributable to the value of marketable securities received as
compensation for its services of $91,575.

For the three months ended March 31, 2007 China Direct Consulting
generated revenues of $440,000 from Dragon Capital Group Corp., a related party,
which represents the value of marketable securities received as compensation.
For the three months ended March 31, 2006, we received cash fees of $100,000
from Dragon Capital Group Corp.

Management expects revenues for China Direct Consulting will continue
to increase during the balance of fiscal 2007. Following our capital raise in
the fourth quarter of fiscal 2006 we began expanding our infrastructure to
support the addition of more consulting clients. To date, we have added
personnel in the areas of business representation, accounting, legal and
administration and we are actively marketing China Direct Consulting's services
to potential new clients. In addition, China Direct Consulting will record
deferred revenue in each of fiscal 2007 and fiscal 2008 which represents
revenues China Direct Consulting has received for services which are being
amortized over the term of the consulting agreements. We anticipate that
$779,900 will be recognized over the next 12 months, and the remaining $584,925
will be recognized prior to December 31, 2008.

Lang Chemical generated revenues of $12,394,612 for the three months
ended March 31, 2007 from the sale and distribution of industrial grade
synthetic chemicals. The majority of Lang Chemical's customers are industrial
manufacturing facilities and trading companies. As described in Note 7-Pro Forma
Financial Information (unaudited) to the consolidated financial statements
appearing elsewhere in this quarterly report, for the three months ended March
31, 2006 Lang Chemical had total sales of $6,678,140. The increase in revenues
from the three months ended March 31, 2006 and the fiscal 2007 period is
primarily attributable to the expansion of products offered by Lang Chemical.
Based upon information known to us at this time, we anticipate that Lang
Chemical's revenues will continue to increase in the remaining periods of fiscal
2007.

-46-

Chang Magnesium generated revenues of $14,416,451 for the three months
ended March 31, 2007. Chang Magnesium and its wholly owned subsidiary Changxin
Trading process and distribute various forms of magnesium including magnesium
powder, magnesium scrap, magnesium alloy and various grades of ordinary
magnesium slabs. As set forth in Note 7-Pro Forma Financial Information
(unaudited) to the consolidated financial statements appearing elsewhere in this
quarterly report, for the three months ended March 31, 2006 Chang Magnesium had
total revenues of $5,315,805. The increase in revenues from the three months
ended March 31, 2006 and the fiscal 2007 period is attributable to the
commencement of operations of the refinery as well as the addition of Excel
Rise. During the three months ended March 31, 2006 Chang Magnesium's operations
were limited to its Changxin Trading subsidiary. Based upon information known to
us at this time, we also reasonably believe it will report increasing revenues
for the remaining periods of fiscal 2007.

For the CDI Wanda Reporting Period, CDI Wanda generated revenues of
$2,018,748 from the sale of environmentally safe recycling technological
applications. As set forth in Note 7-Pro Forma Financial Information (unaudited)
to the consolidated financial statements appearing elsewhere in this quarterly
report, for the three months ended March 31, 2006 CDI Wanda had total sales of
$20,265. The increase in revenues from the fiscal 2006 period to the fiscal 2007
period is attributable to increased market acceptance of our environmentally
friendly technological applications. In the first quarter of 2007 CDI Wanda
generated non-recurring revenues of $1,240,000 from Evermore Energy Company,
located in Australia, and revenues of $415,000 from Russian Aurora Energy
Company located in Russia. Based upon information known to us at this time, we
also reasonably believe it will report increasing revenues for the remaining
periods of fiscal 2007.

COST OF REVENUES AND GROSS PROFIT

For the three months ended March 31, 2007, our total cost of revenues
was $27,467,014, as compared to $15,260 for the three months ended March 31,
2006, an increase of $27,451,754 or approximately 179,893%. Of the total cost of
revenues of $27,467,014, $12,098,500 is attributable to Lang Chemical,
$13,496,206 is attributable to Chang Magnesium, $1,591,140 is attributable to
CDI Wanda for the CDI Wanda Reporting Period only, and $281,168 is attributable
to China Direct Consulting.

Cost of revenues for China Direct Consulting includes direct costs it
incurs in rendering the services to its client companies, which include
marketing, business development, legal, auditing and accounting fees directly
related to the particular client. In addition, it may engage certain third party
consultants to assist in providing the contracted services to the client company
and the costs of those third party consultants are included in its cost of
revenues. China Direct Consulting's arrangements with its consulting clients
generally provide that its fee will cover the costs 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, China Direct Consulting's cost of revenues can ultimately be
significantly higher than it initially projected, which can adversely impact our
gross profit margins. China Direct Consulting's cost of revenues was
approximately 13% for the three months ended March 31, 2007 as compared to
approximately 7% for the three months ended March 31, 2006. These costs of
revenues in future periods are 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 three months
ended March 31, 2007 to 2006.

-47-

Lang Chemical's cost of revenues includes the cost of goods it sells.
For the three months ended March 31, 2007, Lang Chemical's cost of revenues was
$12,098,500 or approximately 97.6% of its revenues, which is consistent with its
historical operations. As set forth in Note 7 Pro Forma Financial Information
(unaudited) to the consolidated financial statements appearing elsewhere in this
quarterly report, for the three months ended March 31, 2006, its cost of
revenues was approximately 98.5% of its total sales. We estimate gross margins
for Lang Chemical could potentially improve with the application of more
Western-style cash management.

Chang Magnesium's cost of revenues includes the cost of goods it sells.
For the three months ended March 31, 2007, Chang Magnesium's cost of revenues
was $13,496,206 or approximately 93.6% of its revenues. As set forth in Note 7-
Pro Forma Financial Information (unaudited) to the consolidated financial
statements appearing elsewhere in this quarterly report, for the three months
ended March 31, 2006 cost of revenues for Chang Magnesium was approximately
99.5% of its total sales. This reduction in cost of revenues as a percentage of
revenues and improvement in gross margin for the three months ended March 31,
2007 is attributable to reduced cost of goods on inventory levels maintained at
December 31, 2006. We anticipate that Chang Magnesium will continue to report
gross profit margins ranging from 5% to 6% during the balance of fiscal 2007.

CDI Wanda's cost of revenues includes the cost of goods it sells. For
the CDI Wanda Reporting Period, cost of revenues for CDI Wanda was approximately
79% of its revenues. As set forth in Note 7-Pro Forma Financial Information
(unaudited) to the consolidated financial statements appearing elsewhere in this
annual report, for the three months ended March 31, 2006 cost of revenues for
CDI Wanda was approximately 58% of its total sales. This increase in cost of
revenues as a percentage of revenue and reduction in gross margin for the three
months ended March 31, 2007 is attributable to increased cost of raw materials
related to sales to two foreign sources who requested specific qualifications
which increased the cost of goods sold on these orders. We expect CDI Wanda will
generate gross margins of 10% to 15% in during the balance of fiscal 2007.

TOTAL OPERATING EXPENSES

Our total operating expenses for the three months ended March 31, 2007
were $837,509 as compared to $344,140 for the three months ended March 31, 2006,
an increase of $493,369, or approximately 143%. Of our total operating expenses
for the three months ended March 31, 2007, $427,144 is attributable to our
parent company and China Direct Consulting which includes CDI Shanghai
Management and its wholly owned subsidiary Capital One, $36,118 is attributable
to Lang Chemical, $84,406 is attributable to Chang Magnesium, and $289,841 is
attributable to CDI Wanda.

The parent company and China Direct Consulting's operating expenses
increased $83,004, or approximately 24% the three months ended March 31 from
2007 to 2006. These operating expenses 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. The increase in the fiscal 2007 period reflects our recent
increase in infrastructure. We anticipate that the operating expenses for the
parent company and China Direct Consulting will continue to increase as we
continue to expand our operations and implement our business model. Included in
these anticipated increases are salaries and benefits for additional employees,
increased marketing and advertising expenses as well as increased professional
fees. In addition, unless there are further postponements by the Securities and
Exchange Commission of 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 control over financial reporting, including a statement as to whether
or not internal control over financial reporting is effective. In order to

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comply with this requirement we will need to engage a consulting firm to
undertake an analysis of our internal controls as we do not have the expertise
to conduct the necessary evaluation. While we have yet to engage such a
consulting firm, as a result of the diversity of our operations and the number
of subsidiaries located outside the U.S. we expect the costs associated with the
development of the necessary documentation and testing procedures required will
be significant.

Lang Chemical's operating expenses include selling expenses as well as
general and administrative expenses. Operating expenses for the first quarter of
fiscal 2007 were $36,118, and included selling expenses of $101,662 and general
and administrative expenses of $37,397 which was offset by a bad debt recovery
of $102,942. As set forth in Note 7-Pro Forma Financial Information (unaudited)
to the consolidated financial statements appearing elsewhere in this quarterly
report, for the three months ended March 31, 2006 Lang Chemical had total
operating expenses of $92,226. We anticipate that Lang Chemical's operating
expenses for the balance of fiscal 2007 will be consistent with those recognized
for the 12 months ended December 31, 2006.

Chang Magnesium's operating expenses of $84,406 for the three months
ended March 31, 2007 generally consists of selling expenses of $45,962, and
general and administrative expenses of $38,444. As set forth in Note 7-Pro Forma
Financial Information (unaudited) to the consolidated financial statements
appearing elsewhere in this quarterly report, for the three months ended March
31, 2006 Chang Magnesium had total operating expenses of $78,090 which
represented approximately 1.5% of its sales for fiscal 2006 as compared to
$84,406, or approximately 0.6%, for the three months ended March 31, 2007. For
the three months ended March 31, 2006 operating expenses for Chang Magnesium
included shipping expenses, while for the three months ended March 31, 2007,
Chang Magnesium passed the shipping expenses along to its customers. We
anticipate that Chang Magnesium's operating expenses for fiscal 2007 will be
consistent with those recognized for the 12 months ended December 31, 2006 and
2005, subject to any impact of shipping costs.

OTHER INCOME (EXPENSE)

Our total other income for the three months ended March 31, 2007 was
$23,129, as compared to $411,675 for the three months ended March 31, 2006, a
decrease of $388,546 or approximately 94%. The decrease is primarily the result
of an unrealized loss on trading securities of $0 for the three months ended
March 31, 2007 as compared to unrealized gain on trading securities of $411,675
for the three months ended March 31, 2006, and a realized loss on the sale of
marketable securities of $15,973 for the three months ended March 31, 2007 as
compared to realized gain on the sale of marketable securities of $0 for the
three months ended March 31, 2006. For the three months ended March 31, 2007 we
reclassified investment in trading securities to investment in marketable
securities held for sale; accordingly unrealized gains or losses on marketable
securities held for sale are included as a component of comprehensive income.
These decreases were offset by Lang Chemical's rental income of $7,229 and Chang
Magnesium's interest income $12,990. CDI Wanda had an interest expense of
$1,374. As described elsewhere herein, the gain or loss is a result of
fluctuations in the market price of the underlying security and these non cash
gains or losses can have a significant impact, positive or negative, on our
results of operations.

INCOME TAX BENEFIT (EXPENSE)

For the three months ended March 31, 2007 we recorded an income tax
expense of $232,572 as compared to an income tax expense of $102,441 for the
three months ended March 31, 2006, an increase of $130,131, or approximately
127%. As we report profitable operations we are required to record income tax
expenses on those operations. However, as the majority of revenues related to
China Direct Consulting are paid in the form of securities, some of which are
restricted from sale at the time received, our revenue model creates a risk that

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we will not have sufficient cash resources to satisfy our tax obligations as
they become due. China Direct Consulting provides its services pursuant to
written agreements which may vary in duration. Revenues are recognized over the
terms of the agreements. China Direct Consulting recognized revenues of
$1,572,925 and $91,575 in connection with the receipt of securities based on the
terms of the consulting contracts for the three months ended March 31, 2007 and
2006, respectively. China Direct Consulting recorded deferred revenues of
$1,364,825 in connection with the receipt of securities based on the terms of
the consulting contracts at March 31, 2007. At March 31, 2007 our consolidated
balance sheet reflects a deferred income tax liability for income tax of $0. The
recognition of these revenues, however, will not provide offsetting cash to us
for the payment of current taxes.

NET (LOSS) INCOME

For the three months ended March 31, 2007 we reported net income of
$1,870,869 as compared to net income of $156,249 for the three months ended
March 31, 2006, an increase of $1,714,620 or approximately 1,097%. This increase
for the three months ended March 31, 2007 is primarily attributable to net
income of $171,235 from Lang Chemical, adjusted for our 51% ownership interest,
$432,903 from Chang Magnesium, adjusted for our 51% ownership interest, $69,560
from CDI Wanda, adjusted for our 51% ownership interest, and $1,197,171 from
China Direct Consulting.

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

As described elsewhere herein, if we are unable to liquidate securities
received as compensation these securities are classified on our consolidated
balance sheet as marketable securities held for sale. 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. For the three months ended March 31, 2007, we recognized an unrealized
loss of $607,539 on marketable securities, held for sale, net of income tax, and
$341,458 on marketable securities held for sale-related party, net of income
tax, for a total loss of $948,997 as compared to an unrealized gain of
$1,141,560 for the three months ended March 31, 2006, a decrease of $2,090,557
or 183%. 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 on marketable securities will
be reflected in our net income for the period in which the security is
liquidated. At March 31, 2007 and March 31, 2006 the total amount on 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. As described elsewhere herein, we may never be able to liquidate
these securities.

COMPREHENSIVE INCOME

We reported comprehensive income of $1,002,030 for the three months
ended March 31, 2007 as compared to $1,297,809 for the three months ended March
31, 2006, a decrease of $295,779, or 23%. Comprehensive income includes the gain
or loss of on all marketable securities, held for sale, including related party
securities. These securities are valued 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 on marketable securities will
be reflected in our net income for the period in which the security was
liquidated. As mentioned earlier we reported a net income of $1,870,869, foreign
currency translation gain of $80,158. These two figures when combined with the
unrealized loss of $948,997 as described in the section above amounts to
$1,002,030 of comprehensive income for the year ended March 31, 2007.

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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. The following table provides certain balance sheet comparisons
between March 31, 2007 and December 31, 2006:

MARCH DECEMBER
31, 2007 31, 2006 $ CHANGE
---------- ---------- ----------
(UNAUDITED)
---------- ---------- ----------

Working Capital ................................................ 9,770,846 6,788,638 2,982,208
Cash ........................................................... 5,408,626 3,030,345 2,378,281
Notes Receivable ............................................... 44,751 942,117 (897,366)
Investment in marketable securities, held for sale ............. 2,191,400 - 2,191,400
Investment in marketable securities, held for sale-related party 1,410,800 1,325,400 85,400
Investment in trading securities ............................... - 2,166,603 (2,166,603)
Investment in trading securities-related party ................. - 311,611 (311,611)
Accounts receivable ............................................ 6,132,446 2,770,062 3,362,384
Inventories, net ............................................... 2,713,748 5,494,292 (2,780,544)
Prepaid expenses and others .................................... 3,531,506 1,272,246 2,259,260
Prepaid expenses-related party ................................. 3,611,243 - 3,611,243
Other receivable ............................................... 58,510 - 58,510
Due from related party ......................................... 1,435,204 - 1,435,204
Total current assets ........................................... 26,538,234 17,312,676 9,225,558
Property and equipment, net .................................... 3,835,375 2,753,468 1,081,907
Property use rights, net ....................................... 66,666 - 66,666
Prepaid expenses-long term ..................................... 222,728 321,548 (98,820)
Cash-Restricted ................................................ - 447,713 (447,713)
---------- ---------- ----------
Total assets ................................................... 30,663,003 20,835,405 9,827,598
---------- ---------- ----------

Loans Payable-short term ....................................... 395,014 1,536,064 (1,141,050)
Accounts payable and accrued expenses .......................... 3,462,680 4,517,354 (1,054,674)
Accounts payable-related party ................................. 2,755,759 1,546,880 1,208,879
Liabilities in connection with acquisitions-related party ...... 368,272 - 368,272
Advance from customers ......................................... 6,132,222 916,764 5,215,458
Deferred revenues-short term ................................... 779,900 779,900 -
Due to executive officers ...................................... - 140,893 (140,893)
Other payable .................................................. 2,264,652 45,623 2,219,029
Income tax payable ............................................. 608,889 599,699 9,190
Deferred income tax payable .................................... - 440,861 (440,861)
Total current liabilities ...................................... 16,767,388 10,524,038 6,243,350
Other payable-long term ........................................ 718 22,793 (22,075)
Deferred revenues - long term .................................. 584,925 779,900 (194,975)
Total Liabilities .............................................. 17,353,031 11,326,731 6,026,300
Minority Interest .............................................. 4,935,370 3,644,350 1,291,020
---------- ---------- ----------
Total stockholders' equity ..................................... 8,374,602 5,864,324 2,510,278
---------- ---------- ----------

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At March 31, 2007, we held cash and cash equivalents of $5,408,626 and
working capital of $9,770,846. Our working capital increased from $6,788,638 at
December 31, 2006 an increase of $2,982,208. Our cash position increased from
$3,030,345 at December 31, 2006, an increase of $2,378,281. At December 31, 2006
our cash position by geographic area is as follows:

United States ... $3,002,260
China ........... 2,406,366
----------
Total ........... $5,408,626
==========

In addition to the increase in cash and cash equivalents of $2,378,281,
our current assets increased to $26,538,234 at March 31, 2007 from $17,312,676
at December 31, 2006 an increase of $9,225,558 or approximately 53%. Changes in
our total assets from December 31, 2006 to March 31, 2007 include the following:

o an increase of $3,362,384 in accounts receivable. At March 31, 2007
our consolidated balance sheet reflects a total accounts receivable due us, net
of allowance for doubtful accounts of $8,358, of $6,132,446 as compared to
$2,770,062 at December 31, 2006. Included in the amount due at March 31, 2007 is
$37,175 due China Direct Consulting, $4,435,051 due Chang Magnesium, $1,618,494
due Lang Chemical, and $41,726 due CDI Wanda. Chang Magnesium, Lang Chemical and
CDI Wanda all generally offer payment terms of 90 days. For the three months
ended March 31, 2007, the average turn on accounts receivable for Chang
Magnesium was 18 days, the average turn on accounts receivable for Lang Chemical
was 10 days, and the average turn on accounts receivable for CDI Wanda was 20
days. We do not anticipate any change in either the terms of sale or collection
history at these companies in fiscal 2007

o an increase of $2,259,260 in prepaid expenses and others. At March
31, 2007 our consolidated balance sheet includes prepaid expenses and others of
$3,531,506 as compared to prepaid expenses and others of $1,272,246 at December
31, 2006. At March 31, 2007 prepaid expenses and others of $3,531,506 includes
$1,798,285 related to Chang Magnesium which represents prepayments to vendors
for merchandise that had not yet been shipped to Chang Magnesium, $693,127
reflects value added tax refunds available from the Chinese government related
to Chang Magnesium, $453,770 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 under the terms of 36 month agreements, $401,350 relates to Lang
Chemical which represents a prepayment to vendors for merchandise that had not
yet been shipped to Lang Chemical, $181,510 relates to CDI Wanda which
represents prepayments to vendors for merchandise that had not yet been shipped
to CDI Wanda, and $3,464, relate to Jieyang Big Tree.

o an increase of $3,611,243 in prepaid expenses-related party. At March
31, 2007 our consolidated balance sheet includes in prepaid expenses -related
party of $3,611,243 as compared to in prepaid expenses-related party of $0 at
December 31, 2006. Prepaid expenses-related party represent payments of
$3,148,335 to Taiyuan YiWei Magnesium Industry Co., Ltd., a related party, for
inventory which has not yet been received by Chang Magnesium. At March 31, 2007,
Lang Chemical prepaid NanTong LangYuan Chemical Co., Ltd. $462,908 for the
future delivery of inventory.

o an increase of $58,510 in other receivables which is attributable to
a one time purchase of materials by CDI Wanda which were in turn sold to
customer at cost in a courtesy transaction.

o an increase of $1,435,204 in due from related party which includes:

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o a loan of $996,783 due Chang Magnesium by Asia Magnesium Industry
Co., Ltd., and as described later in this section, during the first quarter of
fiscal 2007 Chang Magnesium borrowed $996,783 from a related party and these
funds were advanced to Asia Magnesium Industry Co., Ltd., an unrelated third
party which is a 52% owner of a company developing a new magnesium processing
facility. We are in preliminary discussions to acquire Asia Magnesium Industry
Co., Ltd. There are no written agreements related to this advance which we deem
due upon demand; and

o a loan of $438,421 due from Shantou Dashu to Jieyang Big Tree. This
loan was made prior to our acquisition of control of Jieyang Big Tree.

o an increase of $1,081,907 in property and equipment, net of
accumulated depreciation of $226,250. This increase is attributable to the
recent acquisitions of CDI Wanda, CDI Magnesium, and Jieyang Big Tree which
represent increases of $985,800, $3,100 and $100,000 respectively. These
increases were offset by decreases of $4,050, $2,523, and $420 in Lang Chemical,
Chang Magnesium and China Direct Consulting, respectively, which reflect
reductions in the carrying value as a result of depreciation.

o an increase of $66,666 in property use rights, net of accumulated
amortization. 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 this property use right over the three years beginning April 1, 2007.

These increases were offset by the following:

o a decrease in notes receivable of $897,366. At March 31, 2007 we
reflect notes receivable of $44,751 as opposed to $942,117 at December 31, 2006.
At March 31, 2007 our notes receivable reflect $44,751 due to Lang Chemical. At
December 31, 2006 we reflected a note receivable of $942,117 due to Lang
Chemical from Shanghai Wujin Chemical Co., Ltd. This note was related to the
purchase of raw materials from Lang Chemical; and was satisfied in the three
months ended March 31, 2007.

o a decrease of $201,414 in total investment in trading/marketable
securities held for sale. This decrease is due to the following;

o an increase of $2,191,400 in investment in marketable
securities, held for sale. Investment in marketable securities, held for sale
represents the value of securities held by China Direct Consulting which are
restricted from sale. $1,445,400 of the increase is related to marketable
securities received during the three months ended March 31, 2007 and $746,000 is
related to the change in the value of marketable securities held at December 31,
2006. This represents the value of marketable securities held by China Direct
Consulting at March 31, 2007 which were received as compensation for services
rendered. This asset represents securities of Linkwell Corporation (OTCBB:
LWLL), Dragon International Group Corp. (OTCBB: DRGG), Sunwin International
Neutraceuticals, Inc. (OTCBB: SUWN) and Sense Holdings, Inc. (OTCBB: SEHO), all
of which have fairly liquid trading markets. However, as these shares are all
traded in the over the counter market which is generally not considered as
liquid a market as an exchange such as NASDAQ, we may be unable to liquidate
these securities at their current carrying value at such time as we are able to
sell the securities,

o an increase of $85,400 in investment in marketable
securities, held for sale-related party. This amount consists of securities of
Dragon Capital Group Corp., a related party, received as compensation for
services. $340,000 of the increase is related to marketable securities received
during the three months ended March 31, 2007, which was offset by a decrease of
$254,600 in the value of marketable securities held at March 31, 2007 from the
carrying value at December 31, 2006. These securities were issued to us by a

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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., the 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.

o a decrease of $2,166,603 in investment in trading
securities. At March 31, 2007 all securities are reflected as investment in
marketable securities, held for sale, and investment in marketable securities,
held for sale-related party.

o a decrease of $311,611 in investment in trading
securities-related party. At March 31, 2007 all securities are reflected as
investment in marketable securities, held for sale, and investment in marketable
securities, held for sale-related party.

o a decrease of $2,780,544 in inventory. The decrease at March 31, 2007
is primarily attributable to a reduction in inventory of approximately
$3,066,000 at Chang Magnesium as a result of increased sales.

o a decrease of $98,820 in prepaid expenses-long term. At March 31,
2007 we reflect prepaid expenses-long term of $222,728 as compared to $321,548
at December 31, 2006. This represents prepaid expenses related to China Direct
Consulting which represents the fair value of securities received as
compensation which were assigned to our executive officers, as described above
which will be recognized 12 months beyond the date of our consolidated balance
sheet, and

o a decrease of $447,713 in restricted cash. During the first quarter
of fiscal 2007 Lang Chemical satisfied a loan receivable with a bank for which
it had a corresponding deposit of restricted cash. Upon satisfaction of the loan
the cash was released.

As a result of the foregoing, our total assets increased $9,827,598 at
March 31, 2007 from December 31, 2006. Of the total assets of $30,663,003 at
March 31, 2007, $7,336,348 relate to China Direct which included China Direct
Consulting, CDI Shanghai Management and its wholly owned subsidiary Capital One,
$17,530,830 relate to Chang Magnesium, $3,577,439 relate to Lang Chemical,
$446,314 relate to Jieyang Big Tree, $166,666 relate to CDI Magnesium, and
$1,605,406 related to CDI Wanda. China Direct assets primarily consist of cash
of $3,002,260, investments in marketable securities, held for sale of
$2,191,400, and investment in marketable securities, held for sale-related party
valued at $1,410,800, and accounts receivable of $37,175. Chang Magnesium assets
are primarily cash of $2,010,573, inventory of $2,187,033, property plant and
equipment, net of accumulated depreciation valued at $2,261,645, and accounts
receivable valued at $4,435,051. Lang Chemical assets primarily consist of cash
of $339,668, notes receivable of $44,751, accounts receivable of $1,618,494,
prepaid expenses of $401,350, prepaid expenses of related party $462,908,,
inventory of $243,005 and property and equipment, net of accumulated
depreciation valued at $466,616.

Our total liabilities at March 31, 2007 increased $6,026,300 from
December 31, 2006. Principal changes in our total liabilities at March 31, 2007
from December 31, 2006 include the following:

o an increase of $1,208,879 in accounts payable-related party which
primarily represents amounts due by Chang Magnesium to Taiyuan YiWei Magnesium
Industry Co., Ltd. for the purchase of raw materials.

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o an increase of $5,215,458 in advances from customers. Advances from
customers increased to $6,132,222 at March 31, 2007 from $916,764 at December
31, 2006. Advances from customers represent amounts advanced to Chang Magnesium
and Lang Chemical by its customers for product orders which have not yet been
shipped. At March 31, 2007 this amount included $5,907,531 related to Chang
Magnesium as compared to $605,000 at December 31, 2006, and $217,586 related to
Lang Chemical as opposed to $311,000 at December 31, 2006. As well we have
$7,105 related to CDI Wanda for which there was no amount reflected at December
31, 2006. These amounts will be reduced when the corresponding order is shipped.

o an increase of $2,219,029 in other payables which is primarily
attributable to:

o $1,255,306 at Chang Magnesium which includes $996,783 due
Japan Material Industry Co., Ltd., a related party. As described earlier in this
section, during the first quarter of fiscal 2007 this company advanced Chang
Magnesium the funds which Chang Magnesium in turn advanced to Asia Magnesium
Industry Co., Ltd. There are no written agreements related to this advance to
Chang Magnesium which we deem to be an interest free advance, due upon demand.
Other payables related to Chang Magnesium includes $258,523 due a third party
customer as a refund on an advance from a customer;

o $890,493 at CDI Wanda which includes $344,821 of VAT tax
payable and $528,331 due a contractor in connection with the construction of a
fuel station; and

o $118,853 at Lang Chemical which represents a VAT tax
payable.

o an increase of $9,190 in income tax payable, and

o an increase of $368,272 in liabilities in connection with
acquisitions-related party as a result of the recent acquisitions of CDI Wanda,
Jieyang Big Tree and CDI Magnesium. At March 31, 2007 our consolidated balance
sheet reflected due to related party of $368,272 which represented amounts
payable to our subsidiaries for paid in capital. Included in the amount is
$268,272 worth of common stock due to Guihong Zheng and $100,000 reflects the
value of common stock due to Wuliang Zhang, the 40% owner of CDI Magnesium. We
agreed to issue the aggregate of 78,654 shares of our common stock, valued at
$368,272, to the minority holders of these companies as consideration for our
acquisition of a majority interest. At March 31 2007 we had yet to issue the
shares.

These increases were offset by the following:

o a decrease of $1,141,050 in loans payable. Loans payable-short term
decreased to $395,014 at March 31, 2007 as compared to $1,536,064 at December
31, 2006. At March 31, 2007 Lang Chemical had short term obligations to a bank
totaling $136,646 due January 4, 2008 which is secured by Lang Chemical
property. In addition, Lang Chemical has a loan payable to Shanghai WuJin
Chemical Co., Ltd., a customer and client, in the amount of $193,776. This loan
payable, in the form of a trade acceptance guaranteed by a financial institution
in China, due on April 30, 2007, was for the purchase of finished goods for
resale by Lang Chemical. This loan was satisfied on April 30, 2007. At March 31,
2007 CDI Wanda had short term obligations to a bank totaling $64,592 due August
3, 2007. The decrease in loans payable at March 31, 2007 from December 31, 2006
is primarily attributable to the satisfaction of loans during the period.

-55-

o a decrease of $1,054,674 in accounts payable and accrued expenses.
Accounts payable decreased to $3,462,680 at March 31, 2007 from $4,517,534 at
December 31, 2006. At March 31, 2007 the $3,462,680 includes $142,678 due by our
parent company and China Direct Consulting, $2,125,093 due by Chang Magnesium,
$1,142,817 due by Lang Chemical, and $10,831 due by CDI Wanda. The decrease in
accounts payable at March 31, 2007 from December 31, 2006 is primarily
attributable to the satisfaction of accounts payable during the period.

o a decrease of $140,893 in due to executive officers. At December 31,
2006 our consolidated balance sheet reflected due to executive officers of
$140,893 which represented amounts advanced to us by Dr. Wang and Messrs. Siegel
and Stein for working capital. These amounts were satisfied in the first quarter
of 2007.

o a decrease of $440,861 in deferred income tax payable. Deferred
income tax will be due on deferred revenues when recognized. The recognition of
these revenues, however, will not provide offsetting cash to us for the payment
of these taxes. As a result of unrealized losses on investments in marketable
securities, our deferred tax liability at March 31, 2007 is $0.

o a decrease of $22,075 in long term debt which reflects the
classification of $22,075 from long term debt to loans payable-short term as
these amounts are due within 12 months, and

o a decrease of $194,975 in deferred revenues-long term. At March 31,
2007 our consolidated balance sheet reflects deferred revenues-long term of
$584,925 as compared to $779,900 at December 31, 2006. For the three months
ended March 31, 2007 we realized $194,975 of the deferred revenues as reflected
at December 31, 2006. Deferred revenues-long term reflects revenues of China
Direct Consulting. Theses revenues are comprised of securities received as
compensation which are being amortized over the term of the consulting
agreement.

At March 31, 2007 our total liabilities increased to $17,353,031 from
$11,326,731 at December 31, 2006, an increase of $6,026,300 or approximately
53%. At March 31, 2007, $2,125,590 of our total liabilities are related to our
parent company and China Direct Consulting and consist primarily of liabilities
in connection with acquisitions of $368,272, deferred revenues short term of
$1,364,825, income tax payable of $212,607, and accounts payable of $142,678.
Liabilities related to Chang Magnesium at March 31, 2007 are $12,415,231 and
consist primarily of accounts payable and accrued expenses of $2,125,093,
accounts payable-related party of $2,755,759 which reflects accounts payable due
to Taiyuan Yiwei Magnesium Industry Co. Ltd., a related party, advances from
customers of $5,907,531 and income taxes payable of $371,543. At March 31, 2007
$1,835,136 of our total liabilities relate to Lang Chemical and primarily
consist of accounts payable and accrued expenses of $1,142,817, loans
payable-short term of $330,422, and advances from customers of $217,586. At
March 31, 2007, $977,074 of our total liabilities relate to CDI Wanda and
primarily consist of other payables of $890,493, loans payable-short term of
$64,592, and accounts payable and accrued expenses of $10,831.

At March 31, 2007 our consolidated balance sheet reflects a total
minority interest of $4,935,370, of which $3,238,293 relates to Chang Magnesium,
$178,848 relates to Jieyang Big Tree, $558,234 related to CDI Wanda, $893,329
relates to Lang Chemical and $66,666 relates to CDI Magnesium. The minority
interest represents the equity of the minority shareholders' portion in the
company's subsidiaries.

For the three months ended March 31, 2007, our cash increased to
$5,408,626 from $3,030,345 at December 31, 2006 an increase of $2,378,281 or
approximately 78%. This increase consisted of $1,763,463 of total cash provided
by operating activities, $55,835 of cash provided by financing activities,
$506,231 of cash provided by investing activities, and the effect of prevailing
exchange rate on cash of $52,752.

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Net cash provided by operating activities for the three months ended
March 31, 2007 was $1,763,463 as compared to net cash used in operating
activities of $(174,565) for the three months ended March 31, 2006, an increase
of $1,938,028. For the three months ended March 31, 2007, our operating
subsidiaries used cash in operating activities to primarily fund increases in
inventory of $3,444,443 and advance from customers of $3,561,494, accounts
payable-related party of $1,208,879, and other payable of $1,675,498. These
increases were primarily offset by non-cash expenses totaling $704,056, a
decrease of prepaid expenses of $4,705,222, and a decrease of accounts
receivables of $3,337,203. For the three months ended March 31, 2006, we used
cash in operating primarily to fund increases in deferred revenue of $1,007,325,
deferred income tax of $397,575, accounts payable and accrued expenses of
$17,044. These increases were primarily offset by non-cash expenses totaling
$672,416, income tax payable of $350,134, and prepaid expenses of $730,208.

Net cash provided by investing activities was $506,231 for the three
months ended March 31, 2007 as compared to net cash used in investing activities
of $(3,171) the three months ended March 31, 2006, an increase of $509,402. This
change is primarily attributable to an increase of $125,638 received from the
sale of marketable securities, $55,777 of cash acquired in acquisitions which
was offset primarily by a decrease of $447,713 in restricted cash as well as a
decrease of $897,366 in notes receivable, an increase of $996,783 in amounts due
from a related party and the purchase of $23,480 in property and equipment.

Net cash provided by financing activities for the three months ended
March 31, 2007 was $55,835 as compared to $172,176 for the three months ended
March 31, 2006, a decrease of $116,341. This decrease includes repayment of
loans payable of $1,228,272 related to Lang Chemical and the repayment of
advances in the amount of $140,893 made by our executive officers. These
decreases were offset by $1,425,000 of proceeds from exercises of warrants
and/or options.

Our capital commitments for fiscal 2007 include 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 secure
additional working capital to complete construction of the facility. We also
desire to expand our capabilities to create an additional manufacturing facility
for our subsidiary, Chang Magnesium, which is expected to cost between
$3,400,000 and $3,600,000. In addition, Chang Magnesium has the option to invest
up to $3,650,000 to construct an additional manufacturing facility. We will need
to secure investment capital to commit resources to these projects. In addition,
we have certain other obligations for fiscal 2007 which include:

o At March 31, 2007 Lang Chemical had short term obligations to a bank
totaling $136,646 due January 4, 2008 which is secured by Lang Chemical
property. In addition, Lang Chemical has a loan payable to Shanghai WuJin
Chemical Co., Ltd., a customer and client, in the amount of $193,776. This loan
payable, in the form of a trade acceptance guaranteed by a financial institution
in China, was on April 30, 2007, was for the purchase of finished goods for
resale by Lang Chemical. This amount was satisfied on April 30, 2007. At March
31, 2007 CDI Wanda had short term obligations to a bank totaling $64,592 due
August 3, 2007. We intend to satisfy these obligations from cash on hand;

o Under the terms of various agreements related to our operating
subsidiaries we have agreed to provide capital up to $3,170,000, including
$1,250,000 to Chang Magnesium, $820,000 to CDI Wanda, $1,000,000 to Jieyang Big
Tree (subject to the satisfaction of certain milestones) and $100,000 to CDI
Magnesium. These commitments will be satisfied either from our working capital
or cash generated by operations; and

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o pursuant to a joint venture agreement entered on April 24, 2007,
Jinan has the option to contribute capital to acquire an ownership interest in a
new entity to be created by Guangdong Qingyuan Changxin Waste Material Renewable
Processing Co., Ltd. Under the terms of the agreement Jinan has the right to
invest up to $1,310,000 to acquire a 51% equity ownership of the new entity to
be formed. As of the date of this report Jinan has not conducted an analysis of
the investment and has not made the determination to exercise its option.

While we have recently sold securities which provide us with additional
working capital, in order to satisfy these obligations, fund our existing
operations and fully pursue the expansion of our business plan, we will be
required to raise additional working capital. As described elsewhere herein,
during the first quarter of fiscal 2007 we engaged Roth Capital Partners as our
exclusive investment banker to provide assistance to us at such time as we seek
to enter the capital markets. 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
will in all likelihood 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 not only be unable to
fully implement our business model to expand our operations and acquire
additional companies, but as well we could be unable to satisfy our current
obligations and operating expenses. In this event, we could be forced to curtain
our plans to acquire additional companies and be required to restructure our
obligations for capital contributions to these majority owned subsidiaries.
Without the additional capital, those companies will be unable to expand their
existing operations, in the case of Lang Chemical, CDI Wanda and Chang
Magnesium, or otherwise operate, in the cases of Jieyang Big Tree and CDI
Magnesium. Any inability on our part to raise capital during fiscal 2007 as
needed, will be materially adverse to our results of operations and liquidity.

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 audited consolidated financial statements included in this annual report.
Management believes that the application of these policies on a consistent basis
enables us to provide useful and reliable financial information about the
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 five to forty 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

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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 is 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.

The Company classifies its 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, the Company receives securities which include stock
purchase warrants and common and preferred stock from companies as part of its
compensation for services. These securities are stated at 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". 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. The policy of
China Direct Consulting is to sell securities it receives 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. The Company
recognizes 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.

Net unrealized (loss) or gains related to investments in trading
securities for the three months ended March 31, 2007 and 2006 are $ 0 and
$411,675, respectively. Net realized (loss) or gain related to investments in
marketable securities for the three months ended March 31, 2007 and 2006 are
$(15,973) and $0, respectively.

Unrealized (loss) or gains on marketable securities held for
sale-related party, net of tax for the three months ended March 31, 2007 and
March 31, 2006 were $(948,997) and $1,141,560 respectively.

Stock Based Compensation

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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.

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. 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 services pursuant to written
agreements which vary in duration. Revenues are recognized in accordance with
the terms of the agreements. China Direct Consulting's revenues 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. The policy of China
Direct Consulting is to sell securities it receives 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. China Direct
Consulting recognizes revenue for such stock purchase warrants when received

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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. China Direct Consulting recognized revenues amounting to
$2,109,130 and $206,415 for three months ended March 31, 2007 and 2006,
respectively, of which $1,572,925 and $91,575 were in connection with the
receipt of equity instruments for the three months ended March 31, 2007 and 2006
respectively. Furthermore of these amounts, Dragon Capital Group Corp., a
related party comprised $440,000 and $0 of our revenue in connection with the
receipt of equity instruments for three months ended March 31, 2007 and 2006,
respectively.

March 31, 2007 March 31, 2006
-------------- --------------

Cash ..................................... $ 536,205 $ 14,840
Cash-related party ....................... - 100,000
---------- ----------
Total Cash ............................... $ 536,205 $ 114,840

---------- ----------
Total China Direct Consulting Revenues ... $2,109,130 $ 206,415
========== ==========

Additionally, the Company has deferred revenues of $1,364,825 in
connection with the receipt of securities at March 31, 2007. The fees due under
the contracts with our consulting clients are amortized over the term of the
agreement. Our consolidated balance sheet at March 31, 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 month period. China Direct Consulting will record
$779,900 of deferred revenue for the period ended March 31, 2008. This amount
includes the following; securities of Sunwin International Neutraceuticals, Inc.
valued at $186,300, securities of Dragon International Group Corp. valued at
$311,600, and securities of Linkwell Corp. valued at $282,000. $584,925 will be
realized again in 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,
and collectibility is reasonably assured. Lang Chemical and Chang Magnesium
revenues from the sale of products are recorded when the goods 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 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.

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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.

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.

ITEM 3. CONTROLS AND PROCEDURES

Our management, which includes our CEO and our Vice President of
Finance, 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.

Based upon that evaluation, our management has concluded that our
disclosure controls and procedures are effective for timely gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934, as amended.

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.

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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 May 8, 2007 we entered into a amended agreement related to our
acquistion of 51% of CDI Wanda in February 2007. The revised terms provide that
we are tendering $511,458 on or before April 30, 2007 to acquire a 51% majority
interst in CDI Wanda. As well in the future should CDI China permit other
shareholders to contribute capital to CDI Wanda; CDI China shall have the option
to contribute capital and/or acquire additional interest from other shareholders
to maintain its 51% majority interest in CDI Wanda. In the aggregate CDI China
shall not issue in excess of 337,500 shares of common stock valued at $4.00 per
share on February 6, 2007, as mutually agreed upon by and among the parties to
the agreement in February 2007, and shall not contribute in excess of
$1,350,000, inclusive of the $511,458 capital commitment due on or before April
30, 2007, to maintain its 51% majority stake in CDI Wanda.

On May 8, 2007 we entered into a amended agreement related to our
acquistion of 60% of Jieyang Big Tree in February 2007. The revised terms
provide that we are tendering $268,272 worth of commons tock valued at $5.00 per
share on January 30, 2007, as mutually agreed upon by and amongst the parties to
the agreement to acquire a 60% majority interst in Jieyang Big Tree from
exisitng sharehodlers. As well in the future should CDI China permit other
shareholders to contribute capital to Jieyang Big Tree; CDI China shall have the
option to contribute capital and/or acquire additional interest from other
shareholders to maintain its 60% majority interest in Jieyang Big Tree. In the
aggregate CDI China shall not issue in excess of 240,000 shares of common stock
valued at $5.00 per share on January 30, 2007, as mutually agreed upon by and
among the parties to the agreement, and shall not contribute in excess of
$1,000,000, to maintain its 60% majority stake in Jieyang Big Tree.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

10.1 CDI China, Inc. Jinan Alternative Energy Group Corp. CDI Wanda New
Energy Co., Ltd. Amedment Agreement effective May 8, 2007
10.2 CDI China, Inc. Big Tree Group Corp. Jieyang Big Tree Toy Enterprise
Co., Ltd. Amedment Agreement effective May 8, 2007
31.1 Rule 13a-14(a)/15d-14(a) certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) certificate of principal accounting officer
32.1 Section 1350 certification of CEO
32.2 Section 1350 certification of principal accounting officer

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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.

May 9, 2007 By: /s/ Yuejian (James) Wang
------------------------
Yuejian (James) Wang, CEO,
principal executive officer

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

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