# UNITED STATESSECURITIES
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
period ended: June 30, 2004

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

For the transition period
from____________________to____________________
                                                          Commission file number
                       33-4707-NY

China Direct
Trading Corporation (Exact name of small business issuer as specified in its charter)

| |                                                                 |                                  
| | --------------------------------------------------------------- | ---------------------------------
| | Florida                                                         | 84-1047159                       
| | (State or other jurisdiction 
of incorporation or organization) | (IRS Employer
Identification No.)

12535 Orange
Drive, Suite 613, Davie, Florida 33330 (Address of principal executive offices)

(954) 474-0224Issuers telephone
number

CBQ, Inc. (Former
name, former address and former fiscal year, if changed since last report.)

APPLICABLE ONLY TO
ISSUERS INVOLVED IN BANKRUPTCYPROCEEDING DURING THE PRECEDING FIVE YEARS

Check
whether the registrant filed all documents and reports required to be filed by Section
12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan
confirmed by a court. Yes     No

---



APPLICABLE ONLY TO
CORPORATE ISSUERS

State
the number of shares outstanding of each of the issuers classes of common equity, as
of the latest practical date: June 30, 2004 Approximately 499,350,300 shares

Transitional
Small Business Disclosure Format (check one). Yes___;  NoX

---



# PART I

# Item 1. Financial
Statements

CHINA DIRECT TRADING
CORPORATION AND SUBSIDIARIES (formerly CBQ, Inc.) CONSOLIDATED BALANCE
SHEETS

|                          | (Unaudited)
June 30,
2004 | December 31,
2003
|------------------------- | ------------------------- | -----------------
|Assets:                   |                           |                  
|Current assets:           |                           |                  
|Cash                      |                           |                  
|Deferred Tax Asset        |                           |                  
|                          |                           |                  
|Total Current Assets      |                           |                  
|                          |                           |                  
|Fixed Assets:             |                           |                  
|Office Equipment          |                           |                  
|Accumulated Depreciation  |                           |                  
|                          |                           |                  
|Net Fixed Assets          |                           |                  
|                          |                           |                  
|Other non-current assets: |                           |                  
|Deposits                  |                           |                  
|                          |                           |                  
|Total assets              |                           |                  
|                          |                           |                  

---



CHINA DIRECT TRADING
CORPORATION AND SUBSIDIARIES (formerly CBQ, Inc.) CONSOLIDATED BALANCE SHEETS (Continued)

|                                                | (Unaudited)
June 30,
2004 | December 31,
2003
|----------------------------------------------- | ------------------------- | -----------------
|Liabilities and Stockholders' Equity (Deficit): |                           |                  
|Current liabilities:                            |                           |                  
|Accounts payable, trade                         |                           |                  
|Accrued expenses                                |                           |                  
|Customer Deposits                               |                           |                  
|Due to related party                            |                           |                  
|Due to shareholders                             |                           |                  
|                                                |                           |                  
|Total liabilities                               |                           |                  
|                                                |                           |                  
|Stockholders' Equity (Deficit):                 |                           |                  
|Preferred Stock, par value $.001 per share      |                           |                  
|Authorized 100,000,000 shares,                  |                           |                  
|Issued -0- shares at June 30, 2004 and          |                           |                  
|December 31, 2003                               |                           |                  
|Common Stock, par value $.0001 per share        |                           |                  
|Authorized 500,000,000 shares,                  |                           |                  
|Issued 499,350,300 Shares at June 30, 2004      |                           |                  
|and December 31, 2003                           |                           |                  
|Additional paid-in capital                      |                           |                  
|Shareholder receivables                         |                           |                  
|Accumulated deficit                             |                           |                  
|                                                |                           |                  
|Total Stockholders' Equity (Deficit)            |                           |                  
|                                                |                           |                  
|Total Liabilities and                           |                           |                  
|Stockholders' Equity (Deficit)                  |                           |                  
|                                                |                           |                  
|                                                |                           |                  

See accompanying notes.

---



CHINA DIRECT TRADING CORPORATION
AND SUBSIDIARIES (formerly CBQ, Inc.) CONSOLIDATED
STATEMENTS OF OPERATIONS

|                                    | (Unaudited)
For the three months ended
June 30, | (Unaudited)
For the six months ended
June 30,
|----------------------------------- | ----------------------------------------------- | ---------------------------------------------
|
|Revenues                            |                                                 |                                              
|Cost of Sales                       |                                                 |                                              
|                                    |                                                 |                                              
|Gross Profit                        |                                                 |                                              
|                                    |                                                 |                                              
|Operating Expenses:                 |                                                 |                                              
|Sales and Marketing                 |                                                 |                                              
|Other General and Administrative    |                                                 |                                              
|                                    |                                                 |                                              
|Total Operating Expenses            |                                                 |                                              
|                                    |                                                 |                                              
|Net Operating Income (Loss)         |                                                 |                                              
|Other Income (Expense):             |                                                 |                                              
|Interest Expense                    |                                                 |                                              
|                                    |                                                 |                                              
|Net Income (Loss)                   |                                                 |                                              
|                                    |                                                 |                                              
|Weighted Average Shares Outstanding |                                                 |                                              
|                                    |                                                 |                                              
|Income (Loss) per Share             |                                                 |                                              
|                                    |                                                 |                                              

See accompanying notes.

---



CHINA DIRECT TRADING
CORPORATION AND SUBSIDIARIES (formerly CBQ, Inc.) CONSOLIDATED
STATEMENTS OF CASH FLOWS

|                                                  | (Unaudited)
For the six months ended
June 30,
|------------------------------------------------- | ---------------------------------------------
|
|CASH FLOWS FROM OPERATING                         |                                              
|ACTIVITIES:                                       |                                              
|Continuing operations:                            |                                              
|Net Income (Loss)                                 |                                              
|Adjustments necessary to reconcile net loss       |                                              
|to net cash used in operating activities:         |                                              
|Depreciation                                      |                                              
|(Increase) decrease in security deposits          |                                              
|Increase (decrease) in accounts payable           |                                              
|Increase (decrease) in customer deposits          |                                              
|                                                  |                                              
|Net cash used in operating activities             |                                              
|                                                  |                                              
|CASH FLOWS FROM INVESTING                         |                                              
|ACTIVITIES:                                       |                                              
|Purchase of fixed assets                          |                                              
|                                                  |                                              
|Net cash provided by (used) investing activities  |                                              
|                                                  |                                              
|CASH FLOWS FROM FINANCING                         |                                              
|ACTIVITIES:                                       |                                              
|Shareholder receivables                           |                                              
|                                                  |                                              
|Net Cash Provided by                              |                                              
|Financing Activities                              |                                              
|                                                  |                                              
|Net (Decrease) Increase in                        |                                              
|Cash and Cash Equivalents                         |                                              
|Cash and Cash Equivalents                         |                                              
|at Beginning of Period                            |                                              
|                                                  |                                              
|Cash and Cash Equivalents                         |                                              
|at End of Period                                  |                                              
|                                                  |                                              
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |                                              
|Cash paid during the period for:                  |                                              
|Interest                                          |                                              
|Franchise and income taxes                        |                                              

SUPPLEMENTAL DISCLOSURE
OF NON-CASH INVESTING ANDFINANCING ACTIVITIES: NONE

See accompanying notes.

---



CHINA DIRECT TRADING
CORPORATION AND SUBSIDIARIES (formerly CBQ, Inc.) NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

NOTE 1 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This
summary of accounting policies for China Direct Trading Corporation and Subsidiaries
(formerly CBQ, Inc.) is presented to assist in understanding the Companys financial
statements. The accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial statements.

Interim Reporting

The
unaudited financial statements as of June 30, 2004 and for the three and six month periods
ended June 30, 2004 and 2003 reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to fairly state the financial
position and results of operations for the three and six months. Operating results for
interim periods are not necessarily indicative of the results which can be expected for
full years.

Organization and Basis of
Presentation

CBQ,
Inc., (formerly Freedom Funding, Inc.) a Colorado corporation, was incorporated September
18, 1986, under the laws of the State of Delaware, and changed its situs to Colorado in
1989.

Souvenir
Direct, Inc. was incorporated on September 9, 2002 under the laws of the State of Florida.

On
December 1, 2003, China Direct Trading Corporation acquired 100% of the outstanding common
stock of Souvenir Direct, Inc. in a reverse acquisition. At this time, a new reporting
entity was created. Souvenir Direct, Inc. is considered the reporting entity for financial
reporting purposes.

In
May 2004, the Company changed its name to China Direct Trading Corporation and
reincorporated from the State of Colorado to the State of Florida.

Nature of Business

The
Company is engaged in the business of marketing and selling novelty, gift, and promotional
items in North America. The items are manufactured in the Peoples Republic of China
by third-party manufacturing companies.

Cash and Cash Equivalents

For
purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash equivalents to
the extent the funds are not being held for investment purposes.

---



CHINA DIRECT TRADING
CORPORATION AND SUBSIDIARIES (formerly CBQ, Inc.) NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

NOTE 1 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Principles of Consolidation

The
consolidated financial statements for the six months ended June 30, 2004 and the year
ended December 31, 2003 include the accounts of the parent entity and its subsidiary
Souvenir Direct, Inc.

The
results of subsidiaries acquired or sold during the year are consolidated from their
effective dates of acquisition through their effective dates of disposition.

All
significant intercompany balances and transactions have been eliminated.

Pervasiveness of Estimates

The preparation
of financial statements in conformity with generally accepted accounting principles
required 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Net Income (Loss) Per
Common Share

Basic
earnings (loss) per share has been computed by dividing earnings (loss) available to
common stockholders by the weighted average number of common shares outstanding during the
years. There were no common stock equivalent shares outstanding at June 30, 2004 and 2003.

Concentration of Credit
Risk

The
Company has no significant off-balance-sheet concentrations of credit risk such as foreign
exchange contracts, options contracts or other foreign hedging arrangements.

Reclassifications

Certain
reclassifications have been made in the 2003 financial statements to conform with the 2004
presentation.

Major Suppliers

The
Companys major suppliers are from the Peoples Republic of China and to a
lesser extent a variety of Pacific Rim countries. The Company relies on 30 manufacturing
concerns in China for its products. The loss of these Chinese manufacturing sources would
adversely impact on the business of the Company.

---



CHINA DIRECT TRADING
CORPORATION AND SUBSIDIARIES (formerly CBQ, Inc.) NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

NOTE 1 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)

Major Customers

At
June 30, 2004, the Company receives approximately 36% of its gross revenues from its top
three accounts. The loss of these customers would adversely impact the business of the
Company.

Revenue Recognition

Sales
revenue is recognized upon the shipment of merchandise from suppliers to customers.
Allowances for sales returns, rebates and discounts are recorded as a component on net
sales in the period the allowances are recognized.

Advertising

Advertising
costs are expensed as incurred. Advertising expense was $10,918 for the six months ended
June 30, 2004 and $1,882 for the six months ended June 30, 2003.

Income Taxes

The
Company accounts for income taxes under the provisions of SFAS No. 109, Accounting
for Income Taxes. SFAS No.109 requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets and
liabilities.

NOTE 2  LEASES

The
Company leases approximately 1,500 square feet of office space from Flamingo Commons, LLC.
The lease requires monthly lease payments of approximately $1,200 . The lease expires in
September 2005. The office space is used as the corporate headquarters. It is located at
12535 Orange Drive, Suite 613, Davie, Florida 33330.

The
Company also rents a storage facility on a month-to-month basis. Monthly rentals for the
storage facility are approximately $150.

Rental
expense under these leases was approximately $15,000 for the year ended December 31, 2003.

---



CHINA DIRECT TRADING
CORPORATION AND SUBSIDIARIES (formerly CBQ, Inc.) NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

NOTE 4  LEASES
(continued)

The
minimum future lease payments under these leases for the next five years are:

|Year Ended December 31,             | 
|----------------------------------- | 
|
|2004                                | 
|2005                                | 
|2006                                | 
|2007                                | 
|2008                                | 
|                                    | 
|Total minimum future lease payments | 
|                                    | 

NOTE 5  STOCK
TRANSACTIONS

On
September 9, 2002, the Company issued 100 shares of common stock for $2,774 of start-up
expenses.

On
December 1, 2003, the Company issued 97,000,000 shares of common stock to acquire Souvenir
Direct, Inc. in a reverse acquisition. The 100 shares that were previously issued were
retroactively adjusted to reflect the equivalent number of shares that were issued in
connection with the reverse acquisition. The acquisition was recorded by a credit to
common stock of $9,600 and a debit to paid-in capital of $2,674 and a debit to retained
earnings of $6,926. Also on December 1, 2003, an additional 402,350,300 shares of common
stock were issued to the previous owners of CBQ, Inc. All references to stock reflect the
retroactive adjustment to the shares.

NOTE 6  INCOME TAXES

As
of December 31, 2003, the provision for income taxes consists of federal income tax and
Florida state income tax. The provision consists of the following:

|                     | 
|-------------------- | 
|
|Current:             | 
|Federal              | 
|State                | 
|                     | 
|Deferred tax benefit | 
|                     | 
|Income tax benefit   | 
|                     | 

Deferred
taxes result from temporary differences in the recognition of income and expenses for
income tax reporting and financial statement reporting purposes. The Company had deferred
tax

---



CHINA DIRECT TRADING
CORPORATION AND SUBSIDIARIES (formerly CBQ, Inc.) >NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

NOTE 6  INCOME
TAXES (continued)

benefits of $7,300 as of December 31,
2003. These deferred tax benefits are the result of prepaid customer deposits that are
made towards future sales.

The
difference between the effective income tax rate and the federal statutory income tax rate
on the income (loss) from continuing operations are presented below:

|                                                       | December 31,
2003
|------------------------------------------------------ | -----------------
|Expense (Benefit) at the federal statutory rate of 15% |                  
|Nondeductible expenses                                 |                  
|State Income Taxes                                     |                  
|Deferred Tax Benefit                                   |                  
|Other                                                  |                  
|                                                       |                  
|Effective Tax Expense (Benefit)                        |                  
|                                                       |                  

The
above table reflects activity from December 1, 2003 to December 31, 2003. Prior to
December 1, 2003, the Company was an S-corporation and did not incur income taxes.
Instead, its earnings and losses were included in the personal returns of its shareholders
and taxed depending on their personal tax situations. The 2002 financial statements do not
reflect a provision for income taxes.

NOTE 7  LEGAL
SETTLEMENTS

On
December 19, 2003, the Company settled a $459,662 judgment with Bell Microproducts, Inc.
This $459,662 plus interest of $103,996 had been included in the Companys accounts
payable. Bart Fisher, a former officer and director and principal shareholder of the
Company paid the entire settlement of 3,000,000 shares of common stock and $25,000 cash.
Mr. Fisher agreed to assume the obligation to pay the settlement consideration without any
consideration or reimbursement from the Company.

In
June 2001, ITC/INFO Tech (Claimant) obtained a default award of $79,000
against the Company. The award was based on non-payment for computer goods shipped by ITC
to two subsidiaries of the Company. The Company has offered to settle the award for shares
of restricted stock, but the Claimant has refused to accept such an offer to date. The
Claimant has made no effort to enforce its award since June 2001. As of December 31, 2003
and June 30, 2004, the award amount has been included in the accrued expenses of the
Company.

---



CHINA DIRECT TRADING
CORPORATION AND SUBSIDIARIES (formerly CBQ, Inc.) NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

NOTE 8 
CONTINGENCIES

Celeste
Trust Reg., Esquire Trade, et al. v. CBQ, Inc. (Case# 03 Civ. 9650 RMB; US District Court,
SDNY, 12/4/2003). A lawsuit filed against CBQ, Inc. by three plaintiffs on or about
December 4, 2003, but which the Company did not receive notice of until the week of
February 18, 2004 or thereabouts. The plaintiffs purchased debentures issued by Socrates
Technologies Corporation (STC), a public Delaware corporation in 2000. When the Company
purchased the assets of two STC subsidiaries in March 2001, the plaintiffs allege that the
Company promised to issue to the plaintiffs and others the consideration that was to be
paid to STC for the acquired assets and to so do in order to compensate the plaintiffs for
their investment in the STC debentures, which were apparently in default at that time. The
total consideration paid for the STC subsidiaries assets were 7.65 million shares of
Company Common Stock and a Promissory Note made by CBQ, Inc. for $700,000 principal
amount. The Company is currently contesting the lawsuit. On April 15, 2004, the Court
denied the plaintiffs motion for default judgment and set the case for discovery and
trial.

NOTE 9  SUBSIDIARY

In
February 2004, the Company established a new subsidiary, China Pathfinder Fund, LLC, a
Florida limited liability company. The purpose of this new subsidiary is to pursue the
business of acting as a funding and merger-and-acquisition agent in the United States and
China.

# Item 2.
Managements Discussion and Analysis or Plan of Operation

General  This discussion
should be read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations in the Companys annual report on Form 10-KSB for
the year ended December 31, 2003.

PLAN OF OPERATIONS The
Company was organized for the purpose of creating a corporate vehicle to seek, investigate
and, if such investigation warrants, acquire an interest in one or more business
opportunities presented to it by persons or firms who or which desire to seek perceived
advantages of a publicly held corporation. Since the acquisition of SDI in December
2003, the Company continues to explore acquisition opportunities as a means of growth, but
the Companys focus is mostly on acquisitions that are consistent with, and
complementary to, its core trading company business line.

The
Company may incur significant post-merger or acquisition registration costs in the event
management wishes to register a portion of their shares for subsequent sale. The Company
will also incur significant legal and accounting costs in connection with the acquisition
including the costs of preparing post- effective amendments, Forms 8-K, agreements and
related reports and documents.

While
the Company believes that SDI will be able to generate sufficient cash flow to pay for
SDIs, China Pathfinders and the Companys direct overhead costs and, with
respect to SDI, its internal planned growth in fiscal year 2004, SDI does not generate
sufficient cash flow at this time to fund an acquisition program and
development of new businesses (except ones requiring low start-up costs or which are
complementary to the Companys current low-overhead distribution operations).

---



The
Company entered into an equity line of financing with Dutchess Private Equities
Fund, II, L.P., a Delaware limited partnership,
(Dutchess) on August 5, 2004, to provide up to a $2,500,000 funding to the
Company. Under the equity line of financing, the Company has the right, under certain
conditions, to put or require Dutchess to purchase shares of Company Common Stock. The
shares acquired under the equity line of credit must be registered under the Securities
Act of 1933, as amended.

The
Purchase Price for the Common Stock identified in the put shall be equal to 95% of the
lowest closing bid price of the Common Stock (as reported by www.bloomberg.com)
during the period commencing on the date of the put delivered to Dutchess by the Company
and ending on and including the date that is five (5) trading days after such put date.
The amount that the Company shall be entitled to Put to the Dutchess (the
Put Amount) shall be equal to, at the Companys election, either: (A)
200% of the average daily volume (U.S. market only) of the Common Stock for the 20 Trading
Days immediately prior to the applicable put notice date, multiplied by the average of the
three daily closing bid prices immediately preceding the put date (as reported by
www.bloomberg.com), or (B) $100,000; provided that in no event will the Put Amount be more
than $1,000,000 with respect to any single put. A put will not be honored if the purchase
price of the Common Stock does not equal or exceed 85% of the lowest closing bid price as
quoted by www.bloomberg.com for the ten Trading Day period
immediately preceding such put notice date. . The proceeds from the sale of the shares
under the equity line of credit must be used for general working capital or acquisitions
by the Company.

The
Company also signed a registration rights agreement with Dutchess on August 5, 2004, which
agreement obligates the Company to file a registration statement under the Securities Act
of 1933, as amended, to register the shares of Company Common Stock to be used in the
equity line of financing with Dutchess. The Company anticipates that it will take several
months to register the shares of Common Stock underlying the equity line of credit.

The
agreement with Dutchess for the equity line of credit limits the total number of shares of
Company Common Stock issuable under the equity line of credit limits the total number of
shares that can be issued to Dutchess to that amount that equals 18% of the issued and
outstanding shares of Company Common Stock (based on 502,410,299 shares issued and
outstanding). Further, the Company is not obligated to put all or any portion of the
shares to Dutchess under the equity line of credit. The equity line of credit could be
dilutive of existing shareholders even with such limitations. The Company, which has
limited assets because of the nature of its business, and is a penny stock company, has
been unable to locate better terms and conditions for funding and believes that the
Dutchess equity line of credit presents the best available terms under current
circumstances.

The
above is a summary of certain terms and conditions of the equity line of credit. The
summary is qualified in its entirety by reference to the Investment Agreement and
Registration Agreement which are attached as exhibits to the
Form 8-K as filed by the Company with the Commission on August 10,
2004.

---



RESULTS OF OPERATIONS The Company had no operations during 2002. On December 1, 2003, the Company acquired
all of the issued and outstanding shares of common stock of Souvenir Direct, Inc.
(SDI), a private Florida corporation engaged in the business of distributing
to its customers custom manufactured souvenir, promotional and gift items manufactured in
China. The financial results of SDI for the three and six months ended June 30, 2004 and
2003 are reflected in the financial statements of this Report.

Prior
to the spring of 2002, the Company was engaged in systems development, the development of
customized software programs for business clients and in value-added reseller of computer
hardware and software manufactured by other companies. After the spring of 2002, the
Company had no business operations. Accordingly, comparisons with prior periods are not
meaningful.

LIQUIDITY AND CAPITAL RESOURCES.Historically, the Company has not generated enough cash flow from operations to cover
its overhead costs and the cost of growth. The inadequacy of cash flow and the inability
of the Company to consistently obtain funding and ongoing funding on commercially
reasonable terms have undermined the former business operations of the Company and forced
the Company to obtain funding from management and through the sale of Company securities.

The
Company sought to acquire SDI because it is a low overhead distributor operation run by
two persons, with no inventory of any consequence to finance and with the ability to grow
without extensive outlays of funds. The Company is hoping that SDI will generate enough
cash flow to cover the overhead costs of the Company and SDI and to fund the expansion of
SDIs business. Any acquisitions by the Company will most likely require third-party
funding of the acquisition and the acquired operations. As a small business and a penny
stock company, the Company will continue to face difficulty in obtaining financing or
funding on reasonable commercial terms.

The
Company expects future development and expansion will be financed through cash flow from
operations and other forms of financing such as the sale of additional equity and debt
securities, capital leases and other credit facilities. Since the Company, by the very
nature of its business, has limited assets, and is a penny stock company, there are no
assurances that such financing will be available on terms acceptable or favorable to the
Company. Further, the increase in the number of shares of common stock in the public
markets may reduce the ability or appeal of the Company to future sources of possible
financing or funding. The Company has entered into an equity line of credit with Dutchess
Private Equities Fund, II, LP (See Plan of Operations in Item 2 above) whereby the
Company, upon registering the underlying shares of Common Stock under the Securities Act
of 1933, as amended.

GOVERNMENT REGULATIONS The Company is subject to all pertinent Federal, State, and Local laws governing its
business. The Company is subject to licensing and regulation by a number of authorities in
its State or municipality. These may include health, safety, and fire regulations. The
Companys operations are also subject to Federal and State minimum wage laws
governing such matters as working conditions and overtime.

---



IMPACT OF INFLATION.To date,
the Company has not experienced any significant effect from inflation. The Companys
major expenses have been the cost of marketing its product lines to customers in North
America. That effort involves mostly Mr. Ullman traveling to make direct marketing and
sales pitches to customers and potential customers as well as showing the SDI products at
industry trade shows around North America and visiting China to maintain and expand
SDIs distribution and manufacturing relationships and channels. The Company
generally has been able to meet increase in costs by raising prices of its products.

COUNTRY RISK.Almost all of
the Companys contract manufacturing operations and sources of products are located
in China. As such, the Company is subject to significant risks not typically faced by
companies operating in or obtaining products from North America and Western Europe. China
has experienced significant economic growth in the past two years and China must continue
to expand its infrastructure, especially electrical and other utilities, to sustain such
growth and its manufacturing industry. Inadequate infrastructure may affect the ability of
the Companys manufacturing sources to timely produce the Companys products.
Political, economic and trade conflicts between the United States and China, including
possible conflict over North Koreas nuclear weapons program or the independence of
Taiwan, could severely hinder the ability of the Company to obtain products and fill
customer orders from the Companys current Chinese manufacturing sources. Further,
Chinese commercial law is still evolving to accommodate increasing capitalism in Chinese
society, especially in terms of commercial relationships and dealings with foreign
companies, and can be unpredictable in application or principal. The same unpredictability
exists with respect to the central Chinese government, which can unilaterally and without
prior warning impose new legal, economic and commercial laws, policies and procedures.
This element of unpredictability heightens the risk of doing business in China.

China
is also under international pressure to value its currency in a manner that would increase
the value of Chinese currency in respect of other world currencies and thereby increase
the cost of Chinese goods in the world market. The Company does not believe that such
revaluation of Chinese currency would adversely impact its business because of the
low-cost nature of the Companys products and the fact that U.S. dollars is the
currency of use in all of the Companys commercial transactions.

# Item 3. Controls and
Procedures

The Companys Chief Executive
Officer and Chief Financial Officer have concluded, based on an evaluation conducted
within 90 days prior to the filing date of this Quarterly Report on Form 10- QSB, that the
Companys disclosure controls and procedures have functioned effectively so as to
provide those officers the information necessary to evaluate whether:

|(i) | this Quarterly Report on Form 10-QSB contains any untrue statement of a
                    material fact or omits to state a material fact necessary to make the statements
                    made, in light of the circumstances under which such statements were made, not
                    misleading with respect to the period covered by this Quarterly Report on Form
                    10-QSB, and
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(ii) | the financial statements, and other financial information included in this
                    Quarterly Report
|---- | ---------------------------------------------------------------------------------------------------------------

---



| | on
Form 10-QSB, fairly present in all material respects the financial condition, results of
operations and cash flows of the Company as of, and for, the periods presented in this
Quarterly Report on Form 10-QSB.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There have been no significant
changes in the Companys internal controls or in other factors since the date of the
Chief Executive Officers and Chief Financial Officers evaluation that could
significantly affect these internal controls, including any corrective actions with regard
to significant deficiencies and material weaknesses.

# PART II  OTHER
INFORMATION

# ITEM 1. LEGAL PROCEEDINGS

CELESTE
TRUST LITIGATION. Celeste Trust Reg., Esquire Trade, et al. v. CBQ, Inc.(Case# 03
Civ. 9650 RMB; US District Court, SDNY, 12/4/2003). A lawsuit filed against CBQ, Inc. by
three plaintiffs on or about December 4, 2003, but which the Company did not receive
notice of until the week of February 18, 2004 or thereabouts. The plaintiffs purchased
debentures issued by Socrates Technologies Corporation (STC), a former public Delaware
corporation, in 2000. When the Company purchased the assets of two STC subsidiaries in
March 2001, the plaintiffs allege that the Company promised to issue to the plaintiffs the
consideration that was to be paid to STC by CBQ, Inc. for the acquired STC
subsidiaries assets and to so do in order to compensate the plaintiffs for their
investment in the STC debentures, which were apparently in default at that time. The total
consideration paid for the STC subsidiaries assets were 7.65 million shares of
Company Common Stock and a Promissory Note made by CBQ, Inc. for $700,000 principal
amount. The Company is currently contesting the lawsuit. On April 15, 2004, the Court
denied the plaintiffs motion for default judgment and the case is being for
discovery and trial. There has been no significant developments in this lawsuit since
April 15, 2004.

Sun
Trust Bank line of credit and term note: Prior to being acquired by the Company, Quantum
Technology Group had a $4 million line of credit with Crestar Bank, which was subsequently
acquired by Sun Trust. This line of credit was guaranteed by Quantum and five individual
guarantors, including Ray Kostkowski, Anne Sigman, Skip Lewis, and Anthony Saunders. This
line of credit was opened during April, 2000. On August 8, 2000, the Company acquired all
of the shares of Quantum. Sun Trust asserted that $1.3 million of the line of credit had
been used, and was owing to Sun Trust, as well as line of credit, a $200,000 term loan
from Sun Trust to Quantum, approximately $200,000 in accrued interest and $100,000 in
attorney fees  all of which Suntrust had sought to collect from the individual
guarantors. Suntrust had not sued CBQI but has threatened to sue. RAS Investment, Inc., a
company affiliated with Anne Sigman, has advised the Company that RAS has acquired the Sun
Trust note and has demanded payment in cash or stock. The Company is considering or
investigating all of the claims in the RAS communication to the Company. As of the date of
this report, the Companys position remains as before, that is, that the Company is
not obligated to pay the Sun Trust debts and any claims made to collect that debt could be
defeated by several potential defenses and counterclaims.

---



# ITEM 2. CHANGES IN
SECURITIES

At
the start of trading on May 28, 2004, the Companys name and trading symbol on the
OTC Bulletin Board changed from CBQ, Inc. and Symbol CBQI.OB to
China Direct Trading Corporation and Symbol CHDT.OB.

# ITEM 3. DEFAULTS UPON
SENIOR SECURITIES

None/Not Applicable.

# ITEM 4.  SUBMISSION OF
MATTERS TO A VOTE OF SECURITIES HOLDERS

None/Not Applicable.

# ITEM 5. OTHER INFORMATION

None

# ITEM 6. EXHIBITS AND
REPORTS ON FORM 8-K

|(a) | EXHIBITS
|--- | --------

|10.1 | Investment
Agreement, dated August 5, 2004, by Company and Dutchess Private Equities Fund, II, LP (1)
|---- | -----------------------------------------------------------------------------------------------------

|10.2 | Registration
Rights Agreement, dated August 5, 2004, by Company and Dutchess Private Equities Fund, II,
LP (1)
|---- | --------------------------------------------------------------------------------------------------------------

|31 | Certification
 Pursuant  to Section  302 of the  Sarbanes-Oxley  Act of 2002.
|-- | -----------------------------------------------------------------------------

|32 | Certification
 Pursuant  to Section  906 of the  Sarbanes-Oxley  Act of 2002.
|-- | -----------------------------------------------------------------------------

(1)    
          Incorporated by reference from Companys Form 8-K, dated August 6, 2004.

|(b) | Reports on Form 8-K.
|--- | --------------------

|i) | Item 5  Company name change and change of state of incorporation. Report
          dated and filed May 28, 2004.
|-- | -----------------------------------------------------------------------------------------------------------------

|ii) | Item 5  Press release concerning listing of Companys common stock on
          the Berlin Stock Exchange. Report dated and filed June 17, 2004; and
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|iii) | Item 5  Agreement to purchase all of the outstanding shares of Magnet
          World, Inc. and Magnet World, Ltd. Report dated and filed June 21, 2004
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|iv) | Item 5  Investment Agreement and Registration Rights Agreement, dated
          August 5, 2004, by Company and Dutchess Private Equities Fund, II, LP
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

---



# SIGNATURES

In
accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, this 10th day of
August, 2004.

China Direct Trading
Corporation

August 10, 2004

/s/ Howard UllmanHoward UllmanCEO, President
and Chairman(Principal Executive Officer) (Principal Financial and
Accounting Officer)

---