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 period ended:         September 30, 2006
                                            ------------------------------------

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

For the transition period from                                to
                               ------------------------------    ---------------

Commission file number                        000-28831
                      ----------------------------------------------------------

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

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

            10400 Griffin Road, Suite 109, Cooper City, Florida 33328
 -------------------------------------------------------------------------------
                    (Address of principal executive offices)

                                 (954) 252-3440
                            Issuer's telephone number


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


                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDING 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 -----

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


<PAGE>




                      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:  September  30,  2006
Approximately 554,181,750 shares

         Transitional Small Business Disclosure Format (check one).
Yes      ;  No   X
    ----       -----










































<PAGE>



                                     PART I

ITEM 1.  FINANCIAL STATEMENTS

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS



                                          (Unaudited)
                                         September 30,        December 31,
                                              2006                2005
                                       ------------------  ------------------
Assets:

Current assets:
   Cash                                $          111,258  $            9,090
   Accounts receivable - net                    3,383,624               4,000
   Advances                                        52,039                   -
   Inventory                                    1,556,922              11,760
   Prepaid expense                                 65,538                   -
                                       ------------------  ------------------

     Total Current Assets                       5,169,381              24,850
                                       ------------------  ------------------

Fixed assets:
   Communications equipment                        12,941                   -
   Computer equipment                              35,238               4,965
   Computer software                                6,724                   -
   Transportation equipment                       365,303                   -
   Machinery and equipment                        191,280                   -
   Furniture and fixtures                          86,787                   -
   Leasehold improvements                          31,819                   -
   Less: Accumulated Depreciation                (235,868)             (2,132)
                                       ------------------  ------------------

     Total Fixed Assets                           494,224               2,833
                                       ------------------  ------------------

Other non-current assets:
   Deposits                                        69,724               1,775
   Goodwill                                     3,532,307                   -
                                       ------------------  ------------------

      Total other non-current assets            3,602,031               1,775
                                       ------------------  ------------------

         Total assets                  $        9,265,636  $           29,458
                                       ==================  ==================








<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (Continued)

<TABLE>
<CAPTION>
                                                                                (Unaudited)
                                                                               September 30,        December 31,
                                                                                    2006                2005
                                                                             ------------------  ------------------
Liabilities and Stockholders' Deficit:

Current Liabilities:
<S>                                                                          <C>                 <C>
   Accounts payable, trade                                                   $        1,054,144  $           35,666
   Accrued expenses                                                                     657,629             496,783
   Customer deposits                                                                    769,774              24,891
   Notes payable - current maturities                                                    80,535                   -
   Related party payables                                                                16,011              16,011
                                                                             ------------------  ------------------
         Total Current Liabilities                                                    2,578,093             573,351
                                                                             ------------------  ------------------

Long-Term Liabilities:
   Notes payable - less current maturities                                              268,861                   -
   Stockholder loans payable                                                          1,604,833                   -
   Investor loans payable                                                               665,100                   -
                                                                             ------------------  ------------------
         Total Long-Term Liabilities                                                  2,538,794                   -
                                                                             ------------------  ------------------

         Total Liabilities                                                            5,116,887             573,351
                                                                             ------------------  ------------------

Minority Interest                                                                       945,691                   -
                                                                             ------------------  ------------------

Stockholders' Deficit:
   Preferred Stock,  Series B, par value $.01 per share  Authorized  100,000,000
      shares, Issued 548,966 shares at September 30, 2006 and
      -0- shares at December 31, 2005                                                     5,490                   -
   Preferred Stock, Series A, par value $.001 per share
      Authorized 100,000,000 shares,
      Issued 1,264,000 shares at September 30, 2006 and
      8,000 shares at December 31, 2005                                                   1,264                   8
   Common Stock, par value $.0001 per share
      Authorized 600,000,000 shares,
      Issued 554,181,750 Shares at September 30, 2006 and
      December 31, 2005                                                                  55,418              54,313
   Additional paid-in capital                                                         4,256,574             832,665
   Accumulated deficit                                                               (1,115,688)         (1,430,879)
                                                                             ------------------  ------------------

     Total Stockholders' Deficit                                                      3,203,058            (543,893)
                                                                             ------------------  ------------------

     Total Liabilities and
       Stockholders' Deficit                                                 $        9,265,636  $           29,458
                                                                             ==================  ==================
</TABLE>


                             See accompanying notes.


<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                   (Unaudited)                                (Unaudited)
                                                  For the Three Months                     For the Nine Months
                                                    Ended September 30,                     Ended September 30,
                                                  2006               2005                2006                2005
                                           ------------------  -----------------   -----------------  ------------------
<S>                                        <C>                 <C>                 <C>                <C>
Revenues                                   $        1,917,557  $         256,788   $       8,399,323  $          722,158
Cost of Sales                                      (1,722,310)          (215,235)         (5,765,539)           (542,611)
                                           ------------------  -----------------   -----------------  ------------------
        Gross Profit                                  195,247             41,553           2,633,784             179,547
                                           ------------------  -----------------   -----------------  ------------------

Operating Expenses:
  Sales and marketing                                  41,363              1,462             214,922               7,588
  Compensation                                              -             50,000             100,000             150,000
  Other General and administrative                     33,937             70,331           1,259,152             205,335
                                           ------------------  -----------------   -----------------  ------------------
       Total Operating Expenses                        75,300            121,793           1,574,074             362,923
                                           ------------------  -----------------   -----------------  ------------------

Net Operating Income (Loss)                           119,947            (80,240)          1,059,710            (183,376)

Other Income (Expense):
  Interest income                                       6,289                  7               8,439                  18
  Interest expense                                    (24,746)              (366)            (66,470)             (1,106)
                                           ------------------  -----------------   -----------------  ------------------

Net Income (Loss) before minority interest            101,490            (80,599)          1,001,679            (184,464)
Minority interest                                    (203,902)                 -            (686,488)                  -
                                           ------------------  -----------------   -----------------  ------------------

Net Income (Loss)                          $         (102,412) $         (80,599)  $         315,191  $         (184,464)
                                           ==================  =================   =================  ==================

Weighted Average Shares Outstanding               549,878,217        517,232,972         545,462,954         516,348,305
                                           ==================  =================   =================  ==================

Income (Loss) per Common Share             $                -  $               -   $               -  $                -
                                           ==================  =================   =================  ==================
</TABLE>



                             See accompanying notes.


<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                  (Unaudited)
                                                                               For the Nine Months
                                                                               Ended September 30,
                                                                            2006                2005
                                                                      -----------------  ------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Continuing operations:
<S>                                                                   <C>                <C>
   Net Income (Loss)                                                  $         315,191  $         (184,464)
Adjustments necessary to reconcile net loss
   to net cash used in operating activities:
      Stock issued for accrued compensation                                           -             200,000
      Stock issued for expenses                                                 271,611               9,000
      Depreciation                                                              127,939                 671
     Minority interest in income                                                686,488                   -
     (Increase) decrease in advances                                            (48,000)            (14,346)
     (Increase) decrease in accounts receivable                              (2,184,182)                  -
     (Increase) decrease in inventory                                        (1,186,214)                  -
     (Increase) decrease in prepaids                                            (58,038)                  -
     (Increase) decrease in deposits                                            (20,124)             (1,837)
      Increase (decrease) in accounts payable                                   657,855               1,844
      Increase (decrease) in accrued expenses                                    34,267             (57,953)
      Increase (decrease) in deposits from customers                            744,883                   -
                                                                      -----------------  ------------------
  Net Cash Used in continuing operations                                       (658,324)            (47,085)
                                                                      -----------------  ------------------

CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment in subsidiaries                                                   (1,387,000)                  -
Purchase of fixed assets                                                       (377,581)                  -
                                                                      -----------------  ------------------
Net cash provided by (used) investing activities                             (1,764,581)                  -
                                                                      -----------------  ------------------

CASH FLOWS FROM FINANCING
ACTIVITIES:
Cash acquired in acquisition                                                    116,050                   -
Proceeds from sale of stock                                                     710,150                   -
Loan proceeds                                                                   213,818                   -
Stockholder loan proceeds                                                     1,330,515                   -
Investor loan proceeds                                                          920,000                   -
Shareholder loan repayments                                                    (765,460)                  -
                                                                      -----------------  ------------------
Net Cash Provided by Financing Activities                                     2,525,073                   -
                                                                      -----------------  ------------------

Net (Decrease) Increase in
  Cash and Cash Equivalents                                                     102,168             (47,085)
Cash and Cash Equivalents
  at Beginning of Period                                                          9,090              77,503
                                                                      -----------------  ------------------
Cash and Cash Equivalents
  at End of Period                                                    $         111,258  $           30,418
                                                                      =================  ==================
</TABLE>



<PAGE>


                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)


<TABLE>
<CAPTION>
                                                                                (Unaudited)
                                                                            For the Nine Months
                                                                            Ended September 30,
                                                                          2006                2005
                                                                   ------------------  ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
<S>                                                                <C>                 <C>
  Interest                                                         $           61,235  $            1,106
  Franchise and income taxes                                       $                -  $                -

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
</TABLE>

         On January 27, 2006, the Company entered into a Purchase Agreement (the
"Purchase  Agreement")  with Complete Power Solutions  ("CPS") pursuant to which
the Company  acquired 51% of the member  interests  of CPS for a purchase  price
consisting of the payment of $637,000 in cash and the delivery of 600,000 shares
of  Company's  Series A  Convertible  Preferred  Stock (the  "Series A Preferred
Stock") having a stated value of $1,200,000.

         On  September  15,  2006  the  Company  entered  into a Stock  Purchase
Agreement  with Capstone  Industries,  Inc., a Florida  corporation  (Capstone),
engaged in the  business  of  producing  and  selling  portable  book lights and
related  consumer  goods,  and the  sole  shareholder  of  Capstone.  Under  the
agreement  the Company  acquired  100% of the issued and  outstanding  shares of
Capstone  Common Stock in exchange for $750,000 in cash and $1.25 million of the
Company's  series B Preferred  Stock,  which is convertible  into 15.625 million
"restricted" shares of China Direct Common Stock, $0.0001 par value.















                             See accompanying notes.



<PAGE>


               CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of accounting  policies for China Direct  Trading  Corporation  and
Subsidiaries  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 September 30, 2006 and for the three
and nine month periods ended September 30, 2006 and 2005 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 nine  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

China Direct Trading Corporation  (formerly "CBQ, Inc."), a Florida corporation,
was  initially  incorporated  September  18, 1986 under the laws of the State of
Delaware under the name  "Yorkshire  Leveraged  Group,  Incorporated",  and then
changed its situs to Colorado  in 1989 by merging  into a Colorado  corporation,
named "Freedom Funding,  Inc.".  Freedom Funding,  Inc. then changed its name to
"CBQ,  Inc." by amendment of its Articles of Incorporation on November 25, 1998.
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.

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.

On January 27, 2006, the Company entered into a Purchase Agreement with Complete
Power Solutions  ("CPS") to acquire 51% of the member  interests of CPS. CPS was
organized by William Dato on September 20, 2004, as a Florida limited  liability
company to  distribute  power  generators  in Florida and adjacent  states.  CPS
currently  distributes  and installs  Guardian-brand  commercial and residential
power  generators.  CPS sells to Home Depot and Lowe's  retail  stores and local
electrical contractors in Florida.

On September 15, 2006 the Company  entered into a Stock Purchase  Agreement with
Capstone  Industries,  Inc.,  a Florida  corporation  (Capstone).  Capstone  was
incorporated in Florida on May 15, 1996 and is engaged primarily in the business
of wholesaling novelties to retailers in the United States.

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 typically  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.

<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

INVENTORY

The Company's  inventory consists of its power generators,  electrical  transfer
switches,  propane  tanks,  concrete  slabs  and  electrical,  plumbing  and gas
hardware and supplies held by Complete Power Solutions,  Inc. as well as novelty
items held by Capstone Industries, Inc. Inventory, which is recorded at cost, is
summarized below:

       Complete Power Solutions, Inc.                       $1,306,562

       Capstone Industries, Inc.                             250,360
                                                            --------

                Total inventory                             $1,556,922
                                                            ==========

FIXED ASSETS

Fixed  assets are stated at cost.  Depreciation  and  amortization  are computed
using the straight- line method over the estimated  economic useful lives of the
related assets as follows:

           Communications equipment               3 - 7 years
           Computer equipment                     3 - 7 years
           Computer software                      3 - 7 years
           Transportation equipment               3 - 7 years
           Machinery and equipment                3 - 7 years
           Furniture and fixtures                 3 - 7 years
           Leasehold improvements               Term of lease


Upon sale or other  disposition of property and equipment,  the cost and related
accumulated  depreciation or amortization  are removed from the accounts and any
gain or loss is included in the determination of income or loss.

Expenditures  for  maintenance  and repairs are charged to expense as  incurred.
Major overhauls and  betterments  are  capitalized  and  depreciated  over their
estimated economic useful lives.

Depreciation  expense was $48,895 and $671 for the nine months  ended  September
30, 2006 and 2005, respectively.

<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NET INCOME (LOSS) PER COMMON SHARE

Basic  earnings  per common  share were  computed  by  dividing  net loss by the
weighted average number of shares of common stock  outstanding  during the year.
Diluted loss per common share for the nine months ended  September  30, 2006 and
2005 are not presented as it would be anti- dilutive.

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 2005  financial  statements to
conform with the 2006 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.

PERVASIVENESS OF 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 revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The  consolidated  financial  statements for the nine months ended September 30,
2006 and 2005  include the  accounts of the parent  entity and its  wholly-owned
subsidiaries  Souvenir Direct,  Inc. ,Overseas Building Supplies,  LLC (formerly
China Pathfinder Fund, LLC),  Capstone  Industries,  Inc. and its majority owned
subsidiary Complete Power Solutions.

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.

MAJOR CUSTOMERS

At September 30, 2006,  Souvenir Direct receives  approximately 40% of its gross
revenues  from  its top  three  accounts.  The  loss of  these  customers  would
adversely impact the business of that Company.





<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

REVENUE RECOGNITION

Sales of  merchandise  are  recorded  when  goods  are  shipped,  and  profit is
recognized at that time. Allowances for sales returns, rebates and discounts are
recorded  as a  component  on  net  sales  in  the  period  the  allowances  are
recognized.  Revenues  and  related  costs for sales and  installation  of power
generators is recognized as the work progresses.

ADVERTISING

Advertising costs are expensed as incurred.

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

On  September  1,  2005,  the  Company   entered  into  a  lease  agreement  for
approximately  1,200 square feet of office  space.  The lease  requires  monthly
lease payments of $1,775. The lease expires August 31, 2006. The office space is
used as the corporate  headquarters.  It is located at 10400 Griffin Road, Suite
109, Cooper City, Florida 33328.

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  $17,846 and $23,610 for the
nine months ended September 30, 2006 and 2005, respectively.

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

   Year Ended December 31,
   -------------------------------------------
            2006                                             $       14,200
            2007                                                          -
            2008                                                          -
            2009                                                          -
            2010                                                          -
                                                             --------------
            Total minimum future lease payments              $       14,200
                                                             ==============

The company's majority owned subsidiary,  Complete Power Solutions, Inc. entered
into a lease  agreement April 1, 2006 for its current office space and warehouse
facility. The lease requires monthly payments of $7,108. The lease expires March
31,  2009 with an option to extend  the lease for three  additional  years.  The
facility is located at 1288 S. W. 29th Avenue, Pompasno Beach, Florida 33069.

Rental  expense under this lease and the previous lease for office and warehouse
space  which  was  terminated  when the  current  lease  became  effective,  was
approximately  $50,558 and $0 for the nine months ended  September  30, 2006 and
2005, respectively.

<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - LEASES (CONTINUED)

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

       Year Ended June 30,
       -------------------------------------------
                2007                                             $      80,818
                2008                                                    89,595
                2009                                                    69,192
                2010                                                          -
                2011                                                          -
                                                                 --------------
                Total minimum future lease payments              $      239,605
                                                                 ==============


NOTE 3 - COMMITMENTS

On December 1, 2003,  the Company  entered  into an  employment  agreement  with
Howard  Ullman,  the  Company's  President  and CEO  that  provides  for  annual
compensation of $200,000. For 2006 Mr. Ullman has agreed to reduce his salary to
$100,000.

On January 27, 2006,  the Company  entered  into an  employment  agreement  with
William  Dato,  the  President  of  Complete  Power  Solutions,   the  Company's
majority-owned subsidiary, that provides for annual compensation of $100,000.

NOTE 4 - STOCK TRANSACTIONS

COMMON STOCK

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  414,628,300  shares of common stock were issued
to the  previous  owners  of CBQ,  Inc.  All  references  to stock  reflect  the
retroactive adjustment to the shares.

         In January 2005,  the Company  issued 500,000 shares of common stock to
settle a lawsuit. The value of settlement was $28,000.

         In April 2005, the Company issued  6,940,030 shares of common stock for
services valued at $200,000.

         In May 2005,  the Company  issued  100,000  shares of common  stock for
services valued at $3,000.

         In June 2005, the Company issued  9,523,810  shares of common stock for
accrued compensation of $200,000.


<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - STOCK TRANSACTIONS (CONTINUED)


         In June 2005,  6,896,552  shares of common  stock were  returned to the
treasury and cancelled.

         In October 2005,  the Company issued  6,250,000  shares of common stock
for accrued compensation of $100,000.

         In November 2005, the Company issued 588,718 shares of common stock for
legal services valued at $12,500.


         In November 2005, the Company issued  1,140,000  shares of common stock
for legal services valued at $28,500.


         In December 2005, the Company issued  2,300,000  shares of common stock
for services valued at $40,000.

         In December 2005, the Company issued  5,555,555  shares of common stock
for accrued compensation of $100,000.

         In December 2005, the Company issued  1,666,667  shares of common stock
for cash of $30,000.

         In June, 2006, 1,000 shares of the company's series "A" preferred stock
was exchanged for 1,000,000 shares of the company's common stock.

         In June 2006,  the company  issued  500,000  shares of common stock for
compensation valued at $37,500.

         In June 2006 the  company  issued  834,722  shares of common  stock for
consulting fees and professional services valued at $25,111.

         In July 2006 the  company  issued  250,000  shares of common  stock for
consulting fees valued at $8,750.

         In July  2006  options  were  exercised  for  4,000,000  shares  of the
company's common stock for $72,000.

         In August 2006 the company  issued  250,000  shares of common stock for
legal fees valued at $25,250.




<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - STOCK TRANSACTIONS (CONTINUED)

         In September 2006 the company issued  5,000,000  shares of common stock
for accrued directors fees valued at $175,000.

         In September  2006 800,000  shares of the  company's  common stock were
returned to the treasury and cancelled.

         In  September  2006  options were  exercised  for 25,000  shares of the
company's common stock for $1,150.

SERIES "A" PREFERRED STOCK

In February  2004,  the Company sold 1,000 shares of series "A" preferred  stock
for cash of $5,000.  In June 2004, the Company issued 7,100 shares of series "A"
preferred  stock for services  valued at $128. In May 2005, 100 shares of series
"A" preferred  stock were returned to the treasury and cancelled.  The preferred
shares are convertible into common shares.

In January 2006 the company  issued an additional  600,000  shares of series "A"
preferred stock in connection with the acquisition of a 51% majority interest in
Complete Power Solutions, Inc.

SERIES "B" PREFERRED STOCK

In January  2006 the company sold  657,000  shares of it's series "B"  preferred
stock for cash of $637,000. In September, 2006 the company issued 548,966 shares
of it's series "B" preferred stock in connection with the acquisition of 100% of
the voting interest of Capstone Industries, Inc.

WARRANTS

The Company has issued stock  warrants to its officers and directors for a total
of 5,975,000  shares of the Company's  common stock. The warrants expire between
November 11, 2011 and July 20, 2014. The warrants have an exercise price of $.03
to $.05.

The Company issued a stock warrant to each of two former officers of the Company
in December  2003 for a total of 35,000  shares of the  Company's  common stock.
Each of the stock  warrants  expires on July 20,  2014,and  entitles each former
officer to purchase  10,000 and 25,000  shares,  respectively,  of the Company's
common stock at an exercise price of $0.05.

The Company  issued a stock  warrant for  50,000,000  shares of common  stock to
Dutchess Private Equities Fund, II, L.P. ("Dutchess"),  as part of an investment
agreement between Dutchess and the Company.  As part of the agreement,  Dutchess
was to invest up to  $2,500,000  to purchase the  Company's  common  stock.  The
warrant was to expire  August 3, 2014.  On February  16,  2005,  the Company and
Dutchess  agreed to  postpone  the  implementation  of the  foregoing  financing
arrangement. As of the date of this Report, the Company and Dutchess have agreed
not to proceed with this financing  arrangement and the  aforementioned  warrant
has been cancelled.





<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - STOCK TRANSACTIONS (CONTINUED)

OPTIONS

On May 20, 2005 the  company  granted a  non-qualified  stock  option  under the
company's  2005  Equity  Plan for a maximum of 250,000  shares of the  company's
common  stock for $0.02 per share.  The option  expires  May 25, 2015 and may be
exercised any time after May 25, 2005.

NOTE 5 - RELATED PARTY PAYABLES

On September 1, 2004, China Pathfinder Fund, LLC., a wholly-owned  subsidiary of
the Company  received  loans of $15,000 from  shareholders  of the Company.  The
loans  carry an interest  rate of 5% per annum and are  payable in twelve  equal
monthly  installments  with the first installment due and payable on January 31,
2006. At September 30, 2006, the total amount due on these loans was $16,011.

During 2003 and 2004, a former  officer of the Company paid $300,000 to settle a
previously  filed  lawsuit  on behalf of the  Company.  This  $300,000  has been
included in accrued liabilities at September 30, 2006 and December 31, 2005.

NOTE 6 - INCOME TAXES

As of December 31, 2005, the Company had a net operating loss  carryforward  for
income tax reporting  purposes of  approximately  $1,038,000  that may be offset
against future taxable income through 2025. Current tax laws limit the amount of
loss  available to be offset  against  future  taxable income when a substantial
change in ownership  occurs.  Therefore,  the amount  available to offset future
taxable income may be limited. No tax benefit has been reported in the financial
statements,  because the Company  believes  there is a 50% or greater chance the
carryforwards will expire unused. Accordingly, the potential tax benefits of the
loss carryforwards are offset by a valuation allowance of the same amount.

NOTE 7 - LEGAL SETTLEMENTS

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 September 30, 2006 and December 31, 2005, the award
amount has been included in the accrued expenses of the Company.

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 company 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 the Company
for $700,000  principal amount. The Company has defended against the Plaintiffs'
claims to date. If the Plaintiffs win a judgment on their claims,  the judgment,
if collected,  would prove potentially ruinous the Company,  unless a settlement
involving  no  cash  was  arranged  between  the  parties  to the  lawsuit.  The
Plaintiff's claims include a claim for receipt of the money


<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - CONTINGENCIES (CONTINUED)

due under the Promissory Note with a principal  amount of $700,000.  The Company
lacks the cash flow or cash  reserves or funding  resources to pay such a claim,
either in a lump sum or over time.  If the  Plaintiffs  are  awarded the claimed
damages against the Company in this lawsuit,  the Company would be unable to pay
such damages, either in a lump-sum or under a schedule, and would be insolvent.

The  Plaintiff's  complaint in Celeste was dismissed by the U.S.  District Court
for the  Southern  District  of New York in early  2005 for  failure to have all
essential parties to the dispute as parties to the lawsuit. The Plaintiffs filed
an  amended  complaint  prior to the March 1, 2005  deadline  for doing so.  The
Company currently  intends to vigorously defend against the Plaintiff's  amended
complaint, which adds two former, now defunct,  subsidiaries involved in the STC
transaction as defendants. The assets of Networkland,  Inc. and Technet Computer
Services  Corporation  were  acquired  by the Company on March 15, 2001 and that
transaction is at the heart of the dispute in the Celeste case.  Currently,  the
Company's  second  motion to dismiss is scheduled to be heard by the Court on or
about  September  15,  2005.  The Court has also  heard  Plaintiff's  motion for
default judgment against the subsidiaries  involved in the STC transaction.  The
Court's decision may take several months to be issued.  The Company is uncertain
at this time of the final outcome of this litigation.

Sun Trust Bank Dispute. 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. Sun Trust had not
sued the Company and has not raised its prior threat to sue in 2005.

RAS Investment,  Inc., a company  affiliated with Anne Sigman, a former employee
of the Company, has advised the Company that RAS has acquired the Sun Trust note
and has demanded  payment in cash or stock.  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.

The Company is a defendant to another  lawsuit  concerning a trade show contract
for approximately $25,000, but the Company does not believe that this lawsuit is
material in respect of potential liability of the Company.  The Company has been
and intends to vigorously  defend itself in this  lawsuit.  In August 2006,  the
Company settled this lawsuit for $25,000.

As reported previously,  the Company has received two claims from certain former
shareholders  of  Cyberquest,  Inc. that they hold or own  approximately  70,000
shares of a class of the Company's redeemable preferred stock that was issued in
the Company's 1998 acquisition of Cyberquest.  Cyberquest  ceased  operations in
2000-2001  period.  The Company has  investigated  these claims and has not been
able to date to  substantiate  any of the claims to date and the claimants  have
not pursued their claims beyond an initial communication  asserting ownership of
these shares of serial preferred stock.

<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - SUBSIDIARY

In February 2004, the Company  established a new  subsidiary,  China  Pathfinder
Fund,  LLC, a Florida  limited  liability  company.  During  2005,  the name was
changed to  Overseas  Building  Supplies,  LLC to reflect  its shift in business
lines from business development to trading Chinese- made building supplies.

NOTE 10 - ACQUISITIONS

On March 18, 2005, the Company entered into an agreement whereby the Company was
to  acquire  40%  of  the  outstanding  shares  of  Beijing  Hua  Wei  Furniture
Manufacture  Co.,  Ltd.,  ("HWFM"),  a company  organized  under the laws of the
People's  Republic of China.  The Company was to issue  common  stock  valued at
$1,325,000 at closing to acquire its 40% interest in HWFM. On July 20, 2005, the
Company  announced  the  termination  of this  agreement  because HWFM failed to
satisfy one of the conditions to consummation of the acquisition.


On  January  27,  2006,  the  Company  entered  into a Purchase  Agreement  (the
"Purchase  Agreement")  with William Dato and Complete Power  Solutions  ("CPS")
pursuant to which the Company  acquired 51% of the member interests of CPS owned
by Mr. Dato for a purchase  price  consisting of the payment of $637,000 in cash
and the delivery of 600,000 shares of Company's  Series A Convertible  Preferred
Stock (the  "Series A Preferred  Stock")  having a stated  value of  $1,200,000,
which Series A Preferred  Stock are convertible  into  50,739,958  shares of the
Company's  Common  Stock  at the  demand  of Mr.  Dato.  The  cash  paid  in the
transaction  was  obtained  from  capital  provided  to the  Company  for use in
connection with  acquisitions by Howard Ullman,  our Chief Executive Officer and
President, and certain of our directors and principal shareholders.  The Company
recognized  goodwill of  $1,567,214 as part of the  transaction.  The Company is
currently evaluating the value of the goodwill.

On September 15, 2006 the Company  entered into a Stock Purchase  Agreement (the
Purchase  Aggreement)  with  Capstone  Industries,  Inc., a Florida  corporation
(Capstone),  engaged in the  business of  producing  and selling  portable  book
lights and related consumer goods, and Stewart Wallach,  the sole shareholder of
Capstone.  Under the Stock Purchase  Agreement the Company  acquired 100% of the
issued and outstanding  shares of Capstone Common Stock in exchange for $750,000
in cash  (funded by the credit  line  provided  by  certain  directors  of China
Direct) and $1.25 million of the Company's series B Preferred  Stock,  $0.01 par
value per share,  which  Series "B" stock is  convertible  into  15.625  million
"restricted"  shares of China Direct  Common  Stock,  $0.0001 par value  (common
stock).  China  Direct has agreed to register  shares of Common  Stock under the
Securities Act of 1933, as amended,  to cover conversion of the Series "B" Stock
issued to Mr. Wallach in the acquisition of Capstone.  China Direct will operate
Capstone as a wholly-owned subsidiary.

<PAGE>

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, 2005.

PLAN OF  OPERATIONS.  The Company's  plan of operations is to focus on expanding
OBS' building supplies business and CPS's power generator  distribution business
as the  primary  business  lines of t he Company.  The  Company  will devote its
available  resources  and funding to the  expansion  of OBS and CPS.  Except for
occasional  short-term  loans  from Mr.  Ullman,  SDI will have to  support  its
operations from cash flow from operations.

         The  Company's  current  plan  of  operations  also  includes  actively
reviewing mergers and acquisitions and investment  opportunities like CPS, which
opportunities  are in industries  that  complement the ability of the Company to
trade   Chinese-made   products  in  North  America.   The  Company  is  seeking
opportunities  that  potentially and immediately  enhance our sales revenues and
net worth as well as  possibly  contribute  a  positive  cash  flow and  enhance
shareholder  value beyond the  capability of our current core business  line. As
such,  we are  interested  in  investing in or  acquiring  companies  that could
benefit from  exploiting  the  Company's  financial  and  contacts  with Chinese
manufacturing  firms.  Our  strategic  plan has  traditionally  been to remain a
trading  company with low overhead and focused on  exploiting  its contacts with
Chinese  manufacturers  to meet our  customers'  needs.  We have  concluded that
ownership of or investment in companies that are established distributors in the
U.S. and potential  distribution  channels of Chinese-made  products in the U.S.
should be  considered  as part of the overall  strategy to exploit our  contacts
with over 30 Chinese manufacturing companies.

         We received in early January 2006, a credit line commitment of $500,000
(increased to $647,000) from its chief executive  officer and president,  Howard
Ullman, and three Company directors, Jeffrey Postal, Lorenzo Lamadrid and Laurie
Holtz  (collectively,  the  "lenders").  The credit line is to be used solely to
fund the cash  portion of any  acquisition  or  investment  by the  Company  The
funding was used to acquire the 51% membership interest in CPS. Under the credit
line, the Company has 4 years to repay any advances of credit,  which  repayment
shall be made in  calendar  quarterly  interest-only  payments  for the first 24
months  of  the  term  and  equal  calendar  quarterly  principal  and  interest
installment  payments for the last 24 months of the term.  The interest  rate is
8.5% per annum.  Upon  demand,  any lender may  convert  all or a portion of any
unpaid principal or interest into "restricted" shares (as defined in Rule 144 of
the Securities Act of 1933, as amended) of a new class of the Company  preferred
stock ("Series B Convertible  Preferred  Stock").  The rights,  designations and
privileges  of the Series B  Preferred  Stock  will be  negotiated  between  the
Company  and the  lenders;  provided,  however,  that  the  Preferred  Stock  is
convertible into "restricted" shares of Company Common Stock,  $0.0001 par value
per share,  ("Common  Stock") at a conversion ratio that entitles the lenders to
receive an aggregate of  33,333,333  "restricted"  shares of Common Stock (to be
adjusted for any future stock split or  recapitalization).  The conversion ratio
is based on the principal  amount of the debt  ($647,000)  divided by $0.015 per
share of Common Stock.  Any shares of Common Stock issued in a conversion of the
Series B Preferred Stock have piggyback  registration rights under the agreement
between the Company and the lenders for the credit line.


<PAGE>

         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 and CPS will be able to generate
sufficient  cash  flow to pay for their  respective  direct  overhead  costs and
internal  planned  growth in fiscal  year 2006,  neither  SDI nor our  company's
interest  in CPS  generate  sufficient  cash  flow  at  this  time  to  fund  an
acquisition program, or fund of the proposed enhanced and expanded marketing and
sales efforts for OBS and the overhead of our company. The Company will not have
sufficient  funds  (unless it is able to raise funds in a private  placement  or
debt financing) to undertake any significant business development,  or extensive
marketing,  in terms  of  scope  of  campaign  and  geographical  reach,  of new
products.  Accordingly,  following any future acquisition,  the Company will, in
all likelihood and unless the acquired business  generates  sufficient cash flow
and  profits,  be  required to either  seek debt or equity  financing  or obtain
funding from third parties, in exchange for which the Company may be required to
give up a  substantial  portion of its  interest in the  acquired  product or to
issue large number of shares of its capital  stock.  There is no assurance  that
the Company will be able either to obtain additional financing or interest third
parties  in  providing  funding  for  the  further  development,  marketing  and
manufacturing of any products acquired.

         On  September  15,  2006  the  Company  entered  into a Stock  Purchase
Agreement  with Capstone  Industries,  Inc., a Florida  corporation  (Capstone),
engaged in the  business  of  producing  and  selling  portable  book lights and
related  consumer  goods,  and the  sole  shareholder  of  Capstone.  Under  the
agreement  the Company  acquired  100% of the issued and  outstanding  shares of
Capstone  Common Stock in exchange for $750,000 in cash and $1.25 million of the
Company's  series B Preferred  Stock,  which is convertible  into 15.625 million
"restricted" shares of China Direct Common Stock, $0.0001 par value.


RESULTS OF  OPERATIONS  - For the nine months  ended  September  30,  2006,  the
Company had net income of  approximately  $315,000.  For the nine  months  ended
September 30, 2005, the Company had a net loss of approximately $185,000.

         Total Revenues - For the nine months ended September 30, 2006 and 2005,
the  Company  had  total  sales  of   approximately   $8,399,000   and  $722,000
respectively,  for an  increase of  approximately  $7,677,000.  The  increase in
revenues was due to the  acquisition  of Complete  Power  Solutions and Capstone
Industries.

         Costs and Expenses - For the nine months ended  September  30, 2006 and
2005,  the Company had cost of sales of  approximately  $5,766,000 and $543,000,
respectively.  The  increase  in the cost of sales  was due the  acquisition  of
Complete Power Solutions and Capstone  Industries.  Operating expenses increased
approximately $1,211,000,  from $363,000 for the nine months ended September 30,
2005 to $1,574,000 for the nine months ended  September 30, 2006.  This increase
is  attributable  primarily to the  acquisition of Complete Power  Solutions and
Capstone Industries. The cost of rent and other general and administrative costs
also  increased in for the nine months ended  September  30, 2006 as compared to
the same period in 2005.


<PAGE>

         Liquidity  and  Capital  Reserves.  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.

         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. 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.

         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.

         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  Risks.  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.  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

<PAGE>

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 are
responsible for establishing and maintaining  disclosure controls and procedures
for the Company.

         (a) Evaluation of Disclosure Controls and Procedures

         As of the end of the period covered by this report, the Company carried
out an  evaluation,  under the  supervision  and with the  participation  of the
Company's management, including the Company's President, of the effectiveness of
the design and operation of the  Company's  disclosure  controls and  procedures
pursuant to Rule 13a-15 under the  Securities  Exchange Act of 1934,  as amended
(the  "Exchange  Act").  Based  upon the  evaluation,  the  Company's  President
concluded that, as of the end of the period, the Company's  disclosure  controls
and  procedures  were effective in timely  alerting him to material  information
relating to the Company  required to be included in the reports that the Company
files and submits pursuant to the Exchange Act.

         (b) Changes in Internal Controls

         Based  on his  evaluation  as of  September  30,  2006,  there  were no
significant  changes in the Company's internal controls over financial reporting
or in any other areas that could  significantly  affect the  Company's  internal
controls  subsequent  to the date of his most recent  evaluation,  including any
corrective  actions  with  regard  to  significant   deficiencies  and  material
weaknesses.

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         On January 25, 2005, the U.S.  District Court for the Southern District
of New York dismissed without prejudice the lawsuit against China Direct Trading
Corporation  in the  previously-reported  civil case styled  CELESTE TRUST REG.,
ESQUIRE TRADE,  ET AL. V. CBQ, INC.  (Case# 03 Civ. 9650 RMB; US District Court,
Southern  District  for New York,  12/4/2003).  The lawsuit was  dismissed  in a
response to China Direct Trading Corporation's motion to dismiss. The Plaintiffs
can  refile the  lawsuit if they a  complaint  on or before  March 1, 2005.  The
Plaintiffs  filed an amended  complaint  with the Court on or about February 24,
2005.  While the  Company  currently  intends  to  defend  against  the  Amended
Complaint,  and without  admitting any liability in the matter,  the Company may
also explore settlement of the litigation in order to avoid any further drain by
this federal lawsuit on the Company's resources.  The Company has filed a motion
to dismiss the  plaintiff's  amended  complaint,  which  motion has not yet been
heard or ruled upon by the Court.

         As  reported  previously,  the  Company  has  received  two claims from
certain  former  shareholders  of  Cyberquest,   Inc.  that  they  hold  or  own
approximately  70,000  shares of a class of the Company's  redeemable  preferred
stock  that  was  issued  in  the  Company's  1998  acquisition  of  Cyberquest.
Cyberquest ceased  operations in 2000-2001 period.  The Company has investigated

<PAGE>

these claims and has not been able to date to substantiate  any of the claims to
date  and the  claimants  have  not  pursued  their  claims  beyond  an  initial
communication asserting ownership of these shares of serial preferred stock.

         The Company is a defendant to another  lawsuit  concerning a trade show
contract,  but the  Company  does not believe  that this  lawsuit is material in
respect of potential liability of the Company. The Company intends to vigorously
defend itself in this lawsuit.  In August 2006, the Company settled this lawsuit
for $25,000.

         No director, officer or affiliate of the Company, or owner of record of
more than five percent (5%) of the  securities of the Company,  or any associate
of any such director, officer or security holder is a party adverse to us or has
a material interest adverse to us in reference to pending litigation.

         We are not  currently  a party to any other legal  proceedings  that we
believe  will have a  material  adverse  effect on our  financial  condition  or
results of operations.

ITEM 2.  CHANGES IN SECURITIES

None.

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

2.1      Purchase  Agreement,  dated January 27, 2006, by and among China Direct
         Trading Corporation, William Dato and Complete Power Solutions, LLC. ++

3.1      Articles of Incorporation of the Company *

3.1.1    Articles  of  Incorporation   of  China  Direct  Trading   Company,   a
         Wholly-owned subsidiary of the Company **

3.2      By-laws of the Company***


<PAGE>

10.1     Voting  Agreement,  dated  January 27, 2006,  by and among China Direct
         Trading Corporation, William Dato and Howard Ullman. *****

10.2     Operating  Agreement,  dated  January  27,  2006,  for  Complete  Power
         Solutions, LLC. *****

10.3     Employment Agreement, dated January 27, 2006, among William Dato, China
         Direct Trading Corporation and Complete Power Solutions, LLC. *****

10.4     Form of July 20,  2005 sales  agency  agreement  between  China  Direct
         Trading Corporation and Sutter's Mill Specialties. *****

14       Code of Ethics, dated November 21, 2003, ++++

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

32       Certification  Pursuant  to Section  302 of the  Sarbanes-Oxley  Act of
         2002.+

---------------

*        Incorporated  by  reference  to Annex C to the  Special  Meeting  Proxy
         Statement,  dated  April  15,  2004,  filed  by  China  Direct  Trading
         Corporation with the Commission on April 20, 2004.

**       Incorporated  by  reference  to Annex G to the  Special  Meeting  Proxy
         Statement,  dated  April  15,  2004,  filed  by  China  Direct  Trading
         Corporation with the Commission on April 20, 2004.

***      Incorporated  by  reference  to  Annex  D  the  Special  Meeting  Proxy
         Statement,  dated  April  15,  2004,  filed  by  China  Direct  Trading
         Corporation with the Commission on April 20, 2004.

****     Incorporated  by  reference  to  Annex  H  the  Special  Meeting  Proxy
         Statement,  dated  April  15,  2004,  filed  by  China  Direct  Trading
         Corporation with the Commission on April 20, 2004.

*****    Incorporated by reference to Form 10KSB, dated April 17, 2006.

+        Filed Herein

++       Previously Filed with Form 10-KSB for December 31, 2005, filed with the
         Commission on April 17, 2006.

++++     Incorporated  by reference to Exhibit 14 to the  Company's  Form 10-KSB
         for the fiscal year ending  December 31, 2003, as filed by China Direct
         Trading Company with the Commission on April 20, 2004.

         (b) Reports on Form 8-K filed.

            The  following  reports  were  filed on Form 8-K  during  the  third
         quarter of the 2006 fiscal  year:  September  13, 2006,  September  14,
         2006, September 18, 2006 and October 19, 2006.


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                                   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 14th day of November , 2006.

China Direct Trading Corporation

November 14, 2006

/s/ Howard Ullman
Howard Ullman
CEO, President and Chairman
(Principal Executive Officer)
(Principal Financial and Accounting Officer)






















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