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: March 31, 2007
                  --------------------------------------------

             [ ] 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: March 31, 2007  Approximately
560,865,870 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

<TABLE>
<CAPTION>
                                                          (Unaudited)
                                                           March 31,          December 31,
                                                              2007                2006
                                                       ------------------  ------------------
Assets:

Current assets:
<S>                                                    <C>                 <C>
   Cash                                                $          156,537  $          198,084
   Accounts receivable - net                                      116,400             560,475
   Inventory                                                      143,939              69,895
   Deposit on inventory                                                 -              19,569
   Notes receivable from former subsidiary                        202,150             202,150
   Prepaid expense                                                 17,129              16,162
                                                       ------------------  ------------------

     Total Current Assets                                         636,155           1,066,335
                                                       ------------------  ------------------

Fixed assets:
   Computer equipment/software                                      5,999               5,422
   Communications equipment                                         2,014               2,014
   Machinery and equipment                                        115,364              98,514
   Furniture and fixtures                                           5,665               4,965
   Less: Accumulated Depreciation                                 (85,665)            (80,571)
                                                       ------------------  ------------------

     Total Fixed Assets                                            43,377              30,344
                                                       ------------------  ------------------

Other non-current assets:
   Note receivable from former subsidiary - long term             228,329             225,560
   Goodwill                                                     1,936,020           1,936,020
   Deposits                                                        18,725              16,775
                                                       ------------------  ------------------

      Total other non-current assets                            2,183,074           2,178,355
                                                       ------------------  ------------------

         Total assets                                  $        2,862,606  $        3,275,034
                                                       ==================  ==================
</TABLE>






                                        1

<PAGE>



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


<TABLE>
<CAPTION>
                                                                                (Unaudited)
                                                                                 March 31,          December 31,
                                                                                    2007                2006
                                                                             ------------------  ------------------
Liabilities and Stockholders' Deficit:

Current Liabilities:
<S>                                                                          <C>                 <C>
   Accounts payable and accrued expenses                                     $          356,422  $          416,539
   Customer deposits                                                                     18,235                   -
   Due to related parties                                                               300,000             400,000
   Notes and loans payable to related parties - current maturities                      496,213             726,759
                                                                             ------------------  ------------------
         Total Current Liabilities                                                    1,170,870           1,543,298
                                                                             ------------------  ------------------

Long-Term Liabilities:
   Notes and loans payable to related parties                                           782,383             767,589
   Investor loans payable                                                                     -              54,038
                                                                             ------------------  ------------------
         Total Long-Term Liabilities                                                    782,383             821,627
                                                                             ------------------  ------------------

         Total Liabilities                                                            1,953,253           2,364,925
                                                                             ------------------  ------------------

Stockholders' Deficit:
   Preferred Stock,  Series A, par value $.001 per share Authorized  100,000,000
      shares, Issued 6,266 shares at March 31, 2007
      and 607,000 shares at December 31, 2006                                                 7                 607
   Preferred Stock, Series B, par value $.10 per share
     Authorized 100,000,000 shares,
     Issued 942,030 shares at March 31, 2007 and
     1,193,769 shares at December 31, 2006                                               94,203             119,377
   Common Stock, par value $.0001 per share
      Authorized 600,000,000 shares,
      Issued 560,865,870 shares at March 31, 2007
      and 536,406,750 shares at December 31, 2006                                        56,087              53,642
   Related party receivable                                                                   -          (1,775,864)
   Additional paid-in capital                                                         2,666,024           4,166,747
   Accumulated deficit                                                               (1,906,968)         (1,654,400)
                                                                             ------------------  ------------------

     Total Stockholders' Deficit                                                        909,353             910,109
                                                                             ------------------  ------------------

     Total Liabilities and Stockholders' Deficit                             $        2,862,606  $        3,275,034
                                                                             ==================  ==================
</TABLE>


                             See accompanying notes.

                                        2

<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                         (Unaudited)
                                                                                     For the Three Months
                                                                                       Ended March 31,
                                                                                  2007                  2006
                                                                            ------------------  ------------------
<S>                                                                         <C>                 <C>
Revenues                                                                    $          211,042  $          169,672
Cost of Sales                                                                         (138,015)           (144,464)
                                                                            ------------------  ------------------
        Gross Profit                                                                    73,027              25,208
                                                                            ------------------  ------------------

Operating Expenses:
  Sales and marketing                                                                   13,688              13,583
  Compensation                                                                          95,615              57,540
  Professional fees                                                                     47,207              18,221
  Consulting                                                                            66,875                   -
  Other General and administrative                                                      78,723              29,823
                                                                            ------------------  ------------------
       Total Operating Expenses                                                        302,108             119,167
                                                                            ------------------  ------------------

Net Operating Income (Loss)                                                           (229,081)            (93,959)
                                                                            ------------------  ------------------

Other Income (Expense):
  Miscellaneous income                                                                     750                   -
  Interest income                                                                        3,267                   -
  Interest expense                                                                     (27,504)                (68)
                                                                            ------------------  ------------------
       Total Other Income (Expense)                                                    (23,487)                (68)
                                                                            ------------------  ------------------

Net Income (Loss) from continuing operations                                          (252,568)            (94,027)

Discontinued Operations
   Income (Loss) from discontinued operations                                                -             136,745
                                                                            ------------------  ------------------

Net Income (Loss)                                                           $         (252,568) $           42,718
                                                                            ==================  ==================

Weighted Average
Shares Outstanding                                                                 543,997,861         543,122,028
                                                                            ==================  ==================

Income (Loss) per Common Share
   Continuing operations                                                    $                -  $                -
   Discontinued operations                                                                   -                   -
                                                                            ------------------  ------------------
   Net Income (Loss)                                                        $                -  $                -
                                                                            ==================  ==================
</TABLE>



                             See accompanying notes.

                                        3

<PAGE>



                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                         (Unaudited)
                                                                                    For the Three Months
                                                                                       Ended March 31,
                                                                                    2007               2006
                                                                            ------------------  -----------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Continuing operations:
<S>                                                                         <C>                 <C>
   Net Income (Loss)                                                        $         (252,568) $          42,718
Adjustments necessary to reconcile net loss
   to net cash used in operating activities:
     Income from discontinued operations                                                     -           (136,745)
     Stock issued for accrued expenses                                                 106,813                  -
      Stock issued for expenses                                                         75,000                  -
      Depreciation                                                                       5,094                  -
     (Increase) decrease in advances                                                         -                  -
     (Increase) decrease in accounts receivable                                        444,075                  -
     (Increase) decrease in inventory                                                  (54,475)                 -
     (Increase) decrease in prepaids                                                      (967)                 -
     (Increase) decrease in deposits                                                    (1,950)                 -
     (Increase) decrease in interest receivable                                         (2,769)                 -
      Increase (decrease) in accounts payable & accrued expenses                       (60,117)            50,126
      Increase (decrease) in due to/from related parties                              (100,000)                 -
      Increase (decrease) in accrued interest on notes payable                          17,184                  -
      Increase (decrease) in deposits from customers                                    18,235                  -
                                                                            ------------------  -----------------
  Net Cash Used in continuing operations                                               193,555            (43,901)
  Net Cash Used in discontinued operations                                                   -           (765,152)
                                                                            ------------------  -----------------
  Net Cash Used in operating activities                                                193,555           (809,053)
                                                                            ------------------  -----------------


CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of fixed assets                                                               (18,127)                 -
                                                                            ------------------  -----------------
Net cash provided by (used in) continuing activities                                   (18,127)                 -
Net cash provided by (used in) discontinued activities                                       -           (306,112)
                                                                            -------------------------------------
Net cash provided by (used in) investing activities                                    (18,127)          (306,112)
                                                                            ------------------  -----------------
</TABLE>








                                        4

<PAGE>


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


<TABLE>
<CAPTION>
                                                                                         (Unaudited)
                                                                                    For the Three Months
                                                                                        Ended March 31,
                                                                                   2007                2006
                                                                            ------------------  -----------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
<S>                                                                          <C>                <C>
Proceeds from sale of stock                                                              5,000                  -
Payments on notes payable to related parties                                          (221,975)                 -
Cash acquired in acquisition                                                                 -                  -
Proceeds from loans                                                                          -             60,000
                                                                            ------------------  -----------------
Net cash provided by (used in) continuing activities                                  (216,975)            60,000
Net cash provided by (used in) discontinued activities                                       -          1,693,570
                                                                            ------------------  -----------------

(216,975) 1,753,570
                                                                            ------------------  -----------------

Net (Decrease) Increase in cash and cash equivalents                                   (41,547)           638,405
Cash and Cash Equivalents at beginning of period                                       198,084              9,090
                                                                            ------------------  -----------------
Cash and Cash Equivalents at end of period                                  $          156,537  $         647,495
                                                                            ==================  =================


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Interest                                                                  $           27,504  $             68
  Franchise and income taxes                                                $                -  $              -
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:

         On February 21, 2007, the Company issued 468,750 shares of common stock
for notes payable of $15,000 and accrued interest of $1,761.

         On March 16, 2007, the Company issued  1,835,050 shares of common stock
for investor loans payable of $50,000 and accrued interest of $5,052.










                             See accompanying notes.

                                        5

<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.

The unaudited financial  statements as of March 31, 2007 and for the three month
periods ended March 31, 2007 and 2006 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
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  issued 97 million shares
common stock to acquire 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.  Also on December 1, 2003, an additional  414,628,300 shares of common
stock were issued to the previous owners of CBQ, Inc.

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 Supply,  LLC to reflect its shift in business lines
from business development to trading Chinese- made building supplies.

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.  The
Company  subsequently  sold its 51%  membership  interest in CPS,  pursuant to a
Purchase and Settlement Agreement dated and effective as of December 31, 2006.

On September 13, 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,  and, with the acquisition of Capstone on September 13,
2006, the sale of portable booklights in North America.  The items are typically
manufactured  in  the  People's  Republic  of  China  by  third-party   contract
manufacturing companies.

During the period that the Company owned a 51% interest in CPS (January 27, 2006
through December 31, 2006), the Company, through CPS, engaged in the business of
power generators in Florida and adjacent states.



                                       6
<PAGE>


                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

CASH AND CASH EQUIVALENTS

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.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

An allowance  for doubtful  accounts is  established  as losses are estimated to
have  occurred  through a  provision  for bad debts  charged  to  earnings.  The
allowance  for bad debt is evaluated  on a regular  basis by  management  and is
based  on  upon  management's  periodic  review  of  the  collectibility  of the
receivables.  This  evaluation in inherently  subjective and requires  estimated
that are  susceptible  to  significant  revisions  as more  information  becomes
available.

As of March 31, 2007, management has determined that the accounts receivable are
fully  collectible.  As such,  management  has not  recorded  an  allowance  for
doubtful accounts.

INVENTORY

The  Company's  inventory,  which is  recorded  at the lower of cost  (first-in,
first-out)  or  market,  consists  of  finished  goods for  resale by  Capstone,
totaling $143,939 at March 31, 2007 and $69,895 as of December 31, 2006.

In addition,  Overseas  Building  Supplies had deposits on inventory of $19,569,
representing  payments  made for  inventory  not  received  by the Company as of
December 31, 2006.

PROPERTY AND EQUIPMENT

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:

               Computer equipment                                   3 - 7 years
               Computer software                                    3 - 7 years
               Machinery and equipment                              3 - 7 years
               Furniture and fixtures                               3 - 7 years

The Company  follows  FASB  Statement  No. 144 (SFAS 144),  "Accounting  for the
Impairment of Long-Lived Assets." SFAS 144 requires that long-lived assets to be
held and used  are  reviewed  for  impairment  whenever  events  or  changes  in
circumstances  indicate that the related carrying amount may not be recoverable.
When  required,  impairment  losses on assets to be held and used are recognized
based on the fair value of the asset.  Long-lived  assets to be disposed  of, if
any,  are  reported at the lower of  carrying  amount or fair value less cost to
sell. No impairments were recognized by the Company during 2006.

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 $5,095 and $3,450 for the three months ended March 31,
2007 and 2006, respectively.



                                       7
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other  intangible  assets are recorded  under the provisions of the
Financial  Accounting  Standards  Board  (FASB)  Statement  No.142  (SFAS  142),
Goodwill and Other Intangible Assets. SFAS 142 requires that an intangible asset
that is acquired  either  individually  or with a group of other assets (but not
those  acquired in a business  combination)  shall be initially  recognized  and
measured based on its fair value.  Goodwill acquired in business combinations is
initially  computed as the amount paid by the acquiring company in excess of the
fair value of the net assets acquired.

Costs of internally  developing,  maintaining  and restoring  intangible  assets
(including  goodwill)  that  are  not  specifically   identifiable,   that  have
indeterminate  lives, or that are inherent in a continuing  business and related
to an entity as a whole, are recognized as an expense when incurred.

An  intangible  asset  (excluding  goodwill)  with a  definite  useful  life  is
amortized;  an intangible asset with an indefinite  useful life is not amortized
until its useful life is  determined to be no longer  indefinite.  The remaining
useful lives of  intangible  assets not being  amortized  are evaluated at least
annually to determine  whether  events and  circumstance  continue to support an
indefinite  useful life.  If and when an  intangible  asset is  determined to no
longer  have an  indefinite  useful  life,  the asset  shall  then be  amortized
prospectively over its estimated  remaining useful life and accounted for in the
same manner as other intangibles that are subject to amortization.

An intangible  asset  (including  goodwill) that is not subject to  amortization
shall be tested for impairment  annually or more frequently if events or changes
in circumstances  indicate that the asset might be impaired. The impairment test
consists of a  comparison  of the fair value of the  intangible  assets with its
carrying amount.  If the carrying amount of an intangible asset exceeds its fair
value, an impairment loss shall be recognized in an amount equal to that excess.
In accordance with SFAS 142, goodwill is not amortized.

It is the Company's policy to test for impairment no less than annually, or when
conditions  occur that may  indicate an  impairment.  The  Company's  intangible
assets,  which consist of goodwill of $1,936,020 recorded in connection with the
Capstone  acquisition,  were  tested  for  impairment  and  determined  that  no
adjustment for  impairment was necessary as of March 31, 2007,  whereas the fair
value of the intangible asset exceeds its carrying amount,

In addition, the Company initially recorded goodwill of $1,567,214 in connection
with the CPS acquisition.  Effective  December 31, 2006, the Company disposed of
its interest in CPS and,  accordingly,  wrote off this amount, which is included
in the loss from discontinued operations on the consolidated statement of income
(loss).

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.
In periods  where losses are  reported,  the weighted  average  number of common
shares  outstanding  excludes common stock  equivalents  because their inclusion
would be  anti-dilutive.  Diluted  loss per  common  share for the  years  ended
December 31, 2006 and 2005 are not  presented as it would be  anti-dilutive.  At
December 31, 2006 and 2005,  the total  number of  potentially  dilutive  common
stock equivalents was 85,748,980 and 7,060,000, respectively.

PRINCIPLES OF CONSOLIDATION

The consolidated  financial statements for the three months ended March 31, 2007
and  2006  include  the  accounts  of the  parent  entity  and its  wholly-owned
subsidiaries  Souvenir Direct,  Inc.,  Overseas  Building Supply,  LLC (formerly
China Pathfinder Fund, LLC), and Capstone Industries, Inc.



                                       8
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The  results  of  operations  attributable  to  Capstone  are  included  in  the
consolidated  results of operating  beginning on September 13, 2006, the date on
which the Company's interest in Capstone was acquired.

The results of operations  attributable to the Company's  interest in its former
subsidiary,  CPS, for the period of time in which  majority  interest in CPS was
held by the Company (January 27, 2006 through December 31, 2006) are included in
the loss from  discontinued  operations on the consolidated  statement of income
(loss).  All  significant  intercompany  balances  and  transactions  have  been
eliminated.


FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of the Company's  financial  instruments,  including accounts
payable  and  accrued  liabilities  at March  31,  2007 and  December  31,  2006
approximates  their fair values due to the short-term  nature of these financial
instruments.

RECLASSIFICATIONS

Certain  reclassifications  have been made in the 2006  financial  statements to
conform  with  the  2007  presentation.   There  were  no  material  changes  in
classifications made to previously issued financial statements.

REVENUE RECOGNITION

Product Sales are recognized when an agreement of sale exists,  product delivery
has occurred,  pricing is final or  determinable,  and  collection is reasonably
assured.

Allowances for sales returns,  rebates and discounts are recorded as a component
of net sales in the period the allowances are recognized.  In addition,  accrued
liabilities  contained in the  accompanying  balance sheet include  accruals for
estimated  amounts of credits to be issued in future years based on  potentially
defective product, other product returns and various allowances. These estimates
could change significantly in the near term.

ADVERTISING AND PROMOTION

Advertising and promotion costs,  including advertising,  public relations,  and
trade show expenses, are expensed as incurred. Advertising and promotion expense
was  $13,688 and  $91,786  for the three  months  ended March 31, 2007 and 2006,
respectively.

SHIPPING AND HANDLING

The Company's shipping and handling costs, incurred by Capstone, are included in
selling  expenses  and  amounted to $2,220 for the three  months ended March 31,
2007.

INCOME TAXES

The  Company  accounts  for  income  taxes  under the  provisions  of  Financial
Accounting Standards Board (FASB) Statement No. 109 (SFAS 109),  "Accounting for
Income Taxes." SFAS 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.  The  Company  and its  subsidiaries  intend to file
consolidated income tax returns



                                       9
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

STOCK-BASED COMPENSATION

On January 1, 2006,  the  Company  adopted  Statement  of  Financial  Accounting
Standards  No. 123 (Revised  2004),  Share-Based  Payments,  SFAS 123(R),  which
requires  the  measurement  and  recognition  of  compensation  expense  for all
share-based  payment awards made to employees and directors,  including employee
stock  options,  based on estimated  fair  values.  SFAS 123(R)  supersedes  the
Company's previous accounting under Accounting  Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees  (APB 25) and related  interpretations,
applied for periods through December 31, 2005. In March 2005, the Securities and
Exchange  Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating
to SFAS 123(R). The Company has applied the provision of SAB 107 in its adoption
of SFAS 123(R).

The Company  adopted  SFAS 123(R)  using the  modified  prospective  application
transition method,  which requires the application of the accounting standard as
of January 1, 2006,  the first date of the Company's  fiscal year. The Company's
consolidated financial statements as of and for the year ended December 31, 2006
reflect the impact of SFAS 123(R).  In accordance with the modified  prospective
method, the Company's  consolidated  financial statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of share-based payment
awards on the date of the grant using an option-pricing  model. The value of the
portion  of the award  that is  ultimately  expected  to vest is  recognized  as
expenses  over the  requisite  service  periods  in the  Company's  consolidated
statements of income (loss).  Prior to the adoption of SFAS 123(R),  the Company
accounted for stock-based  awards to employees and directors using the intrinsic
value  method  in  accordance  with APB 25,  as  allowed  under  SFAS  No.  123,
Accounting for Stock-Based  Compensation,  (SFAS 123). Under the intrinsic value
method,  compensation  expense under fixed term option plans was recorded at the
date of grant only to the extent that the market value of the  underlying  stock
at the date of grant exceeded the exercise price.  Accordingly,  for those stock
options  granted for which the exercise  price  equaled the fair market value of
the underlying stock at the date of grant, no expense was recorded.

Stock-based  compensation  expense  recognized during the period is based on the
value of the portion of share-based  payment awards that is ultimately  expected
to vest  during  the  period.  There  was no  stock-based  compensation  expense
attributable  to options for the three  months ended March 31, 2007 and 2006 for
compensation  expense for  share-based  payment awards granted prior to, but not
vested as of December 31, 2005.  Such  stock-based  compensation is based on the
grant date fair value estimated in accordance  with the pro forma  provisions of
SFAS 123. Compensation expense for share-based payment awards granted subsequent
to  December  31,  2005 are based on the  grant  date fair  value  estimated  in
accordance with the provisions of SFAS 123(R).

In  conjunction  with the  adoption  of SFAS  123(R),  the  Company  adopted the
straight-line  single  option  method of  attributing  the value of  stock-based
compensation  expense. As stock-based  compensation expense is recognized during
the  period is based on awards  ultimately  expected  to vest,  it is subject to
reduction for estimated  forfeitures.  SFAS 123(R)  requires  forfeitures  to be
estimated at the time of grant and revised, if necessary,  in subsequent periods
if actual  forfeitures  differ  from  those  estimates.  As of and for the three
months  ended  March  31,  2007,  there  were no  material  amounts  subject  to
forfeiture.   The   Company   has  not   accelerated   vesting   terms   of  its
out-of-the-money  stock options, or made any other significant changes, prior to
adopting FASB 123(R), Share-Based Payments.

The Company  recognizes  compensation  expense  paid with common stock and other
equity  instruments  issued for assets and services received based upon the fair
value of the assets/services or the equity instruments issued, whichever is more
readily determined.



                                       10
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As of the date of this  report the  Company  has not adopted a method to account
for the tax  effects of  stock-based  compensation  pursuant  to SFAS 123(R) and
related  interpretations.  However,  whereas  the Company  has  substantial  net
operating  losses to offset future taxable  income and its current  deferred tax
asset is completely reduced by the valuation allowance,  no material tax effects
are anticipated.

During the year ended  December 31, 2005, the Company valued stock options using
the intrinsic  value method  prescribed  by APB 25. Since the exercise  price of
stock options previously issued was greater than or equal to the market price on
grant date, no compensation expense was recognized.


STOCK-BASED COMPENSATION EXPENSE

Stock-based  compensation  expense  for the three  months  ended  March 31, 2007
included  $75,000,  consisting of $25,000 included in employee  compensation and
$50,000 for  consulting  fees.  Stock-based  compensation  expense for the three
months ended March 31, 2006 was $0.

RECENT ACCOUNTING STANDARDS

In  September  2006,  the FASB issued SFAS No. 157,  "Accounting  for Fair Value
Measurements."  SFAS No. 157 defines fair value, and establishes a framework for
measuring  fair value in generally  accepted  accounting  principles and expands
disclosure  about fair value  measurements.  SFAS No. 157 is  effective  for the
Company for financial  statements  issued  subsequent to November 15, 2007.  The
Company  does not expect the new  standard  to have any  material  impact on the
financial position and results of operations.

In September  2006, the staff of the Securities and Exchange  Commission  issued
Staff  Accounting  Bulletin  No. 108 ("SAB  108")  which  provides  interpretive
guidance  on how  the  effects  of the  carryover  or  reversal  of  prior  year
misstatements  should be considered in quantifying a current year  misstatement.
SAB 108 becomes effective in fiscal 2007. Management is evaluating the financial
impact of this pronouncement.

In December  2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
"Accounting for Registration Payment  Arrangements" ("FSP EITF 00-19-2"),  which
specifies  that the contingent  obligation to make future  payments or otherwise
transfer consideration under a registration payment arrangement,  whether issued
as a separate agreement or included as a provision of a financial  instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5,  "Accounting  for  Contingencies".  FSP EITF 00-19-2  also  requires
additional   disclosure   regarding  the  nature  of  any  registration  payment
arrangements,  alternative  settlement methods,  the maximum potential amount of
consideration  and the current  carrying  amount of the  liability,  if any. The
guidance in FSP EITF 00-19-2  amends FASB  Statements No. 133,  "Accounting  for
Derivative  Instruments and Hedging  Activities",  and No. 150,  "Accounting for
Certain  Financial  Instruments  with  Characteristics  of both  Liabilities and
Equity", and FASB Interpretation No. 45, "Guarantor's  Accounting and Disclosure
requirement for  Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others", to include scope exceptions for registration payment arrangements.

FSP EITF 00-19-2 is effective  immediately for registration payment arrangements
and the financial  instruments  subject to those  arrangements  that are entered
into or modified  subsequent  to the issuance date of this FSP, or for financial
statements  issued for fiscal years  beginning  after  December  15,  2006,  and
interim periods within those fiscal years, for registration payment arrangements
entered  into  prior to the  issuance  date of this FSP.  The  adoption  of this
pronouncement  is not  expected  to have any  material  impact on the  Company's
financial position, results of operations or cash flows.



                                       11
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In October 2005, the FASB issued FSP FAS 123(R)-2,  "Practical  Accommodation to
the  Application  of Grant Date as Defied in FASB Statement No.  123(R)",  which
provides  clarification of the concept of mutual understanding  between employer
and employee with respect to the grant date of a share-based payment award. This
FSP provides that a mutual understanding of the key terms and conditions of an

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

award shall be presumed to exist on the date the award is approved by management
if the  recipient  does not have the  ability  to  negotiate  the key  terms and
conditions of the award and those key terms and conditions  will be communicated
to the individual recipient within a relatively short time period after the date
of approval.  This  guidance was  applicable  upon the initial  adoption of SFAS
123(R).  The  adoption  of this  pronouncement  did not  have an  impact  on the
Company's financial position, results of operations, or cash flows.

In February  2007,  the FASB issued  SFAS no,  159,  "The Fair Value  Option for
Financial  Assets and Financial  Liabilities"  ("SFAS  159").  SFAS 159 provides
companies with an option to report selected financials assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both complexity in accounting
for financial  instruments  and the  volatility in earnings  caused by measuring
related  assets  and  liabilities  differently.  Generally  accepted  accounting
principles have required different  measurement  attributes for different assets
and liabilities that can create artificial volatility in earnings.  The FASB has
indicated   it  believes   that  SFAS  159  helps  to  mitigate   this  type  of
accounting-induced volatility by enabling companies to report related assets and
liabilities  at fair value,  which would likely reduce the need for companies to
comply  with  detailed  rules for hedge  accounting.  SFAS 159 also  establishes
presentation  and  disclosure  requirements  designed to facilitate  comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.  SFAS 159 does not eliminate disclosure  requirements
included in other accounting standards,  including  requirements for disclosures
about fair value measurements included in SFAS 157 and SFA No. 107, "Disclosures
about  Fair  Value of  Financial  Instruments."  SFAS 159 is  effective  for the
Company  as of  the  beginning  of  fiscal  year  2009.  The  adoption  of  this
pronouncement  is not  expected  to have an  impact on the  Company's  financial
position, results of operations or cash flows.

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,  and the differences  could be
material.

NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE

Financial  instruments  that  potentially  subject  the  Company to credit  risk
consist principally of cash and cash equivalents and accounts receivable.

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

CASH AND CASH EQUIVALENTS

The  Company  at  times  has  cash  and  cash  equivalents  with  its  financial
institution in excess of Federal Deposit Insurance  Corporation (FDIC) insurance
limits. The Company places in cash and cash equivalents with high credit quality
financial  institution  which  minimize  these risks.  As of March 31, 2007, the
Company [Capstone] has cash in excess of FDIC limits of approximately $56,000.

ACCOUNTS RECEIVABLE

The Company grants credit to its customers, substantially all of whom are retail
establishments  located throughout the United States. The Company typically does
not  require  collateral  from  customers.  Credit  risk is  limited  due to the
financial strength of the customers comprising the Company's customer base and



                                       12
<PAGE>


                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (CONTINUED)

their dispersion across difference  geographical  regions.  The Company monitors
exposure  of credit  losses and  maintains  allowances  for  anticipated  losses
considered necessary under the circumstances.

MAJOR CUSTOMERS

During  the years  ended  December  31,  2006 and  2005,  the  Company  received
approximately 49% and 40% respectively, of its gross revenues from its top three
customers.  The loss of these customers  would adversely  impact the business of
the Company.

During the years ended December 31, 2006 Capstone received  approximately 71% of
its  gross  revenues  from  its top two  customers.  As of  December  31,  2006,
approximately 68% (or $440,386) of the Company's  accounts  receivable were from
these two customers.  The loss of these  customers  would  adversely  impact the
business of the Company.

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.

In addition,  Capstone has certain  vendors from which it purchased at least ten
percent of merchandise during 2006. During the year ended December 31, 2006, the
Capstone  purchased  approximately 96% of its merchandise for two suppliers (one
at 86% and another at $10%).

The loss of these suppliers would adversely impact the business of the Company.

NOTE 3 - DUE TO RELATED PARTIES

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 due related  parties at March 31, 2007 and December  31, 2006.  Also
included in due to related  parties,  as of December  31,  2006,  is accrued but
unpaid officer's compensation of $100,000,  payable to the Company's CEO. During
the three months ended March 31, 2007,  the $100,000  accrued  compensation  was
converted into 3,031,000 shares of common stock.

NOTE 4 - NOTES AND LOANS PAYABLE TO RELATED PARTIES

OVERSEAS BUILDING SUPPLY - NOTES PAYABLE TO SHAREHOLDERS

On September 1, 2004,  Overseas Building  Supplies,  LLC (f/k/a China Pathfinder
Fund, LLC), a wholly-owned subsidiary of the Company,  executed notes payable of
$15,000 to three shareholders of the Company, including $5,000 to CEO. The notes
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. As
of  December  31,  2006,  the total  amounts  due on these  loans  was  $16,761,
including accrued interest.  During the three months ended March 31, 2007, these
notes were converted into 468,750 shares of common stock.



                                       13
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - NOTES AND LOANS PAYABLE TO RELATED PARTIES (CONTINUED)

CHINA DIRECT - NOTES PAYABLE TO CHIEF EXECUTIVE OFFICER

On June 29, 2006, the Company executed a $250,000 note payable to the CEO of the
Company.  The note  carries an  interest  rate of 7% per annum and is payable if
full, with accrued interest,  on June 30, 2007. The proceeds from this note were
used to advanced funds to CPS. As of December 31, 2006, the total amount payable
on the note was $258,750,  including $8,750 of accrued interest. As of March 31,
2007,  the total amount payable on the note was $263,125,  including  $13,125 of
accrued  interest.  The  Company  may,  at its  option,  pay the  entire  unpaid
principal  and  accrued  interest  (but not less than the  entire  amount)  with
restricted shares (Rule 144) of Company common stock.  However,  the Company may
not pay off the principal and accrued  interest with shares of common stock,  if
such  issuance  would  cause the  Company to issue a number of shares that would
equal or exceed 18% of the  shares of stock  issued  and  outstanding  as of the
conversion date. The value of each share of stock to be issued in the conversion
of stock for debt shall be $.10 per share.

On September 15, 2006, the Company  executed a $750,000  promissory note payable
to the CEO of the  Company,  secured  by the  accounts  receivable  of the  note
holder.  The note carries an interest rate of 8% per annum.  Interest is payable
each calendar quarter,  commencing with the quarter ended December 31, 2006. All
principal is payable if full,  with accrued  interest,  on December 31, 2008. At
the option of the note holder,  any  quarterly  interest or the principal may be
paid in cash or in shares of the Company's common stock or a combination of cash
or shares.  Any shares issued shall have a value of $ .08 per share for purposes
of calculating  the amount of principal or interest paid by the issuance of each
share.  The proceeds from this note were used to funds to Capstone  acquisition.
As of December 31,  2006,  the total  amount  payable on the note was  $767,589,
including  $17,589 of accrued  interest.  As of March 31, 2007, the total amount
payable on the note was $782,383,  including  $32,383 of accrued  interest.  The
carrying amount of the collateral,  the Company's  accounts  receivable at March
31, 2007 and December 31, 2006 was $116,400 and $560,475, respectively.

OVERSEAS BUILDING SUPPLIES - NOTES PAYABLE TO CHIEF EXECUTIVE OFFICER

On December 14, 2006,  Overseas  Building Supply  received  proceeds from a note
payable of $2,500 to the CEO. The note carries an interest  rate of 8% per annum
and is due on demand.  At March 31, 2007 and December 31, 2006, the total amount
due on this loan was $2,560 and $2,510, respectively.

CHINA DIRECT AND SOUVENIR DIRECT - LOANS PAYABLE TO CHIEF EXECUTIVE OFFICER

In addition,  during the period from August 24, 2006 through  November 30, 2006,
the CEO made loans to the Company totaling  $490,000,  including  $10,000 to the
Company's  wholly  owned  subsidiary,  Souvenir  Direct,  Inc.  The loans  carry
interest of 8% and are payable on demand.  In November  2006, the Company repaid
$50,000 of this amount.  As of December 31,  2006,  the total amount  payable on
these loans was $448,738,  including  $8,738 of accrued  interest.  At March 31,
2007, the total amount payable on these loans was $230,528, including $12,503 of
accrued interest.

Based on the above, the total amount payable to the CEO as of March 31, 2007 and
December 31, 2006 was $1,278,596 and $1,494,348, respectively, including accrued
interest of $58,071 and $36,848, respectively.



                                       14
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - NOTES AND LOANS PAYABLE TO RELATED PARTIES (CONTINUED)

The maturities under the notes and loans payable to related parties for the next
five years are:

Year Ended December 31,
-------------------------------------------
         2007                                             $      496,213
         2008                                                    782,383
         2009                                                          -
         2010                                                          -
         2011                                                          -
                                                          --------------
         Total future maturities                           $   1,278,596
                                                          ==============

NOTE 5 - INVESTOR LOANS PAYABLE

In March, 2006, the Company executed notes payable to an investor of $25,500 and
$24,500, totaling $50,000. The notes carry an interest rate of 10% per annum and
are payable if full, with accrued interest, in March 2008. The notes are secured
by shares of the  Company's  common  stock and  convertible  into the  Company's
common stock. As of December 31, 2006, the total amount payable on the notes was
$54,038, including $4,038 of accrued interest.

Interest  shall be  payable,  at the  option of the note  holder,  in cash or in
shares of the Company's  common stock.  The number of common shares to be issued
as payment of accrued and unpaid  interest  shall be  determined by dividing the
total  amount of accrued and unpaid  interest to be converted in common stock by
the Conversion  Price.  The Note shall be convertible  (in whole or in part), at
the option of the note  holder,  into a number of fully paid and  non-assessable
shares of common stock,  by dividing that portion of the  outstanding  principal
balance plus any accrued but unpaid  interest as of the  conversion  date by the
Conversion Price.

The  Conversion  Price  shall mean a price no lower than $ .03 and higher than $
..04 which  will be the  average of the  closing  bid price  (adjusted  for stock
splits,  combinations,  certain dividends and  distributions,  reclassification,
exchange or  substitution,  reorganization,  merger,  consolidation  or sales of
asses,  issuances of additional  shares of common stock,  and issuance of common
stock equivalents) for ten days trading preceding the conversion date.

In March 2007, the note holders elected to convert the notes payable and accrued
interest,  totaling  $55,052,  into a total of 1,835,050 shares of the Company's
common stock, at a conversion price of $ .03 per share.

NOTE 6 - 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 expired  August 31, 2006 and,  through the
date of this report, the Company is leasing the space on a month-to-month basis,
in  anticipation  of moving to larger offices and showrooms.  The current 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.

Capstone's  operating facility was leased by a company that is 100% owned by the
former sole shareholder.

Rental  expense under these leases was  approximately  $5,645 and $6,000 for the
three months ended March 31, 2007 and 2006, respectively.



                                       15
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - COMMITMENTS

EMPLOYMENT AGREEMENTS

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 and 2007, Mr. Ullman has agreed to reduce his
compensation  to $100,000.  As of December 31, 2006 and through the date of this
report, such compensation has been accrued but unpaid.

On January 27, 2006,  the Company  entered  into an  employment  agreement  with
William  Dato,  the  President of CPS,  the  Company's  formerly  majority-owned
subsidiary, which provided for annual compensation of $100,000. Upon the sale of
the Company's interest in CPS, the employment agreement was terminated.

LICENSE AGREEMENT

Capstone entered into a marketing  agreement for design and marketing  services.
These  agreements call for royalty  payments to be paid either at fixed periodic
amounts  or at  varying  rates,  based on sales  volume of  specified  products.
Capstone did not renew the royalty  agreement in 2006 and did not incur  royalty
expense for the year ended December 31, 2006.

LINE OF CREDIT

Capstone  had a line of credit with a financial  institution,  with an available
limit of $300,000 during 2005 and a portion of 2006. As of December 31, 2006 and
2005,  Capstone  did not  have an  outstanding  balance  related  to the line of
credit. Capstone terminated the line effective October 18, 2006

NOTE 8 - STOCK TRANSACTIONS

COMMON STOCK

In June,  2006,  1,000  shares of the  company's  series  "A"  preferred  stock,
beneficially  owned by the Company's CEO, were 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.

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.

In September 2006,  20,000,000  shares of the Company's common stock held by the
Company's  CEO were  exchanged for 300,300  shares of the  Company's  series "B"
preferred stock.



                                       16
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - STOCK TRANSACTIONS (CONTINUED)

In October  2006,  options were  exercised by the  Company's  CEO for  1,975,000
shares of the company's common stock for $9,875.

In  October  2006,  the  Company  issued  250,000  shares  of  common  stock for
consulting fees valued at $11,750.

In  February  2007,  the Company  issued  1,428,571  shares of common  stock for
consulting fees valued at $50,000. The shares were valued at $.035 per share.

In February  2007, the Company issued 250,000 shares of common stock for cash of
$5,000.

In February  2007,  the Company  issued 468,750 shares of common stock for notes
payable totaling $16,761.

In March 2007, the Company issued  3,031,000  shares of common stock for accrued
compensation of $100,000.

In March 2007,  the Company  issued  757,575 shares of common stock for officers
compensation valued at $25,000. The shares were valued at $.033 per share.

In March 2007, the Company issued  1,835,050 shares of common stock for investor
loans payable totaling $55,051.

For issuances of shares of common stock during the periods  described above, the
Company  issued  restricted  shares (Rule 144). The shares issued were valued by
the Company  based upon the closing price of the shares on the date of issuance.
The value of these shares  issued for  services  was charged to expense,  unless
they were in consideration for future services, in which case they were recorded
as deferred  consulting  fees.  Shares  retired / cancelled were recorded at par
value.

SERIES "A" PREFERRED STOCK

A total of 8,100 shares of series "A" preferred  stock were issued in 2004, and,
in May 2005, 100 shares were returned to the treasury and cancelled.

In January 2006 the Company issued 600,000 shares of series "A" preferred stock,
convertible into 50,738,958  shares of the Company's common stock, in connection
with the  acquisition of a 51% majority  interest in CPS. The shares were valued
at $1,200,000.

In January 2007 (effective  December 31, 2006), the 600,000 shares of series "A"
convertible preferred issued to CPS were returned to the treasury and cancelled,
in connection  with the  Company's  sale of its interest in CPS. The shares were
valued at  $1,775,864.  None of the  preferred  shares were  converted to common
shares.  At December 31, 2006, the shares had not been  returned,  and a related
party receivable of $1,775,864 was recorded. During the three months ended March
31, 2007, these shares were returned to the treasury and cancelled.

In June,  2006,  1,000  shares of the  company's  series  "A"  preferred  stock,
beneficially  owned by the Company's CEO, were exchanged for 1,000,000 shares of
the Company's common stock.

In February  2007, 734 shares of the Company's  series "A" preferred  stock were
exchanged for 73,400 shares of the Company's common stock.

As of March 31, 2007, a total of 6,266 shares of series "A" preferred stock were
issued and  outstanding,  and are convertible  into common shares,  at a rate of
1,000  shares of common stock for each share of series "A"  preferred  stock and
are redeemable at the option of the Company.



                                       17
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - STOCK TRANSACTIONS (CONTINUED)

SERIES "B" PREFERRED STOCK

In January  2006 the Company  sold  657,000  shares of its series "B"  preferred
stock for cash of $637,000,  including  387,000  shares to the Company's CEO and
the remaining shares to other directors of the Company.  During the three months
ended March 31, 2007, 15,000 shares of the Company's series "B" preferred shares
issued to a director were exchanged for 990,000  shares of the Company's  common
stock.

In September  2006 the Company issued 300,030 shares of its series "B" preferred
stock to the Company's CEO in exchange for 20,000,000 shares of its common stock
held by the CEO.

In September, 2006 the Company issued an additional 236,739 shares of its series
"B" preferred  stock in connection  with the  acquisition  of 100% of the voting
interest  of Capstone  Industries,  Inc.  The shares were valued at  $1,250,000.
During the three months ended March 31, 2007,  236,739  shares of the  Company's
series "B" preferred stock was converted into 15,624,774 shares of the Company's
common stock.

The series "B" preferred shares are convertible into common shares, at a rate of
66.66 shares of common stock for each share of series "B" preferred stock.

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.

OPTIONS

In 2005,  the  Company  authorized  the 2005  Equity  Plan that  made  available
10,000,000  shares  of common  stock for  issuance  through  awards of  options,
restricted stock, stock bonuses,  stock appreciation rights and restricted stock
units. On May 20, 2005 the Company granted non-qualified stock options 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  options  expire May 25, 2015 and may be
exercised any time after May 25, 2005 During the years end December 31, 2006 and
2005, and through the date of this report,  none of these options were exercised
by the option holder.



                                       18
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - BUSINESS ACQUISITIONS AND DISPOSALS

COMPLETE POWER SOLUTIONS

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.

On  January  26,  2007,  the  Company  entered  into a Purchase  and  Settlement
Agreement (the "Settlement  Agreement"),  dated and effective as of December 31,
2006, with William Dato and CPS whereby:  (a) CPS repurchased the 51% membership
interest  owned by China Direct in return for the transfer of the 600,000 shares
of the  Company's  "Series  A  Preferred  Stock",  which  are  convertible  into
50,739,958  shares of the  Company's  common  stock,  and (b) the  issuance of a
promissory  note by CPS to China Direct for 225,560,  bearing annual interest at
7% with interest-only  payments  commencing on July 1, 2007 and thereafter being
paid  quarterly on April 1st,  July 1st,  October 1st, and January 1st until the
principal  and all unpaid  interest  thereon shall become due and payable on the
maturity  date,  being January 6, 2010 (the "2007  Promissory  Note").  The 2007
Promissory  Note also provides that the  principal  amount may be  automatically
increased  by an amount of up to $7,500  if the  amount of a  customer  claim is
settled for less than $7,500. As of the date of this report the principal amount
has not been increased by an amount up to $7,500, as described above. The shares
were  valued at  $1,775,864  based on the market  value of the common  stock the
shares are convertible into.

As of December 31, 2006,  the balance due on the $225,560 was  classified on the
Company's balance sheet as an amount due from former  subsidiary.  This item was
classified  as  long-term  as of  December  31,  2006,  in  anticipation  of its
conversion to a note receivable, the maturiy of which is more than one year from
the balance sheet date. Subsequently, upon execution of the 2007 Promissory Note
on January 26, 2007,  the Company  reclassified  the balance as a long-term note
receivable  from  former  subsidiary.  At March 31,  2007,  the  balance due was
$228,329, which included accrued interest receivable of $2,769.

CPS is also  indebted to China Direct  under a  promissory  note in the original
principal  amount of  $250,000,  executed  by William  Dato on June 27, 2006 and
payable to China Direct,  bearing  interest at 7% per annum and maturing on June
30,  2007,  subject to  extension  (the "2006  Promissory  Note") and subject to
offset by (i)  $41,600  owed by an  affiliate  of China  Direct to the CPS funds
advanced  by CPS for  portable  generators  that were never  delivered  and (ii)
$15,000 as an agreed amount paid to compensate CPS for certain refunds  required
to be made by CPS (which  amounts have been first  applied to accrued and unpaid
interest  due  September  30, 2006 and  December  31,  2006 and then  applied to
quarterly  interest  payable on the  principal  of the 2006  Promissory  Note to
maturity  (June 30,  2007) and then to reduce the  principal  amount of the 2006
Promissory Note to $210,900 .

As of March 31, 2007, the balance due on the 2006  Promissory note was $202,150,
which reflects the offsets listed above, plus accrued interest of $8,750.

The Company  disposed of its  interest in CPS to further its goal of focusing on
its Capstone  Industries  consumer product business line in an effort to achieve
sustained profitability from low-coast, low inventory consumer products that are
direct shipped from Chinese and other low cost contract manufacturing sources to
the Company's customers.

In  connection  with the  disposal  of CPS,  the  Company  recorded  a gain from
discontinued  operations  of  $149,424  at  December  31,  2006.  The gain  from
discontinued operations consists of the following unaudited amounts:



                                       19
<PAGE>


                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - BUSINESS ACQUISITIONS AND DISPOSALS (CONTINUED)


<TABLE>
<CAPTION>
                                                             (Unaudited)
                                                         For the Years Ended
                                                             December 31,
                                                       2006                 2005
                                                ------------------- -------------------
<S>                                             <C>                 <C>
Net loss from discontinued operations           $         (518,902) $                 -
Net gain on disposal of discontinued operations            668,326                    -
                                                ------------------- -------------------
Income (Loss) from discontinued operations      $          149,424  $                 -
                                                ------------------- -------------------
</TABLE>

CAPSTONE INDUSTRIES

On September 13, 2006 the Company  entered into a Stock Purchase  Agreement (the
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 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 a note payable to the  Company's CEO 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.  As of the date of this report these share have not been registered.
The Capstone acquisition was recorded as follows:

     Cash                                       $    33,676

     Accounts receivable                            208,851

     Inventory                                      340,109

     Prepaid expenses                                 7,500

     Property and equipment                          16,127

     Goodwill                                     1,936,020

     Accounts payable and accrued expenses         (417,283)

     Loan payable to China Direct                  (125,000)
                                                 -----------

              Total purchase price               $2,000,000
                                                 ----------



Capstone  was  acquired  to expand the  Company's  customer  base and sources of
supply, the value of which contributed to the recording of goodwill.

For tax  purposes,  the  goodwill is expected to be amortized as an IRC Sec. 197
intangible over a period of fifteen years from date of acquisition.


                                       20
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - INCOME TAXES

As of December 31, 2006, the Company had a net operating loss  carryforward  for
income tax reporting  purposes of  approximately  $1,206,000  that may be offset
against future taxable income through 2026. 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.


                                         2006               2005
                                    ---------------    ----------------
      Net Operating Losses          $      247,230     $       214,430
      Valuation Allowance                 (247,230)           (214,430)
                                    ---------------    ----------------
                                    $            -     $             -
                                    ===============    ================

The provision for income taxes differ from the amount computed using the federal
US statutory income tax rate as follows:
                                                  2006             2005
                                               --------------- ----------------
Provision (Benefit) at US Statutory Rate       $      (59,187)     $  (150,382)
Accrued but Unpaid Officers Compensation               20,500                -
Accrued but Unpaid Interest on Officer Loans            8,174                -
Meals and Entertainment                                    47              533
Depreciation                                          (2,334)               92
Increase (Decrease) in Valuation Allowance             32,800          149,757
                                               --------------- ----------------
                                               $            -         $      -
                                               =============== ================

The Company evaluates its valuation  allowance  requirements  based on projected
future operations. When circumstances change and causes a change in management's
judgment  about the  recoverability  of deferred  tax assets,  the impact of the
change on the valuation is reflected in current income.

NOTE 11 - LEGAL SETTLEMENTS

ITC/INFO TECH

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 March 31, 2007 and December  31,  2006,  the award
amount has been included in the accrued expenses of the Company.

TRADE SHOW CONTRACT

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,  this
lawsuit was settled for $25,000.


                                       21
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - CONTINGENCIES

CELESTE TRUST REG., ESQUIRE TRADE, ET AL. V. CBQ, INC AND DEPOSIT ON ACQUISITION
OF TREASURY STOCK

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 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.

On January 25, 2005, the U.S.  District  Court for the Southern  District of New
York  ("Court")  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 were entitled to refile the lawsuit if they an
amended  complaint on or before March 1, 2005. The  Plaintiffs  filed an amended
complaint with the Court on February 24, 2005.

On July 20, 2006, the Court  dismissed the amended  complaint by the Plaintiffs,
but did not rule on Plaintiffs' motion for default judgment,  which China Direct
filed an  opposing  motion,  against  Networkland,  Inc.  and  Technet  Computer
Services,  Inc., two dormant companies.  The Plaintiffs  attempted to appeal the
dismissal of the amended  complaint,  but the U.S.  Circuit Court of Appeals for
the Second  Circuit did not accept that appeal because the Court had not decided
the motion for default  judgment  against  the other  defendants.  To date,  the
plaintiffs  have not taken any actions known to me to resolve this impediment to
an appeal of the dismissal of the amended complaint

China  Direct does not  believe  that the claim of the  Plaintiffs  is valid and
China Direct intends to aggressively  defend against this lawsuit.  China Direct
does  not  have the  financial  wherewithal  to pay the  damages  sought  by the
Plaintiffs.  No  estimate  of the  outcome  may be made at  this  time,  but the
plaintiffs  have failed to date to pursue the steps  necessary to file an appeal
of the Court's dismissal of their complaint against China Direct.

The lawsuit claims that China Direct owes to the  Plaintiffs  the  consideration
paid for the acquisition of the assets of Networkland, Inc. and Technet Computer
Services,  Inc. in March 2001 because the plaintiffs  were secured  creditors of
the sole  shareholder of those two companies and the assets sold to China Direct
were covered by Plaintiff's  lien against the sole  shareholder of  Networkland,
Inc. and Technet Computer Service Corporation.



                                       22
<PAGE>

                CHINA DIRECT TRADING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - CONTINGENCIES (CONTINUED)

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.

CYBERQUEST, INC.

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. The Company has not received any further
claims or communications since mid-2006.

NOTE 13 - DISCONTINUED OPERATIONS

         On December 31, 2006, Complete Power Solutions,  a 51% owned subsidiary
of the Company, was sold, and is no longer a subsidiary of the Company.

         Operating results of this  discontinued  operation for the three months
ended  March 31,  2006 are shown  separately  in the  accompanying  consolidated
statement of operations.  The operating results of this  discontinued  operation
for the three months ended March 31, 2007 and 2006 consist of:

                                       (Unaudited)               (Unaudited)
                           For the Three Months Ended For the Three Months Ended
                                        March 31,                March 31,
                                          2007                     2006
                                    -----------------    -----------------------
Sales                               $                    $
Cost of sales                                      -                 2,342,137
Sales and marketing                                -                (1,738,081)
Compensation                                       -                   (78,203)
Professional fees                                  -                   (99,877)
General and administrative                         -                   (13,647)
Interest expense                                   -                  (129,261)
Minority interest                                  -                   (14,941)
Net Income (Loss)                                  -                  (131,382)
                                    -----------------    -----------------------
                                    $              -     $             136,745
                                    =================    =======================


                                       23
<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, 2006.

         Plan of Operations.  The Company's plan of operations  since the fourth
quarter of Fiscal Year 2006 has been to focus on expanding  Capstone's  consumer
products,  including its private branding  efforts,  and OBS' building  supplies
business.  The Company will devote its  available  resources  and funding to the
expansion of Capstone.  Except for occasional  short-term  loans from Mr. Ullman
and other members of management,  China Direct's operating  subsidiaries have to
rely on revenues from operations to cover their overhead and expansion efforts.

         The Company's  current plan of operations is to focus on development of
Capstone as its primary  business and such an effort may include  pursuit of and
sale of Chinese-made  products in North America under the Capstone name or under
private brand names promoted by the Company.

         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  shifted our  strategic  plan to focus on  promoting  Capstone  low-tech
consumer  products - both those  under the  Capstone  name and under the private
branding efforts. Secondary in our strategic plan will be promoting OBS' sale of
Chinese-made  roofing tiles in Florida and the Southeast.  While we will explore
opportunities to sell other  Chinese-made  building  supplies in that market and
the certain parts of the Southern  U.S., we intend to focus on the roofing tiles
as the most likely, in our opinion,  the Chinese-made  building products to find
market  demand in the U.S.  This opinion is based on  discussions  and marketing
efforts with building suppliers in Florida and other parts of the U.S.

         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.  Pursuant to a
December  31, 2006  settlement  agreement,  the  purchase of the 51%  membership
interest by the Company in CPS was rescinded and the loan was repaid in full.

         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  Capstone  will be able to  generate
sufficient  cash flow to pay its  direct  overhead  costs and  internal  planned
growth in fiscal year 2007, OBS does not generate  sufficient  cash flow at this
time to fund its  operations or any business  development  efforts and marketing
and sales  efforts in fiscal year 2007.  With  respect to Capstone  and OBS, 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.



                                       24
<PAGE>

         RESULTS OF OPERATIONS - For the three months ended March 31, 2007,  the
Company had a net loss from continuing operations of approximately $253,000. For
the three months ended March 31, 2006, the Company had net loss from  continuing
operations  of  approximately  $94,000.  The  increase  in  the  net  loss  from
continuing operations was mainly due to additional overhead from the acquisition
of Capstone.  For the three  months  ended March 31,  2006,  the Company had net
income from discontinued  operations of approximately  $137,000.  The net income
from  discontinued  operations for the three months ended March 31, 2006 was due
to the revenues from Complete  Power  Solutions for the quarter.  Complete Power
Solutions was disposed of as December 31, 2006.

         Total  Revenues - For the three  months  ended March 31, 2007 and 2006,
the Company had total sales of approximately $211,000 and $170,000 respectively,
for an increase of approximately $41,000. The increase in revenue was due to the
acquisition of Capstone.

          Costs and  Expenses - For the three  months  ended  March 31, 2007 and
2006,  the Company had cost of sales of  approximately  $138,000  and  $144,000,
respectively. Operating expenses increased approximately $183,000, from $119,000
in  2006  to  $302,000  in  2007.  The  cost  of  rent  and  other  general  and
administrative  costs  increased  in 2007 as compared to 2006 due to  additional
overhead from the  acquisition of Capstone.  Stock-based  expenses for the three
months ended March 31, 2007  increased by  approximately  $75,000 as compared to
2006.  Expenses were approximately  $75,000 for the three months ended March 31,
2007 compared to $0 in 2006.

         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 sales staff traveling to make direct marketing and sales pitches
to customers  and  potential  customers.,  trade shows around North  America and
visiting   China  to  maintain  and  expand   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.



                                       25
<PAGE>

         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 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 March 31, 2007, 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

         Other  than as set  forth  below,  the  Company  is not a party  to any
material pending legal  proceedings  and, to the best of its knowledge,  no such
action by or against the Company has been threatened.  The Company is subject to
legal  proceedings and claims that arise in the ordinary course of its business.
Although  occasional  adverse  decisions or settlements  may occur,  the Company
believes  that the final  disposition  of such  matters  will not have  material
adverse effect on its financial position, results of operations or liquidity.

         CELESTE TRUST REG., ESQUIRE TRADE, ET AL. V. CBQ, INC.: 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  defended  against
the  Plaintiff's  amended  complaint,  which  added  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. The Court also dismissed the Plaintiff's  amended complaint on
July 20, 2006. The  Plaintiffs  filed an appeal in September 2006 to the adverse
order issued by the Court dismissing the amended complaint. The appeal, however,
was not  accepted  by the Court in  October  2006  because  there is a  pending,
unresolved   motion  for  default   judgment   against  the  other   defendants,
Networkland,  Inc. and Technet Computer Services Corporation, who are two former
subsidiaries  of  Socrates   Technologies   Corporation,   a  defunct   Delaware
corporation,  and not  owned by or  affiliated  with  China  Direct.  The  staff
attorney for the 2nd Circuit stated that said motion must be resolved before the
Court will  entertain  any  appeal.  The  Company is not a party to the  pending
motion for default judgment before the trial court;  however,  the Company filed
an opposition to the motion for default judgment. As of date of this Report, the


                                       26
<PAGE>

Company  is not aware of any  action by the  plaintiffs  to date to  resolve  or
remove the pending motion for default  judgment  against the other defendants in
order to clear  the way for an appeal of the  judgment  entered  in favor of for
Company by the Court.  While the  Company is  confident  of  prevailing  in this
matter,  the Company is uncertain at this time of the final  outcome  motion for
default against the other defendants or whether the plaintiffs  intend to pursue
this litigation further.

         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 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.

         SUNTRUST BANK CLAIM.  Prior to being  acquired by the company,  Quantum
Technology  Group ("QTG"),  a now defunct  subsidiary,  had a $4 million line of
credit with Crestar Bank (Crestar 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 QTG. 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 QTG,  approximately  $200,000 in
accrued  interest  and  $100,000 in attorney  fees -- all of which  SunTrust had
sought to collect from the individual guarantors, not the company.

         RAS Investment, Inc., a company apparently affiliated with Anne Sigman,
a former  employee  of the  Company,  advised  the  Company in 2004 that RAS has
acquired  the Sun Trust note and  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  has  not  received  any  further  claims  by  RAS
Investment,  Inc. in this matter and the Company is  uncertain  at this point if
RAS Investment, Inc. intends to pursue the aforementioned claims.

         CYBERQUEST,  INC.: The Company  received two claims from certain former
shareholders  of  Cyberquest,  Inc.  in  2006.  They  claimed  to  hold  or  own
approximately  70,000  shares of a class of the Company's  redeemable  preferred
stock 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. The Company has
not received any further claims or communications since the late summer of 2006.
The Company is uncertain at this point if the claimants will pursue or press the
aforementioned claim of preferred stock ownership.

         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.


                                       27
<PAGE>

ITEM 2.  CHANGES IN SECURITIES

In  February  2007,  the Company  issued  1,428,571  shares of common  stock for
consulting fees valued at $50,000. The shares were valued at $.035 per share.

In February  2007, the Company issued 250,000 shares of common stock for cash of
$5,000.

In February  2007,  the Company  issued 468,750 shares of common stock for notes
payable totaling $16,761.

In March 2007, the Company issued  3,031,000  shares of common stock for accrued
compensation of $100,000.

In March 2007,  the Company  issued  757,575 shares of common stock for officers
compensation valued at $25,000. The shares were valued at $.033 per share.

In March 2007, the Company issued  1,835,050 shares of common stock for investor
loans payable totaling $55,051.

During the three  months ended March 31, 2007,  15,000  shares of the  Company's
series "B"  preferred  shares  issued to a director  were  exchanged for 990,000
shares of the Company's common stock.

During the three months ended March 31, 2007,  236,739  shares of the  Company's
series "B" preferred stock was converted into 15,624,774 shares of the Company's
common stock.

In February  2007, 734 shares of the Company's  series "A" preferred  stock were
exchanged for 73,400 shares of the Company's common stock.

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. +

2.1.1    Purchase and  Settlement  Agreement  by and among China Direct  Trading
         Corporation,  Complete Power  Solutions,  LLC,  William Dato and Howard
         Ullman, January 26, 2007 ++

2.1.1.1  Stock Purchase Agreement,  dated September 15, 2006, by and among China
         Direct  Trading  Corporation,  Capstone  Industries,  Inc.  and Certain
         Selling Shareholders 1/4

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 **



                                       28
<PAGE>

3.2      By-laws of the Company***

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. +

10.5     Form of Non-Qualified Stock Option+

14       Code of Ethics Policy, dated December 31, 2006+++

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 Exhibit 2 to the Form 8-K filed by China Direct
Trading  Corporation with the Commission on January 31, 2006. ++ Incorporated by
reference to Exhibit 2 to the Form 8-K filed by China Direct Trading Corporation
with the Commission on January 26, 2007.
(0)  Incorporated  by  reference  to Exhibit  2.1 to the Form 8-K filed by China
Direct  Trading  Corporation  with the  Commission  on September  18, 2006.  +++
Incorporated  by reference to Exhibit 14 to the Form 10KSB filed by China Direct
Trading Corporation with the Commission on April 17, 2007.
++++     Filed Herein

         (b) Reports on Form 8-K filed.

         The  following  reports  were filed during the last quarter of the 2007
fiscal year:  Form 8-K,  February 1, 2007;  Form 8-K/A,  February 28, 2007; Form
8-K, April 25, 2007; and Form 8-K, May 4, 2007.





                                       29
<PAGE>

                                   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 11th day of May, 2007.

China Direct Trading Corporation

May 14, 2007

/s/ Stewart Wallach
Stewart Wallach
CEO and President
(Principal Executive Officer)
(Principal Financial and Accounting Officer)