UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      D.C. 20549Form
      10-Q








[√]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended June 30, 2009





or


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





For the
transition period from __________________ to __________________





Commission
file number: 001-33694


CHINA
      DIRECT INDUSTRIES, INC.(Exact
      name of registrant as specified in its
charter)








Florida
            13-3876100(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)431
      Fairway Drive, Suite 200, Deerfield Beach, Florida
            33441(Address
      of principal executive offices)
            (Zip
      Code)954-363-7333(Registrant’s
      telephone number, including area code)Not
      Applicable(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90
days.                 Yes
[√] No [  ]





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes
[  ]No [  ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer
            [  ]
            Accelerated
      filer
            [√
      ]Non-accelerated
      filer
            [  ]
            Smaller
      reporting company
            [ 
      ](Do
      not check if smaller reporting company)





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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.  26,588,276 shares of common
stock were issued and outstanding as
of August 14, 2009.





TABLE OF CONTENTS





Page
      No.PART
      I. - FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements.
            5Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
            30Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            43Item
      4
            Controls
      and Procedures.
            43PART
      II - OTHER INFORMATIONItem
      1.
            Legal
      Proceedings.
            45Item
      1A.
            Risk
      Factors.
            45Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds.
            46Item
      3.
            Defaults
      Upon Senior Securities.
            46Item
      4.
            Submission
      of Matters to a Vote of Security Holders.
            46Item
      5.
            Other
      Information.
            47Item
      6.
            Exhibits.
            47Signatures
            51










- 2
-


INDEX
OF CERTAIN DEFINED TERMS USED IN THIS REPORT





We
operate our company in two primary divisions. Our Management Services division
acquires controlling interests of Chinese business entities which we consolidate
as either our wholly or majority owned subsidiaries. Our Advisory Services
division provides consulting services to Chinese entities seeking access to the
U.S. capital markets. The following list reflects our primary business entities
and operating segments within our two divisions.





When used
in this report the terms:





•
              
              "China
      Direct”, "we”, "us” or “our” refers to China Direct Industries, Inc., a
      Florida corporation, and our subsidiaries;•
              
              “CDI
      China”, refers to CDI China, Inc., a Florida corporation, and a wholly
      owned subsidiary of China Direct; and•
              
              “PRC”
      refers to the People’s Republic of
China.





Management
Division





Magnesium
Segment





•
                
                “Chang
      Magnesium”, refers to Taiyuan Changxin Magnesium Co., Ltd., a company
      organized under the laws of the PRC and a 51% majority owned subsidiary of
      CDI China;•
                
                “Chang
      Trading”, refers to Taiyuan Changxin YiWei Trading Co., Ltd., a company
      organized under the laws of the PRC and a wholly owned subsidiary of Chang
      Magnesium;•
                
                “Excel
      Rise”, refers to Excel Rise Technology Co., Ltd., a Brunei company and a
      wholly owned subsidiary of Chang Magnesium;•
                
                “CDI
      Magnesium”, refers to CDI Magnesium Co., Ltd., a Brunei company and a 51%
      owned subsidiary of Capital One Resources;•
                
                “Asia
      Magnesium”, refers to Asia Magnesium Co. Ltd., a company organized under
      the laws of Hong Kong and a wholly owned subsidiary of Capital One
      Resource;•
                
                “Golden
      Magnesium”, refers to Shanxi Gu County Golden Magnesium Co., Ltd., a
      company organized under the laws of the PRC and a 52% owned subsidiary of
      Asia Magnesium;•
                
                “Pan
      Asia Magnesium”, refers to Pan Asia Magnesium Co., Ltd., a company
      organized under the laws of the PRC and a 51% owned subsidiary of CDI
      China;•
                
                “Baotou
      Changxin Magnesium”, refers to Baotou Changxin Magnesium Co., Ltd., a
      company organized under the laws of the PRC; a 51% owned subsidiary of CDI
      China, and a 39% owned subsidiary of Excel Rise, effectively China Direct
      holds a 70.9% interest.





Basic
Materials Segment





•
              
              “Lang
      Chemical”, refers to Shanghai Lang Chemical Co., Ltd. a company organized
      under the laws of the PRC and a 51% owned subsidiary of CDI
      China;•
              
              “CDI
      Jingkun Zinc”, refers to CDI Jingkun Zinc Industry Co., Ltd., a company
      organized under the laws of the PRC and a 95% owned subsidiary of CDI
      Shanghai Management;•
              
              “CDI
      Jixiang Metal”, refers to CDI Jixiang Metal Co., Ltd., a company organized
      under the laws of the PRC and a wholly owned subsidiary of CDI
      China;•
              
              “CDI
      Metal Recycling”, refers to Shanghai CDI Metal Recycling Co., Ltd., a
      company organized under the laws of the PRC and an 83% owned subsidiary of
      CDI Shanghai Management;•
              
              “CDI
      Beijing” refers to CDI (Beijing) International Trading Co., Ltd., a
      company organized under the laws of the PRC and a 51% owned subsidiary of
      CDI Shanghai Management;•
              
              “CDII
      Trading” refers to CDII Trading, Inc., a Florida corporation and a wholly
      owned subsidiary of China Direct; and•
              
              “IMG”
      refers to International Magnesium Group, Inc., a Florida corporation and a
      wholly owned subsidiary of China
Direct.





- 3
-


Advisory
Division





Consulting
Segment





•
              
              “China
      Direct Investments”, refers to China Direct Investments, Inc., a Florida
      corporation, and a wholly owned subsidiary of China
  Direct;•
              
              “CDI
      Shanghai Management”, refers to CDI Shanghai Management Co., Ltd., a
      company organized under the laws of the PRC and a wholly owned subsidiary
      of CDI China; and•
              
              “Capital
      One Resource”, refers to Capital One Resource Co., Ltd., a Brunei company,
      and a wholly owned subsidiary of CDI Shanghai
  Management.





- 4
-


PART 1 - FINANCIAL INFORMATION





Item 1.
            Financial
      Statements.





CHINA
DIRECT INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS







June
      30,
                          
                          
                          December
      31,2009
                          
                          
                          2008ASSETS
                          
                          UnauditedCurrent
      Assets:Cash and cash equivalents
                          
                          $
                          13,792,725
                          
                          
                          
                          14,205,229Investment in marketable securities available for sale
                          
                          
                          4,928,754
                          
                          
                          
                          7,569,333Investment in marketable securities available for sale - related
      party
                          
                          
                          385,101
                          
                          
                          
                          160,459Investment in subsidiaries -- cost method
                          
                          
                          290,864
                          
                          
                          
                          290,864Accounts receivable, net of allowance
                          
                          
                          5,874,166
                          
                          
                          
                          9,457,306Accounts receivable - related parties
                          
                          
                          4,349,383
                          
                          
                          
                          1,676,191Inventories, net
                          
                          
                          9,992,885
                          
                          
                          
                          8,559,593Prepaid expenses and other current assets
                          
                          
                          6,508,666
                          
                          
                          
                          8,127,300Prepaid expenses - related parties
                          
                          
                          4,142,066
                          
                          
                          
                          8,007,111Loans receivable - related parties
                          
                          
                          1,120,432
                          
                          
                          
                          1,652,728Due from related parties
                          
                          
                          42,002
                          
                          
                          
                          35,710Total
      current assets
                          
                          
                          51,427,044
                          
                          
                          
                          59,741,824Restricted
      cash
                          
                          
                          1,663,343
                          
                          
                          
                          846,197Property,
      plant and equipment, net
                          
                          
                          44,641,972
                          
                          
                          
                          43,455,683Prepaid
      expenses and other assets
                          
                          
                          1,800,431
                          
                          
                          
                          2,744,427Property
      use rights, net
                          
                          
                          1,281,046
                          
                          
                          
                          591,277Total
      assets
                          
                          $
                          100,813,836
                          
                          
                          $
                          107,379,408LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Loans payable-short term
                          
                          $
                          2,768,503
                          
                          
                          $
                          933,735Accounts payable and accrued expenses
                          
                          
                          9,736,879
                          
                          
                          
                          8,590,010Accounts payable-related parties
                          
                          
                          1,552,780
                          
                          
                          
                          7,516,728Advances from customers
                          
                          
                          1,503,580
                          
                          
                          
                          1,545,273Other payables
                          
                          
                          1,405,597
                          
                          
                          
                          1,624,370Taxes payable
                          
                          
                          843,731
                          
                          
                          
                          1,039,112Due to related parties
                          
                          
                          71,963
                          
                          
                          
                          978,739Total current liabilities
                          
                          
                          17,883,033
                          
                          
                          
                          22,227,967Loans
      payable-long term
                          
                          
                          8,035
                          
                          
                          
                          186,018Stockholders'
      equity:China
      Direct Industries, Inc. stockholders' equitySeries
      A Convertible Preferred Stock: $.0001 par value, stated value $1,000 per
      share; 10,000,000 authorized, 1,006 shares issued and outstanding at
      June 30, 2009 and December 31, 2008.
                          
                          
                          1,006,250
                          
                          
                          
                          1,006,250Common
      Stock: $.0001 par value, 1,000,000,000 authorized, 26,519,623 and
      23,530,642 issued and outstanding at June 30, 2009 and December 31, 2008,
      respectively
                          
                          
                          2,652
                          
                          
                          
                          2,353Additional
      paid-in capital
                          
                          
                          56,239,467
                          
                          
                          
                          51,701,293Deferred
      compensation
                          
                          
                          
                          
                          
                          
                          (11,000
                          )Accumulated
      comprehensive income
                          
                          
                          (13,554,759
                          )
                          
                          
                          (11,711,021
                          )Retained
      earnings
                          
                          
                          12,629,575
                          
                          
                          
                          17,037,407Total
      China Direct Industries, Inc. stockholders’ equity
                          
                          
                          56,323,185
                          
                          
                          
                          58,025,282Non-controlling
      interests
                          
                          
                          26,599,583
                          
                          
                          
                          26,940,141Total
      Equity
                          
                          
                          82,922,768
                          
                          
                          
                          84,965,423Total
      liabilities and stockholders’ equity
                          
                          $
                          100,813,836
                          
                          
                          $
                          107,379,408





See notes
to unaudited consolidated financial statements


- 5
-


CHINA
DIRECT INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)







For
      the Three Months
                                                              
                                                              
                                                              For
      the Six MonthsEnded
      June 30,
                                                              
                                                              
                                                              Ended
      June 30,2009
                                                              
                                                              
                                                              2008
                                                              
                                                              
                                                              2009
                                                              
                                                              
                                                              2008Revenues
                                                              
                                                              $
                                                              18,417,789
                                                              
                                                              
                                                              $
                                                              75,999,328
                                                              
                                                              
                                                              $
                                                              34,474,466
                                                              
                                                              
                                                              $
                                                              134,659,553Revenues-related
      parties
                                                              
                                                              
                                                              2,007,621
                                                              
                                                              
                                                              
                                                              1,344,725
                                                              
                                                              
                                                              
                                                              6,637,053
                                                              
                                                              
                                                              
                                                              2,078,646Total
      revenues
                                                              
                                                              
                                                              20,425,410
                                                              
                                                              
                                                              
                                                              77,344,053
                                                              
                                                              
                                                              
                                                              41,111,519
                                                              
                                                              
                                                              
                                                              136,738,199Cost
      of revenues
                                                              
                                                              
                                                              21,136,660
                                                              
                                                              
                                                              
                                                              63,893,924
                                                              
                                                              
                                                              
                                                              40,453,953
                                                              
                                                              
                                                              
                                                              113,307,926Gross
      profit
                                                              
                                                              
                                                              (711,250
                                                              )
                                                              
                                                              
                                                              13,450,129
                                                              
                                                              
                                                              
                                                              657,566
                                                              
                                                              
                                                              
                                                              23,430,273Operating
      expenses:Selling,
      general, and administrative
                                                              
                                                              
                                                              2,419,684
                                                              
                                                              
                                                              
                                                              2,486,588
                                                              
                                                              
                                                              
                                                              5,518,814
                                                              
                                                              
                                                              
                                                              4,097,581Operating
      (loss) income
                                                              
                                                              
                                                              (3,130,934
                                                              )
                                                              
                                                              
                                                              10,963,541
                                                              
                                                              
                                                              
                                                              (4,861,248
                                                              )
                                                              
                                                              
                                                              19,332,692Other
      income (expense):Other
      income (expense)
                                                              
                                                              
                                                              (403,548
                                                              )
                                                              
                                                              
                                                              102,874
                                                              
                                                              
                                                              
                                                              (331,963
                                                              )
                                                              
                                                              
                                                              296,492Interest
      (expense) income
                                                              
                                                              
                                                              (86,911
                                                              )
                                                              
                                                              
                                                              143,018
                                                              
                                                              
                                                              
                                                              (40,797
                                                              )
                                                              
                                                              
                                                              239,877Realized
      (loss) gain on sale of marketable securities
                                                              
                                                              
                                                              (79,221
                                                              )
                                                              
                                                              
                                                              3,756
                                                              
                                                              
                                                              
                                                              (311,932
                                                              )
                                                              
                                                              
                                                              (35,705
                                                              )Total
      other (expense) income
                                                              
                                                              
                                                              (569,680
                                                              )
                                                              
                                                              
                                                              249,648
                                                              
                                                              
                                                              
                                                              (684,692
                                                              )
                                                              
                                                              
                                                              500,664(Loss)
      income from continuing operations, before tax
                                                              
                                                              
                                                              (3,700,614
                                                              )
                                                              
                                                              
                                                              11,213,189
                                                              
                                                              
                                                              
                                                              (5,545,940
                                                              )
                                                              
                                                              
                                                              19,833,356Income
      tax (expense) benefit
                                                              
                                                              
                                                              (13,492
                                                              )
                                                              
                                                              
                                                              (716,791
                                                              )
                                                              
                                                              
                                                              58,087
                                                              
                                                              
                                                              
                                                              (1,040,424
                                                              )(Loss)
      income from continuing operations, net of tax
                                                              
                                                              
                                                              (3,714,106
                                                              )
                                                              
                                                              
                                                              10,496,398
                                                              
                                                              
                                                              
                                                              (5,487,853
                                                              )
                                                              
                                                              
                                                              18,792,932Income
      from discontinued operations
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (70,151
                                                              )
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              73,357Net
      (loss) income
                                                              
                                                              
                                                              (3,714,106
                                                              )
                                                              
                                                              
                                                              10,426,247
                                                              
                                                              
                                                              
                                                              (5,487,853
                                                              )
                                                              
                                                              
                                                              18,866,289Net
      (loss) income attributable to noncontrolling interests
                                                              
                                                              
                                                              826,450
                                                              
                                                              
                                                              
                                                              (2,911,372
                                                              )
                                                              
                                                              
                                                              1,144,666
                                                              
                                                              
                                                              
                                                              (6,598,538
                                                              )Net
      (loss) income attributable to China Direct Industries,
Inc.
                                                              
                                                              
                                                              (2,887,656
                                                              )
                                                              
                                                              
                                                              7,514,875
                                                              
                                                              
                                                              
                                                              (4,343,187
                                                              )
                                                              
                                                              
                                                              12,267,751Deduct
      dividends on Series A Preferred Stock:Preferred
      stock dividend
                                                              
                                                              
                                                              (20,271
                                                              )
                                                              
                                                              
                                                              (1,047,937
                                                              )
                                                              
                                                              
                                                              (53,926
                                                              )
                                                              
                                                              
                                                              (1,189,467
                                                              )Relative
      fair value of detachable warrants issued
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (2,765,946
                                                              )Preferred
      stock beneficial conversion feature
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (2,451,446
                                                              )(Loss)
      income attributable to China Direct Indstries, Inc. common
      stockholders
                                                              
                                                              $
                                                              (2,907,927
                                                              )
                                                              
                                                              $
                                                              6,466,938
                                                              
                                                              
                                                              $
                                                              (4,397,113
                                                              )
                                                              
                                                              $
                                                              5,860,892Basic
      and diluted income (loss) per common share after deduction in the first
      quarter of 2008, of noncash deemed dividends attributable to Series
      Convertible A Preferred Stock as described in Note 11Basic
                                                              
                                                              $
                                                              (0.12
                                                              )
                                                              
                                                              $
                                                              0.29
                                                              
                                                              
                                                              $
                                                              (0.18
                                                              )
                                                              
                                                              $
                                                              0.27Diluted
                                                              
                                                              $
                                                              (0.12
                                                              )
                                                              
                                                              $
                                                              0.26
                                                              
                                                              
                                                              $
                                                              (0.18
                                                              )
                                                              
                                                              $
                                                              0.24Basic
      weighted average common shares outstanding
                                                              
                                                              
                                                              24,168,640
                                                              
                                                              
                                                              
                                                              22,663,337
                                                              
                                                              
                                                              
                                                              24,082,025
                                                              
                                                              
                                                              
                                                              21,833,388Diluted
      weighted average common shares outstanding
                                                              
                                                              
                                                              24,168,640
                                                              
                                                              
                                                              
                                                              25,427,385
                                                              
                                                              
                                                              
                                                              24,082,025
                                                              
                                                              
                                                              
                                                              24,160,683





See notes
to unaudited consolidated financial statements


- 6
-


CHINA
DIRECT INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





For
      the Six Months EndedJune
      30,2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      income attributable to China Direct Industries, Inc.
                    
                    $
                    (4,343,187
                    )
                    
                    $
                    12,267,751Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Depreciation
      & Amortization
                    
                    
                    1,451,354
                    
                    
                    
                    962,281Allowance
      for bad debt
                    
                    
                    (127,424
                    )
                    
                    
                    45,395Stock
      based compensation for employees and board of directors
                    
                    
                    1,122,803
                    
                    
                    
                    848,364Realized
      loss on sale of investment in marketable securities
                    
                    
                    295,707
                    
                    
                    
                    35,705Fair
      value of securities received for services and interest
                    
                    
                    (584,371
                    )
                    
                    
                    (392,942
                    )Fair
      value of securities paid for services
                    
                    
                    205,165
                    
                    
                    
                    -Deferred
      compensation expense
                    
                    
                    11,000
                    
                    
                    
                    -Income
      (loss) attributable to noncontrolling interest
                    
                    
                    (1,144,666
                    )
                    
                    
                    6,598,538Changes
      in operating assets and liabilities:Prepaid
      expenses and other assets
                    
                    
                    2,115,450
                    
                    
                    
                    (4,857,996
                    )Prepaid
      expenses - related parties
                    
                    
                    3,865,045
                    
                    
                    
                    (670,220
                    )Inventories
                    
                    
                    (1,433,292
                    )
                    
                    
                    (6,881,077
                    )Accounts
      receivable
                    
                    
                    3,710,564
                    
                    
                    
                    (14,733,064
                    )Accounts
      receivable - related parties
                    
                    
                    (2,673,192
                    )
                    
                    
                    1,726,913Accounts
      payable and accrued expenses
                    
                    
                    1,153,722
                    
                    
                    
                    2,526,304Accounts
      payable - related party
                    
                    
                    (5,963,948
                    )
                    
                    
                    (228,930
                    )Advances
      from customers
                    
                    
                    (41,693
                    )
                    
                    
                    (1,177,456
                    )Other
      payables
                    
                    
                    (218,773
                    )
                    
                    
                    1,006,401Income
      taxes payable
                    
                    
                    (195,381
                    )
                    
                    
                    582,015Net
      cash (used in) provided by continuing activities
                    
                    
                    (2,795,117
                    )
                    
                    
                    (2,342,018
                    )Net
      cash provided by discontinued operations
                    
                    
                    -
                    
                    
                    
                    (421,642
                    )Net
      cash (used in) provided by operating activities
                    
                    
                    (2,795,117
                    )
                    
                    
                    (2,763,660
                    )Cash
      flows from investing activities:Decrease
      (increase) in notes receivable
                    
                    
                    -
                    
                    
                    
                    946,897Increase
      in loans receivable
                    
                    
                    -
                    
                    
                    
                    (1,060,156
                    )Repayment
      of loans and advances to related parties
                    
                    
                    546,881
                    
                    
                    
                    (1,597,305
                    )Proceeds
      from the sale of marketable securities available for sale
                    
                    
                    483,723
                    
                    
                    
                    428,395Purchases
      of property, plant and equipment
                    
                    
                    (2,880,232
                    )
                    
                    
                    (7,364,599
                    )Net
      cash used in investing activities
                    
                    
                    (1,849,628
                    )
                    
                    
                    (8,646,768
                    )Cash
      flows from financing activities:Decrease
      (increase) in restricted cash
                    
                    
                    (817,146
                    )
                    
                    
                    644,096Proceeds
      from loans payable
                    
                    
                    926,325
                    
                    
                    
                    1,161,303Payment
      of loans payable
                    
                    
                    -
                    
                    
                    
                    (1,866,075
                    )Payment
      of notes payable
                    
                    
                    -
                    
                    
                    
                    (592,007
                    )Payment
      of notes payable-related party
                    
                    
                    -
                    
                    
                    
                    (410,167
                    )Proceeds
      from repayment of advances to related parties
                    
                    
                    -
                    
                    
                    
                    1,273,325Due
      to related parties
                    
                    
                    (176,316
                    )
                    
                    
                    (2,560,343
                    )Gross
      proceeds from sale of preferred stock
                    
                    
                    -
                    
                    
                    
                    12,950,000Gross
      proceeds from sale of common stock
                    
                    
                    5,000,000
                    
                    
                    
                    -Proceeds
      from exercise of warrants/options
                    
                    
                    10,000
                    
                    
                    
                    2,782,376Cash
      payment for stock split/forward and stock repurchase
                    
                    
                    (1,650,000
                    )
                    
                    
                    -Cash
      dividend payment to preferred stock holders
                    
                    
                    -
                    
                    
                    
                    (141,530
                    )Capital
      contribution from minority interest owners
                    
                    
                    715,788
                    
                    
                    
                    2,217,296Offering
      expenses
                    
                    
                    (190,000
                    )
                    
                    
                    (1,504,345
                    )Net
      cash provided by financing activities
                    
                    
                    3,818,652
                    
                    
                    
                    13,953,929EFFECT
      OF EXCHANGE RATE ON CASH
                    
                    
                    413,591
                    
                    
                    
                    1,872,188Net
      (decrease) increase in cash
                    
                    
                    (412,504
                    )
                    
                    
                    4,415,689Cash,
      beginning of year
                    
                    
                    14,205,229
                    
                    
                    
                    19,024,604Cash,
      end of period
                    
                    $
                    13,792,725
                    
                    
                    $
                    23,440,293





Supplemental
      disclosures of cash flow information:Cash
      paid for taxes
                
                $
                -
                
                
                $
                146,716Cash
      paid for interest
                
                $
                -
                
                
                $
                169,385Dividend
      payment in stock to preferred stock shareholders
                
                $
                53,926
                
                
                $
                1,027,922Non-cash
      preferred stock deemed dividend
                
                $
                -
                
                
                $
                5,217,392See
      notes to audited consolidated financial statements


- 7
-


NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS





Business
and Organization





China
Direct Industries, Inc., a Florida corporation and its subsidiaries are referred
to in this report as the “Company”, “we”, “us”, “our”, or “China
Direct”. We are on a calendar year, as such the three month period ending
June 30, is our second quarter and the six month period ending June 30 is
referred to as the “six months”. The year ended December 31, 2008 is
referred to as “2008” and the coming year ending December 31, 2009 is
referred to as “2009”.





We are a
U.S. company that manages a portfolio of Chinese entities. We also provide
consulting services to Chinese businesses. We operate in three identifiable
segments, Magnesium, Basic Materials and Consulting, in accordance with SFAS No.
131, “Disclosure
about segments of an
Enterprise and Related Information”. In 2006 we established our Magnesium
and Basic Materials segments which have grown through acquisitions of
controlling interests of Chinese private companies. We consolidate these
acquisitions as either our wholly or majority owned subsidiaries. Through this
ownership control, we provide management advice as well as investment capital to
expand their businesses. We hold a controlling interest in twelve subsidiaries
operating in China, five of which comprise our Magnesium segment and five
comprise our Basic Materials segment. As of the date of this report, we have a
total of 1,297 full-time employees, the majority of which, 1,281, work in the
Peoples Republic of China (the “PRC”).





In our
largest segment, Magnesium, we operate five entities which produce, sell and
distribute pure magnesium ingots, magnesium powders and magnesium
scraps.





In our
Basic Materials segment, we operate five entities which sell and distribute a
variety of products including (i) industrial grade synthetic chemicals, (ii)
steel products, (iii) non ferrous metals, and (iv) recycled materials. This
segment also includes our zinc mining property which has not commenced
operations.





In our
Consulting segment, we provide a suite of consulting services to U.S. public
companies that operate primarily in China. The consulting and transactional fees
we charge vary based upon the scope of the services to be rendered.





In 2007
we launched a Clean Technology segment. We discontinued this segment in the
third quarter of 2008 when we completed the sale in October 2008 of an 81%
interest in CDI Clean Technology and its 51% interest in CDI Wanda and its 52%
interest in Yantai CDI Wanda to PE Brothers Corp. for $1,240,000. We plan to
maintain the 19% ownership interest in CDI Clean Technology we retained. We have
received the first installment payment of $240,000.





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





Basis
of Presentation





Our
unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information and pursuant to the requirements for reporting on Form 10-Q.
Accordingly, they do not include all the information and footnotes required by
U.S. generally accepted accounting principles for annual financial statements.
However, the information included in these interim financial statements reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for the fair presentation of the
consolidated financial position and the consolidated results of operations.
Results shown for interim periods are not necessarily indicative of the results
to be obtained for a full year. The consolidated balance sheet information as of
December 31, 2008 was derived from the audited consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2008. These interim financial statements should be read in
conjunction with our Form 10-K for the year ended December 31, 2008. Certain
reclassifications have been made to prior year amounts to conform to the current
year presentation and to disclose our reclassification of discontinued
operations treatment reflecting the sale of an 81% interest in CDI Clean
Technology.





Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods presented.





Significant
estimates for the periods reported include the fair value of share-based
compensation, allowance for doubtful accounts, and useful life of fixed
assets.


- 8
-


We rely
on assumptions such as volatility, forfeiture rate, and expected dividend yield
when deriving the grant date fair value of share-based compensation. If an
equity award is modified, and we expect the service conditions of the original
award will be met, we will adjust our assumptions and estimates as of the
modification date and compare the old equity award valued at the modification
date with the new equity award valued at the modification date to calculate any
incremental cost. We then continue to recognize the original grant date
fair value plus any incremental cost over the modified service
period





Our
estimate for allowance for doubtful accounts is based on an evaluation of our
outstanding accounts receivable including the age of amounts due, the financial
condition of our specific customers, knowledge of our industry segment in Asia,
and historical bad debt experience. This evaluation methodology has proven
to provide a reasonable estimate of bad debt expense in the past and we intend
to continue to employ this approach in our analysis of
collectability. However, we are aware that given the current global
economic situation, including that of China, meaningful time horizons may
change. We intend to enhance our focus on the evaluation of our customers'
sustainability and adjust our estimates as may be indicated.





We group
property plant and equipment into similar groups of assets and estimate the
useful life of each group of assets; see Note 7 – Property and Equipment for
further information on asset groups and estimated useful lives.





Assumptions
and estimates employed in these areas are material to our reported financial
conditions and results of operations. These assumptions and estimates have
been materially accurate in the past and are not expected to materially change
in the future. Actual results could differ from these
estimates.





Cash
and Cash Equivalents





For
purposes of the consolidated statements of cash flows, we consider all highly
liquid investments with original maturities of three months or less to be cash
equivalents. The carrying values of these investments approximate their fair
value.





Concentration
of Credit Risks





Financial
instruments which potentially subject us to concentrations of credit risk
consist principally of cash and trade accounts receivable. We deposit our cash
with high credit quality financial institutions in the United States and China.
As of June 30, 2009, bank deposits in the United States exceeded federally
insured limits by $4,773,504. This amount reflected substantially all of
the net proceeds of our June 15, 2009 offering of our securities. On July 9,
2009, the $4,773,504 was deposited in a CDARS account. At June 30, 2009, we
had deposits of $5,120,032 in banks in China. In China, there is no equivalent
federal deposit insurance as in the United States, so the amounts held in banks
in China are not insured. We have not experienced any losses in such bank
accounts through June 30, 2009.





At June
30, 2009 and December 31, 2008, bank deposits by geographic area were as
follows:








Country
                  
                  June
      30, 2009
                  
                  
                  December
      31, 2008United
      States
                  
                  $
                  8,672,693
                  
                  
                  
                  63
                  %
                  
                  $
                  6,640,672
                  
                  
                  
                  47
                  %China
                  
                  
                  5,120,032
                  
                  
                  
                  37
                  %
                  
                  
                  7,564,557
                  
                  
                  
                  53
                  %Total
      cash and cash equivalents
                  
                  $
                  13,792,725
                  
                  
                  
                  100
                  %
                  
                  $
                  14,205,229
                  
                  
                  
                  100
                  %








In an
effort to mitigate any potential risk, we periodically evaluate the credit
quality of the financial institutions at which we hold deposits, both in the
United States and China.





Accounts
Receivable





Accounts
receivable are reported at net realizable value. We have established an
allowance for doubtful accounts based upon factors pertaining to the credit
risks of specific customers, historical trends, age of the receivable and other
information. Delinquent accounts are written off when it is determined that the
amounts are uncollectible. At June 30, 2009 and December 31, 2008, allowances
for doubtful accounts were approximately $300,000 and $500,000,
respectively.





Inventories





Inventories,
consisting of raw materials and finished goods, are stated at the lower of cost
or market utilizing the weighted average method. Inventories as of June 30, 2009
and December 31, 2008 were $9,992,885 and $8,559,593, respectively. Due to the
nature of our business and the short duration of the manufacturing process of
our products, there was no work-in-process inventory at June 30, 2009 and
December 31, 2008.


- 9
-


Accounts
Payable-Related Parties





At June
30, 2009 our consolidated balance sheet reflects accounts payable-related party
of $1,552,780, an amount due from Chang Magnesium to Pine Capital in repayment
of an advance from customer for the expected delivery of inventory. At
December 31, 2008, our consolidated balance sheet reflects accounts
payable-related party of $7,516,728, comprised of $4,497,180 and $3,019,548 due
Chang Magnesium in repayment of customer advances by Pine Capital and Wheaton
Group, respectively.





Fair
Value of Financial Instruments





As of
January 1, 2008, we adopted on a prospective basis certain required provisions
of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements, as amended by Financial Accounting Standards Board (FASB)
Financial Staff Position (FSP) No. 157-2, on the effective date of FASB
Statement No. 157. Those provisions relate to our financial assets and
liabilities carried at fair value and our fair value disclosures related to
financial assets and liabilities. SFAS 157 defines fair value, expands
related disclosure requirements and specifies a hierarchy of valuation
techniques based on the nature of the inputs used to develop the fair value
measures. Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. There are three levels of inputs to
fair value measurements - Level 1, meaning the use of quoted prices for
identical instruments in active markets; Level 2, meaning the use of quoted
prices for similar instruments in active markets or quoted prices for identical
or similar instruments in markets that are not active or are directly or
indirectly observable; and Level 3, meaning the use of unobservable
inputs. Observable market data should be used when available.





Most, but
not all, of our financial instruments are carried at fair value, including, all
of our cash equivalents, investments classified as available for sale securities
and assets held for sale and are carried at fair value, with unrealized gains
and losses, net of tax. Virtually all of our valuation measurements are Level 1
measurements. The adoption of SFAS 157 did not have a significant impact on our
consolidated financial statements.





Marketable
Securities





Marketable
securities held for sale and marketable securities held for sale-related
party at June 30, 2009 and December 31, 2008 consists of the
following:








Company
                        
                        
                        June
      30, 2009
                        
                        
                        
                        December
      31, 2008%
                        
                        
                        
                        
                        
                        
                        
                        %China
      America Holdings, Inc.
                        
                        $
                        357,557
                        
                        
                        
                        7
                        %
                        
                        $
                        272,200
                        
                        
                        
                        5
                        %China
      Logistics Group, Inc.
                        
                        
                        694,745
                        
                        
                        
                        13
                        %
                        
                        
                        1,807,357
                        
                        
                        
                        23
                        %Dragon
      International Group Corp.
                        
                        
                        807,289
                        
                        
                        
                        15
                        %
                        
                        
                        704,656
                        
                        
                        
                        9
                        %China
      Armco Metals, Inc.
                        
                        
                        2,773,945
                        
                        
                        
                        52
                        %
                        
                        
                        4,045,002
                        
                        
                        
                        52
                        %Sunwin
      International Neutraceuticals, Inc.
                        
                        
                        295,218
                        
                        
                        
                        6
                        %
                        
                        
                        649,337
                        
                        
                        
                        8
                        %Other
                        
                        
                        385,101
                        
                        
                        
                        7
                        %
                        
                        
                        251,240
                        
                        
                        
                        3
                        %Marketable
      securities held for sale
                        
                        $
                        5,313,855
                        
                        
                        
                        100
                        %
                        
                        $
                        7,729,792
                        
                        
                        
                        100
                        %








Through
our Consulting segment, we receive securities which include preferred stock,
common stock and common stock purchase warrants from clients. We classify these
securities as investments in marketable securities available for sale or
investment in marketable securities available for sale-related party. These
securities are stated at their fair value in accordance with SFAS No. 115“Accounting for Certain Investments
in Debt and Equity Securities ”, and EITF 00-8 Accounting by a Grantee for an
Equity Instrument to be Received in Conjunction with Providing Goods or
Services”.Unrealized gains or losses in investments in marketable securities
available for sale are recognized as an element of other comprehensive income on
a monthly basis based on fluctuations in the fair  value of the security as
quoted on an exchange or an inter-dealer quotation system. Realized gains or
losses are recognized in the consolidated statements of operations when the
securities are liquidated.





Our
consulting fees vary based upon the scope of the services to be rendered.
Historically, a significant portion of the fees we earned have been paid in the
form of our clients’ securities which include preferred stock, common stock and
common stock purchase warrants. Some of the securities of China Logistics we own
are restricted securities and cannot be readily resold by us absent a
registration of those securities under the Securities Act of 1933 (the
“Securities Act”) or the availability of an exemption from the registration
requirements under the Securities Act.


- 10
-


The
securities of one client, Dragon Capital Group Corp. (“Dragon Capital”),
accounted for all of the investment in marketable securities available for
sale-related party and totaled $385,101 and $160,459 at June 30, 2009 and
December 31, 2008, respectively. The per share price of these securities
went up from $0.003 to $0.006, which accounted for the increase in the value of
the securities. Dragon Capital is a related party. Mr. Lisheng (Lawrence)
Wang, the CEO and Chairman of the Board of Dragon Capital, is the brother of Dr.
James Wang, CEO and Chairman of China Direct. These securities were issued by
Dragon Capital as compensation for consulting services. Dragon Capital is a
non-reporting company whose securities are quoted on the Pink Sheets, and as
such, under Federal securities laws, securities of Dragon Capital cannot be
readily resold by us, generally, absent a registration of those securities under
the Securities Act. Dragon Capital does not intend to register the
securities.




Other-than-temporary
impairment of securities is evaluated periodically to determine whether a
decline in their value is other than temporary. Management utilizes criteria
such as the magnitude and duration of the decline, in addition to the reasons
underlying the decline, to determine whether the loss in value is other than
temporary. The term “other-than-temporary” is not intended to indicate that the
decline is permanent. It indicates that the prospects for a near term recovery
of value are not necessarily favorable, or that there is a lack of evidence to
support fair values equal to, or greater than, the carrying value of the
investment. Once a decline in value is determined to be other than temporary,
the value of the security is reduced and a corresponding impairment charge to
earnings is recognized.





In
January 2009, the FASB issued FSP EITF 99-20-1 to amend the impairment
guidance in EITF Issue No. 99-20 in order to achieve more consistent
determination of whether other-than-temporary impairment (“OTTI”) has
occurred. This FSP amended EITF 99-20 to more closely align the OTTI guidance to
the guidance in Statement No. 115. Retrospective application to a prior
interim or annual period is prohibited. The guidance in this FSP will be
considered at the end of our fiscal year when we conduct an assessment of OTTI
for our investment in securities available for sale.





All
securities (exclusive of preferred stock and common stock purchase warrants)
received from our clients as compensation are quoted either on the
Over-the-Counter Bulletin Board or the Pink Sheets. The securities are typically
restricted as to resale. Our policy is to liquidate securities received as
compensation when market conditions are favorable for sale. As these
securities are often restricted, we are unable to liquidate these securities
until the restriction is removed. We value common stock based on the fair value
at the time common stock is granted and for common stock purchase warrants based
on the Black-Scholes valuation model. Unrealized gains or losses on marketable
securities available for sale and on marketable securities available for
sale-related party are recognized as an element of comprehensive income on a
monthly basis based on changes in the fair value of the security as quoted on an
exchange or an inter-dealer quotation system. Once liquidated, realized gains or
losses on the sale of marketable securities available for sale and
marketable securities available for sale-related party are reflected in our
net income for the period in which the security was liquidated.





The
unrealized loss on marketable securities available for sale, net of the effect
of taxes, for the second quarter of 2009 and 2008 was $207,262 and $1,590,347,
respectively. The realized gain (loss) on investments in marketable securities
available for sale for the second quarter of 2009 and 2008 was a loss of $79,221
and a gain of $3,756, respectively.





Prepaid
Expenses and Other Current Assets





Prepaid
expenses and other current assets consist of (i) prepayments to vendors for
merchandise that had not yet been shipped, (ii) the fair value of securities
received from client companies associated with our Consulting segment assigned
to our executive officers and employees as compensation, (iii) value added
tax refunds available from the Chinese government, (iv) loans receivable and (v)
other receivables. At June 30, 2009 and
December 31, 2008, our consolidated balance sheets include prepaid expenses and
other current assets of $6,508,666 and $8,127,300, respectively.





Prepaid
expenses-related parties were $4,142,066 and $8,007,111 at June 30, 2009 and
December 31, 2008, respectively. This item is discussed in further detail in
Note 10 - Related Party Transactions.





Non-current
prepaid expenses and other assets consist of (i) the fair value of the
securities of our client companies assigned to executive officers and employees
as compensation for services to be rendered over the term of the respective
consulting agreement which will be amortized beyond the twelve month period, and
(ii) other assets acquired in connection with the acquisition of Pan Asia
Magnesium. This item is discussed in further detail in Note 6- Prepaid
Expenses and other current assets. Accordingly, non-current prepaid
expenses totaled $1,800,431 and $2,744,427 at June 30, 2009 and December 31,
2008, respectively.




- 11
-




Property, Plant and
Equipment


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





Acquisitions





We
account for acquisitions using the purchase method of accounting in accordance
with the provisions of SFAS No. 141. In each of our acquisitions for the periods
presented, we determined that fair values were equivalent to the acquired
historical carrying costs. Acquisitions to be made after December 15, 2008 will
be accounted for under the provisions of SFAS 141R.





Advances
from Customers and Deferred Revenues





Advances
from customers represent (i) prepayments to us for merchandise that had not yet
been shipped to customers, and (ii) the fair value of securities received as
compensation which will be amortized over the term of the respective consulting
agreement. We will recognize these advances as revenues as customers take
delivery of the goods or when the services have been rendered, in compliance
with our revenue recognition policy. Advances from customers totaled $1,503,580
and $1,545,273 at June 30, 2009 and December 31, 2008,
respectively.





Comprehensive
Income





We follow
Statement of Financial Accounting Standards No. 130 (SFAS 130) “Reporting Comprehensive
Income” to recognize the elements of comprehensive income. Comprehensive
income is comprised of net income and all changes to the statements of
stockholders’ equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. Comprehensive income for
the second quarter of 2009 and 2008 included net income, foreign currency
translation adjustments, unrealized gains or losses on marketable securities
available for sale, net of income taxes, and unrealized gains or losses on
marketable securities available for sale-related party, net of income
taxes.





Foreign
Currency Translation





The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of our Chinese subsidiaries is the Renminbi,
the official currency of the People’s Republic of China, (“RMB”). Capital
accounts of the consolidated financial statements are translated into United
States dollars from RMB at their historical exchange rates when the capital
transactions occurred. Assets and liabilities are translated at the exchange
rates as of the balance sheet date. Income and expenditures are translated at
the average exchange rates for the second quarter of 2009 and 2008. A summary of
the conversion rates for the periods presented is as follows:





June
      30,2009
                    
                    
                    2008Quarter
      end RMB : U.S. Dollar exchange rate
                    
                    
                    6.8448
                    
                    
                    
                    6.8718Average
      year-to-date RMB : U.S. Dollar exchange rate
                    
                    
                    6.8432
                    
                    
                    
                    7.0726





The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through PRC authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into United States dollars at the rates applied in the
translation.




Impairment
of Long-Lived Assets





In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, we periodically review our long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be fully recoverable. We recognize an
impairment loss when the sum of expected undiscounted future cash flows is less
than the carrying amount of the asset. The amount of impairment is measured as
the difference between the estimated fair value and the book value of the
underlying asset. We did not record any impairment charges during first and
second quarters of 2009 and 2008.




- 12
-




Subsidiaries Held for
Sale


Long-lived
assets are classified as held for sale when certain criteria are met. These
criteria include management’s commitment to a plan to sell the assets; the
availability of the assets for immediate sale in their present condition; an
active program to locate buyers and other actions to sell the assets has
been initiated; the sale of the assets is probable and their transfer is
expected to qualify for recognition as a completed sale within one year; the
assets are being marketed at reasonable prices in relation to their fair value;
and it is unlikely that significant changes will be made to the plan to sell the
assets. We measure long-lived assets to be disposed of by sale at the lower of
carrying amount or fair value, less cost to sell.





Non-controlling
Interest




Noncontrolling
interests in our subsidiaries are recorded in accordance with the provisions of
SFAS 160 Noncontrolling
Interests in Consolidated Financial Statements, an amendment to ARB No.
51 and are reported as a component of our equity, separate from the
parent’s equity.  Purchase or sale of equity interests that do not result
in a change of control are accounted for as equity transactions.  Results
of operations attributable to the noncontrolling interest are included in our
consolidated results of operations and, upon loss of control, the interest sold,
as well as interest retained, If any, will be reported at fair value with any
gain or loss recognized in earnings.


Income
Taxes





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





Basic
and Diluted Earnings per Share





Basic
income per common share is computed by dividing income available to common
shareholders by the weighted average number of shares of common stock
outstanding for the periods presented. Diluted income per share reflects the
potential dilution that could occur if securities were exercised or converted
into common stock or other contracts to issue common stock resulted in the
issuance of common stock that would then share in our income, subject to
anti-dilution limitations.





Revenue
Recognition





We follow
the guidance of the Securities and Exchange Commission's Staff Accounting
Bulletin (“SAB”) No. 104 and SAB Topic 13 for revenue recognition. In general,
we record revenue when persuasive evidence of an arrangement exists, services
have been rendered or product delivery has occurred, the sales price to the
customer is fixed or determinable, and collectability is reasonably
assured.





Stock-based
Compensation





We
account for the grant of stock options and restricted stock awards in accordance
with SFAS 123R, “Share-Based
Payment, an Amendment of FASB Statement No. 123” (“SFAS 123R”). SFAS 123R
requires companies to recognize in the statement of operations the grant-date
fair value of stock options and other equity based compensation.





Recent
Pronouncements





In
June 2009 the FASB issued SFAS No. 168,The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting , or SFAS
168. SFAS 168 represents the last numbered standard to be issued by FASB under
the old (pre-Codification) numbering system, and amends the GAAP hierarchy
established under SFAS 162. On July 1, 2009 the FASB launched FASB’s new
Codification entitledThe FASB
Accounting Standards Codification, or FASB ASC. The Codification will
supersede all existing non-SEC accounting and reporting standards. SFAS 168 is
effective in the first interim and annual periods ending after
September 15, 2009. This pronouncement will have no effect on our
consolidated financial statements upon adoption other than current references to
GAAP which will be replaced with references to the applicable codification
paragraphs.





- 13
-


In
June 2009 the FASB issued SFAS No. 167,Amendments to FASB Interpretation
No. 46(R), or SFAS 167, that will change how we determine when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. Under SFAS No. 167, determining
whether a company is required to consolidate an entity will be based on, among
other things, an entity’s purpose and design and a company’s ability to direct
the activities of the entity that most significantly impact the entity’s
economic performance. SFAS 167 is effective for financial statements after
January 1, 2010. We are currently evaluating the requirements of SFAS 167
and the impact of adoption on our consolidated financial
statements.





In
May 2009 the FASB issued SFAS No. 165,Subsequent Events, or SFAS
165. SFAS 165 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS 165 requires the disclosure of
the date through which an entity has evaluated subsequent events and the basis
for that date, that is, whether the date represents the date the financial
statements were issued or were available to be issued. SFAS 165 is effective in
the first interim period ending after June 15, 2009. We expect SFAS 165
will have an impact on disclosures in our consolidated financial statements, but
the nature and magnitude of the specific effects will depend upon the nature,
terms and value of the any subsequent events occurring after
adoption.





In April
2009, the FASB issued three final Staff Positions “FSPs” intended to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, provides
guidelines for making fair value measurements more consistent with the
principles presented in FASB Statement No. 157, Fair Value Measurements. FSP FAS
107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, provides additional guidance designed
to create greater clarity and consistency in accounting for and presenting
impairment losses on securities. We are currently evaluating the requirements of
these FSPs, as well as the impact of the adoption on our consolidated financial
statements, if any.





In
January 2009, the FASB issued FSP EITF 99-20-1 to amend the impairment
guidance in EITF Issue No. 99-20 in order to achieve more consistent
determination of whether an other-than-temporary impairment (“OTTI”) has
occurred. This FSP amended EITF 99-20 to more closely align the OTTI guidance
therein to the guidance in Statement No. 115. Retrospective application to
a prior interim or annual period is prohibited. We considered the guidance in
this FSP in the assessment of OTTI for our investment in marketable securities
at March 31, 2009.





On
September 16, 2008, the FASB issued final FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted
in share-based payment transactions are participating securities prior to
vesting. The FSP determines that unvested share-based payment awards that
contain rights to dividend payments should be included in earnings per share
calculations. The guidance will be effective for fiscal years beginning after
December 15, 2008. We have evaluated the requirements of EITF 03-6-1 and it had
no impact on the preparation of our consolidated financial statements as of June
30, 2009.





On
October 10, 2008, the FASB issued SFP No. 157-3,Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. This
FSP clarifies the application of FASB Statement No. 157, Fair Value
Measurements, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. FASB Statement No. 157
was issued in September 2006, and is effective for financial assets and
financial liabilities for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. We have adopted SFAS 157-3 and determined that it had no impact as
of June 30, 2009, and we will continue to evaluate the impact, if any, of SFAS
157-3 on our financial statements.





In May
2008, the FASB issued FSP APB 14-1,Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash
Settlement)(“FSP APB
14-1) . FSP APB 14-1 clarifies that convertible debt instruments that may
be settled in cash upon either mandatory or optiona1l conversion (including
partial cash settlement) are not addressed by paragraph 12 of APB Opinion No.
14,Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We will adopt FSP APB 14-1 beginning in the first
quarter of fiscal 2009,
and this standard must be applied on a retrospective basis. We have evaluated
the requirements of APB 14-1 and it had no impact on the preparation of our
consolidated financial statements as of June 30, 2009.





- 14
-


In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We have evaluated the requirements of SFAS 161 and it had no
impact on the preparation of our consolidated financial statements as of June
30, 2009.





A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to our consolidated financial statements.




NOTE
3 - EARNINGS PER SHARE





Under the
provisions of SFAS 128, “Earnings Per Share”, basic
income (loss) per common share is computed by dividing income (loss) available
to common shareholders by the weighted average number of shares of common stock
outstanding for the periods presented. Diluted income (loss) per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that would then share in the income of
the company, subject to anti-dilution limitations.








For
      three months ended
                
                
                For
      six months endedJune
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Numerator:Net
      (loss) income
                
                $
                (2,887,656
                )
                
                $
                7,514,875
                
                
                $
                (4,343,187
                )
                
                $
                12,267,751Series
      A preferred stock:Preferred
      stock dividend
                
                
                (20,271
                )
                
                
                (1,047,937
                )
                
                
                (53,926
                )
                
                
                (1,189,467
                )Relative
      fair value of detachable warrants issued
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                (2,765,946
                )Preferred
      stock beneficial conversion feature
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                (2,451,446
                )Numerator
      for basic EPS, loss applicable to common stock holders (A)
                
                $
                (2,907,927
                )
                
                $
                6,466,938
                
                
                $
                (4,397,113
                )
                
                $
                5,860,892Plus:
      Income impact of assumed conversionPreferred
      stock dividends - unconverted
                
                
                
                
                
                $
                20,015
                
                
                
                
                
                
                $
                31,097Numerator
      for diluted EPS, Income applicable to common stock holders
                  assumed
      conversions (*)(B)
                
                $
                (2,907,927
                )
                
                $
                6,486,953
                
                
                $
                (4,397,113
                )
                
                $
                5,891,989Denominator:Denominator
      for basic earnings per share - weighted average number of common shares
      outstanding (C)
                
                
                24,168,640
                
                
                
                22,663,337
                
                
                
                24,082,025
                
                
                
                21,833,388Stock
      Awards, Options, and Warrants
                
                
                -
                
                
                
                2,620,298
                
                
                
                -
                
                
                
                2,215,928Preferred
      stock dividends - unconverted
                
                
                
                
                
                
                143,750
                
                
                
                
                
                
                
                111,367Denominator
      for diluted earnings per share - adjusted weighted average outstanding
      average number of common shares outstanding (D)
                
                
                24,168,640
                
                
                
                25,427,385
                
                
                
                24,082,025
                
                
                
                24,160,683Basic
      and Diluted loss Per Common Share:Earnings
      per share - basic (A)/ (C )
                
                $
                (0.12
                )
                
                $
                0.29
                
                
                $
                (0.18
                )
                
                $
                0.27Earnings
      per share - diluted (B)/(D)
                
                $
                (0.12
                )
                
                $
                0.26
                
                
                $
                (0.18
                )
                
                $
                0.24





* The
denominator in diluted earnings per share in 2009 and 2008 does not include
shares that were assumed to be outstanding prior to conversion under the “if
converted” method, 122,240 shares issuable under the unconverted preferred stock
as dividends, and 217,148 of non-vested restricted shares and stock options, as
such inclusion would be anti-dilutive.





- 15
-


EITF
Issue No. 03-6, “Participating
Securities and the Two-Class Method under FASB Statement No. 128 ” (EITF
03-6) requires companies with participating securities to calculate earnings per
share using the two-class method. Our shares of Series A Convertible Preferred
Stock are considered to be participating securities as these securities are
entitled to dividends declared on our common stock; therefore, EITF 03-6
requires the allocation of a portion of undistributed earnings to the Series A
Convertible Preferred Stock in the calculation of basic earnings per
share.





NOTE
4 - COMPREHENSIVE INCOME





Comprehensive
income is comprised of net income and other comprehensive income or loss. Other
comprehensive income or loss refers to revenue, expenses, gains and losses that
under accounting principles generally accepted in the United States are included
in comprehensive income but excluded from net income as these amounts are
recorded directly as an adjustment to stockholders’ equity.





Our other
comprehensive income consists of currency translation adjustments, unrealized
loss on marketable securities available for sale, net of taxes and unrealized
loss on marketable securities available for sale-related party, net of taxes.
The following table sets forth the computation of comprehensive income for the
second quarter and six months of 2009 and 2008, respectively:








For
      the Three Months Ended June 30,
                    
                    
                    For
      the Six Months Ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008unaudited
                    
                    
                    unaudited
                    
                    
                    unaudited
                    
                    
                    unauditedNet
      (loss) income
                    
                    $
                    (3,714,106
                    )
                    
                    $
                    10,426,247
                    
                    
                    $
                    (5,487,853
                    )
                    
                    $
                    18,866,289Other
      comprehensive (loss) income, net of taxForeign
      currency translation gain, net of tax
                    
                    
                    64,083
                    
                    
                    
                    1,309,234
                    
                    
                    
                    380,875
                    
                    
                    
                    3,106,933Unrealized
      loss on marketable securities held for sale, net of tax
                    
                    
                    (399,812
                    )
                    
                    
                    (1,646,180
                    )
                    
                    
                    (2,465,397
                    )
                    
                    
                    (2,774,304
                    )Unrealized
      gain (loss) on marketable securities held for sale, net taxes - related
      parties
                    
                    
                    192,551
                    
                    
                    
                    3,625
                    
                    
                    
                    240,783
                    
                    
                    
                    (458,598
                    )Total
      other comprehensive (loss) income, net of tax
                    
                    
                    (143,178
                    )
                    
                    
                    (333,321
                    )
                    
                    
                    (1,843,739
                    )
                    
                    
                    (125,969
                    )Comprehensive
      Income
                    
                    
                    (3,857,284
                    )
                    
                    
                    10,092,926
                    
                    
                    
                    (7,331,592
                    )
                    
                    
                    18,740,320Comprehensive
      Income attributable to the noncontrolling interests
                    
                    
                    826,450
                    
                    
                    
                    (2,911,372
                    )
                    
                    
                    1,144,666
                    
                    
                    
                    (6,598,538
                    )Comprehensive
      (loss) Income attributable to China Direct Industries Inc.
                    
                    $
                    (3,030,834
                    )
                    
                    $
                    7,181,554
                    
                    
                    $
                    (6,186,926
                    )
                    
                    $
                    12,141,782








NOTE
5 - INVENTORIES





Inventories
at June 30, 2009 and December 31, 2008 consisted of the following:








June
      30, 2009
                  
                  
                  December
      31, 2008unauditedRaw
      materials
                  
                  $
                  5,097,978
                  
                  
                  $
                  6,081,259Finished
      goods
                  
                  
                  4,894,907
                  
                  
                  
                  3,038,956Inventory
      Reserve
                  
                  
                  -
                  
                  
                  
                  (560,622
                  )$
                  9,992,885
                  
                  
                  $
                  8,559,593








Due to
the nature of our business and the short duration of the manufacturing process
for our products, there is no work in progress inventory at June 30, 2009 and
December 31, 2008.




- 16
-




NOTE 6 - PREPAID EXPENSES
AND OTHER CURRENT ASSETS


At June
30, 2009 and December 31, 2008, prepaid expenses and other current assets,
consist of the following:








Description
                      
                      June
      30, 2009
                      
                      
                      December
      31, 2008unauditedPrepayments
      to vendors for merchandise that had not yet been shipped or services that
      had not been performed
                      
                      $
                      2,865,690
                      
                      
                      $
                      2,173,989Other
      recievables
                      
                      
                      446,696
                      
                      
                      
                      2,434,578Fair
      value of securities received from client companies associated with our
      Consulting segment assigned to employees as compensation
                      
                      
                      -
                      
                      
                      
                      524,907Loans
      receivable
                      
                      
                      3,198,156
                      
                      
                      
                      2,987,615Other
      assets acquired in connection with acquisition
                      
                      
                      1,798,555
                      
                      
                      
                      2,750,638Total
                      
                      
                      8,309,097
                      
                      
                      
                      10,871,726Less:
      Current Portion
                      
                      
                      (6,508,666
                      )
                      
                      
                      (8,127,300
                      )Prepaid expenses and other assets, non-current
                      
                      $
                      1,800,431
                      
                      
                      $
                      2,744,426








In the
fourth quarter of 2008 we reallocated a portion of the purchase price to our
September 29, 2007 acquisition of a 51% interest in Pan Asia Magnesium in
accordance with FAS 144. At December 31, 2008, we reallocated $2,229,837, net of
accumulated amortization of $445,967, from “fixed assets” to “other assets
acquired in connection with acquisition”. This reallocation reflects the
intangible value of a three-year fixed price coke supply agreement between Pan
Asia Magnesium and Shanxi Jinyang Coal and Coke Group Co., Ltd., (“Jinyang
Group”) a minority shareholder of Pan Asia Magnesium. In September 2007 Jinyang
Group and CDI China entered into Joint Venture Investment Supplementary
Agreement (“Pan Asia JV Agreement”) establishing Pan Asia Magnesium as a foreign
invested entity. Under the terms of the Pan Asia JV Agreement, Jinyang Group has
a commitment to provide coke gas to Pan Asia Magnesium at a fixed price until
July, 2011;thereafter the price of
the coke gas will be at a discount to prevailing market prices. Pan Asia
Magnesium utilizes coke gas as fuel to operate its magnesium production
facility. The relationship with Jinyang Group is, among other things, intended
to ensure a stable supply of energy to Pan Asia Magnesium at advantageous
prices, given the rising cost of fuel.




In the
second quarter of 2009, we reclassified $689,087, net of accumulated
amortization of $41,394,  from “Prepaid expenses and other assets” to
“Property use rights, net” to reflect Senrun Coal’s contribution of land use
rights to Golden Magnesium pursuant to the November 11, 2006 joint venture
agreement entered into among the parties. Pursuant to these land use rights
which permit construction of a magnesium production plant capable of producing
up to 20,000 tons of magnesium alloy products per year, Golden Magnesium built
its magnesium production plant on this land. The land use rights expire in
2057.








NOTE
7 - PROPERTY, PLANT AND EQUIPMENT





At June
30, 2009 and December 31, 2008, property, plant and equipment, consisted of
the following:








Description
                  
                  Useful
      Life
                  
                  
                  June
      30, 2009
                  
                  
                  December
      31, 2008UnauditedBuilding
                  
                  10-40
      years
                  
                  
                  $
                  12,013,505
                  
                  
                  $
                  7,792,403Manufacturing
      equipment
                  
                  10
      years
                  
                  
                  
                  18,989,327
                  
                  
                  
                  12,635,161Office
      equipment and furniture
                  
                  3-5
      years
                  
                  
                  
                  707,028
                  
                  
                  
                  636,621Autos
      and trucks
                  
                  5
      years
                  
                  
                  
                  1,267,261
                  
                  
                  
                  334,630Construction
      in progress
                  
                  N/A
                  
                  
                  
                  16,839,070
                  
                  
                  
                  26,277,835Total
                  
                  
                  
                  
                  
                  
                  49,816,191
                  
                  
                  
                  47,676,650Less:  Accumulated
      Depreciation
                  
                  
                  
                  
                  
                  
                  (5,174,219
                  )
                  
                  
                  (4,220,967
                  )Property,
      Plant and Equipment, Net
                  
                  
                  
                  
                  
                  $
                  44,641,972
                  
                  
                  $
                  43,455,683








For the
second quarter and six months of 2009 depreciation expense totaled $451,163 and
$953,250, respectively. For the second quarter and six months of 2008
depreciation expense totaled $494,967 and $921,287 ,
respectively.


Golden Magnesium holds land use rights to use approximately 24.5 acres of land
located in Yueyan, Gu County, Shanxi Province, China.  Pursuant to
these land use rights which permit construction of a magnesium production plant
capable of producing up to 20,000 tons of magnesium alloy products per year,
Golden Magnesium built its magnesium production plant on this land. The land use
rights expire in 2057.


- 17
-


NOTE
8 - PROPERTY USE RIGHTS




Property use rights, consisting of mining and property use rights amounted to
$1,281,046 and $591,277 at June 30, 2009 and December 31, 2008,
respectively.




CDI Magnesium holds property use rights valued at $96,078 for the use of
magnesium alloy manufacturing equipment located in a magnesium alloy facility in
China which is owned by Jinyang Group. We will begin to amortize the value of
the property use rights over the useful life of equipment when the magnesium
refinery commences operations.





In
connection with our acquisition of CDI Jixiang Metal in December 2007, we
acquired mining rights to 51 acres located in the Yongshun Kaxi Lake Mining area
of China. CDI Jixiang Metal is presently in the exploration stage of its
business operations and is engaged in the evaluation of mineral deposits or
reserves. We have not established a reserve. There is no assurance
that commercially viable mineral deposits exist on this property and
further exploration will be required before a final evaluation as to the
economic feasibility is determined.





Mineral
property acquisition costs, site restoration costs and development costs on
mineral properties with proven and probable reserves are capitalized and will be
depleted using the units-of-production method over the estimated life of the
reserves. If there are insufficient reserves to use as a basis for depleting
such costs, they will be written off as mineral property or mineral interest
impairment in the period in which the determination is made. Site restoration
costs are depleted over the term of their expected life. The development
potential of mining properties is established by the existence of proven and
probable reserves, reasonable assurance that the property can be permitted as an
operating mine and evidence that there are no metallurgical or other impediments
to the production of saleable metals.





Exploration
costs incurred on mineral interests, other than acquisition costs, prior to the
establishment of proven and probable reserves are charged to operations as
incurred. Development costs incurred on mineral interests with proven and
probable reserves will be capitalized as mineral properties. We regularly
evaluate our investments in mineral interests to assess the recoverability
and/or the residual value of the investments in these assets. All mineral
interests and mineral properties are reviewed for impairment whenever events or
circumstances change which indicate the carrying amount of an asset may not be
recoverable, utilizing established guidelines based upon undiscounted future net
cash flows from the asset or upon the determination that certain exploration
properties do not have sufficient potential for economic
mineralization.





The
estimates of mineral prices and operating, capital and reclamation costs, when
available, are subject to certain risks and uncertainties, which may affect the
recoverability of mineral property costs. Although we make our best estimates of
these factors, it is possible that changes could occur in the near term, which
could adversely affect the future net cash flows to be generated from our
mineral properties.





NOTE
9 - LOANS PAYABLE





Loans
payable at June 30, 2009 and December 31, 2008 consisted of the
following:








Description
                
                June
      30, 2009
                
                
                December
      31, 2008Loan
      due to China Industry Bank., an unrelated party.  Due July
      2012.  6.06375% annual interest rate
                
                $
                8,035
                
                
                $
                186,018Commerical
      Bank due November 2009, related to Lang Chemical, (Lang Chemical deposited
      Principal amount to guarantee this note)
                
                
                1,249,123
                
                
                
                262,613Loan
      due to Chen Jian Fei, unsecured, payable on demand, no
      interest*
                
                
                730,460
                
                
                
                -Mingsheng
      Bank Due May 2010, interest is LIBOR plus 20%
                
                
                496,727
                
                
                
                671,122Shanghai
      Bank Due January 2010, interest is 5.84%
                
                
                292,193
                
                
                
                -Total
                
                
                2,776,538
                
                
                
                1,119,753Less:
      Current Portion
                
                
                (2,768,503
                )
                
                
                (933,735
                )Loans
      payable, long-term
                
                $
                8,035
                
                
                $
                186,018







*This loan was inadvertently
classified in prior periods as an amount due to Chen Chi, a related party, and
was reclassified in the current period to loans payable – short term to reflect
amounts due to Chen Jian Fei, a non-related party.


- 18
-


NOTE
10 - RELATED PARTY TRANSACTIONS





We have
specified the following persons and entities as related parties with ending
balances as of June 30, 2009 and December 31, 2008:


List of Related
Parties





•
                      
                      Yuwei
      Huang is executive vice president of our Magnesium segment, a member of
      our board of directors, chief executive officer and chairman of Chang
      Magnesium, chairman of Baotou Changxin Magnesium, chairman of YiWei
      Magnesium, and chief executive officer and vice chairman of Golden
      Magnesium;•
                      
                      Taiyuan
      YiWei Magnesium Industry Co., Ltd., a company organized under the laws of
      the PRC (“YiWei Magnesium”), is a non-controlling interest owner in Chang
      Magnesium;•
                      
                      Lifei
      Huang is the daughter of Yuwei Huang;•
                      
                      Huihuan
      Huang is the sister of Yuwei Huang;•
                      
                      Lifei
      Huang is a registered representative of Pine Capital Enterprises Inc., a
      company organized under the laws of the Caymen Islands (“Pine
      Capital”);•
                      
                      Lifei
      Huang is a registered representative of Wheaton Group Corp., a
      company organized under the laws of Brunei Darussalam
      (“Wheaton”);•
                      
                      Nippon
      Magnetic Dressing Co., Ltd., a company organized under the laws of the
      Japan (“Nippon Magnetic”), is a non-controlling interest owner of YiWei
      Magnesium;•
                      
                      LuCheng
      Haixu Magnesium Co., Ltd., a company organized under the laws of the PRC
      (“Haixu Magnesium”), is legally represented by an officer of Chang
      Magnesium;•
                      
                      LingShi
      County Yihong Magnesium Co., Ltd., a company organized under the laws of
      the PRC (“Yihong Magnesium”), is legally represented by an officer of
      Chang Magnesium;•
                      
                      Shanxi
      Senrun Coal Chemistry Co., Ltd., a company organized under the laws
      of the PRC (“Senrun Coal”), is a non-controlling interest owner in
      Golden Magnesium;•
                      
                      Shanxi
      Jinyang Coal and Coke Group Co., Ltd., a company organized under the laws
      of the PRC (“Jinyang Group”), is a non-controlling interest owner of
      Pan Asia Magnesium;•
                      
                      Japan
      Material Industry Co., Ltd. a company organized under the laws of the PRC,
      (“Japan Material”), is a non-controlling interest owner of YiWei
      Magnesium;•
                      
                      Australia
      Three Harmony Co., Ltd., a company organized under the laws of Australia,
      is a non-controlling interest owner of Baotou Changxin
      Magnesium;•
                      
                      Runlian
      Tian is a director of Pan Asia Magnesium;•
                      
                      NanTong
      Langyuan Chemical Co., Ltd., a company organized under the laws of the PRC
      (“NanTong Chemical”), is owned by Jingdong Chen and Qian Zhu, the
      non-controlling interest owners of Lang Chemical;•
                      
                      Jingdong
      Chen, is vice president of our Basic Materials segment and chief executive
      officer of Lang Chemical;•
                      
                      Qian
      Zhu is chief financial officer of Lang Chemical. Jingdong Chen and Qian
      Zhu are husband and wife; and•
                      
                      Lisheng
      (Lawrence) Wang is the chief executive officer and chairman of Dragon
      Capital Group Corp. a Nevada corporation, (“Dragon Capital”) and is the
      brother of Dr. Wang, our CEO and Chairman and Xiaowen Zhuang, a key
      employee of
ours.





Accounts
Receivable – related parties





At June
30, 2009 we reflected accounts receivable – related parties of $4,349,383
comprised of the following:





•
              
              $1,772,638
      due Chang Magnesium from YiWei Magnesium for inventory provided;
      and,•
              
              $1,710,945
      due Baotou Changxin Magnesium from YiWei Magnesium, for inventory
      provided; and•
              
              $865,800
      due Golden Magnesium from YiWei Magnesium for inventory
      provided.





At
December 31, 2008 we reflected accounts receivable – related parties of
$1,676,191 comprised of the following:





•
              
              $1,628,896
      due Baotou Changxin Magnesium from YiWei Magnesium, for inventory
      provided; and•
              
              $47,295
      due Golden Magnesium from YiWei Magnesium for inventory
      provided.





- 19
-


Prepaid
Expenses – related parties





At June
30, 2009 we reflected prepaid expenses – related parties of $4,142,066 comprised
of the following:





•
              
              $2,953,028
      prepaid by Chang Magnesium to YiWei Magnesium for future delivery of
      inventory;•
              
              $661,586
      prepaid by Chang Magnesium to Yihong Magnesium to for future delivery of
      inventory;•
              
              $215,577
      prepaid by Pan Asia Magnesium to Jinyang Group for the future delivery of
      coke gas;•
              
              $156,252
      prepaid by Golden Magnesium to Senrun Coal for future delivery of coke gas
      for fuel;•
              
              $98,637
      prepaid by Chang Magnesium to Wheaton Group for the future delivery of
      inventory; and•
              
              $56,986
      prepaid by Chang Magnesium to Haixu Magnesium for future delivery of
      inventory.





At
December 31, 2008 we reflected prepaid expenses – related parties of
$8,007,111 comprised of the following:





•
              
              $5,830,717
      prepaid by Chang Magnesium to YiWei Magnesium for future delivery of
      inventory;•
              
              $940,699
      prepaid by Golden Magnesium to Senrun Coal for future delivery of coke gas
      for fuel;•
              
              $520,397
      prepaid by Chang Magnesium to Nippon Magnetic to for future delivery of
      inventory;•
              
              $389,225
      prepaid by Pan Asia Magnesium to Jinyang Group for the future delivery of
      coke gas; and•
              
              $326,073
      prepaid by Golden Magnesium to YiWei Magnesium for future delivery of
      inventory.





Loan
Receivable – related parties





At June
30, 2009 we reflect loan receivables – related parties of $1,120,432
comprised of the following:





•
              
              $1,120,432
      due Lang Chemical from NanTong Chemical for funds advanced for working
      capital purposes, this loan is due on September 9, 2010 and carries an
      annual interest rate of 6%.





At
December 31, 2008 we reflected loan receivables – related parties of
$1,652,728 comprised of the following:





•
                
                $1,608,959
      due Lang Chemical from NanTong Chemical for funds advanced for working
      capital purposes; and•
                
                $43,769
      due CDI Shanghai Management from Dragon Capital for funds advanced for
      working capital
purposes.





Due
from related parties





At June
30, 2009 we reflect due from related parties of $42,002 comprised of the
following:





•
              
              $42,002
      due China Direct from a China Direct employee for the exercise price of
      exercised stock options and related
taxes.





At
December 31, 2008 we reflected due from related parties of $35,710
comprised of the following:





•
              
              $21,125
      due China Direct from a China Direct employee for the exercise price of
      exercised options; and•
              
              $14,585 due
      CDI Metal Recycling from Zhou Weiyi, for the contribution of registered
      capital related to the formation of CDI Metal
  Recycling.





Accounts
Payable – related parties





At June
30, 2009 we reflect accounts payable – related party of $1,552,780
comprised of the following:





•
              
              $1,552,780
      due from Chang Magnesium to Pine Capital in repayment of an advance from
      customer for the expected delivery of
inventory.





At
December 31, 2008 we reflected accounts payable – related party
of $7,516,728 comprised of the following:





•
              
              $4,497,180
      due from Chang Magnesium to Pine Capital in repayment of an advance from
      customer for the expected delivery of inventory; and•
              
              $3,019,548
      due from Chang Magnesium to Wheaton Group in repayment of an advance form
      customer for the expected delivery of
inventory.


- 20
-


Due
to related parties





At June
30, 2009 we reflect due to related parties balance of $71,963
comprised of the following:





•
              
              $71,963
      due to Australia Three Harmony from Golden Magnesium for fund advances for
      working capital purposes.





At
December 31, 2008 we reflected due to related parties balance of
$978,739 comprised of the following:





•
              
              $832,843 due
      to Chen Chi, this amount is made of up $729,257 due from Capital One
      Resource, and $103,586 from CDI Beijing for fund advances for working
      capital purposes; and•
              
              $145,896
      advanced by Huihuan Huang to Chang Magnesium for working capital
      purposes.





NOTE
11 - STOCKHOLDERS’ EQUITY





Preferred
Stock





We have
10,000,000 shares of preferred stock, par value $.0001, authorized, of which we
designated 12,950 as our Series A Convertible Preferred Stock in February 2008.
At June 30, 2009 and December 31, 2008 there were 1,006 shares of Series A
Convertible Preferred Stock issued and outstanding.





Series
A Preferred Stock and Related Dividends





On
February 11, 2008, we entered into a Securities Purchase Agreement with
accredited investors to sell, in a private placement transaction, 12,950 shares
of our Series A Convertible Preferred Stock (“Series A Preferred Stock”)
together with common stock purchase warrants to purchase an aggregate of
1,850,000 shares of our common stock. At closing, we received gross proceeds of
$12,950,000. The Series A Preferred Stock has a stated value per share of
$1,000, carries an 8% per annum dividend rate payable quarterly in arrears and
is convertible into common stock at $7.00 per share. The dividends are payable
in cash or shares of our common stock, at our option, subject to certain
provisions. If paid in shares of common stock, the stock shall be valued at the
lower of the conversion price or the average of the weighted average price of
the 10 consecutive trading days immediately preceding the dividend
date.





Upon
conversion of the Series A Preferred Stock, we are required to pay an amount
(the “Make-Whole Additional Amount”) equal to 8% of the stated value of the
shares converted or redeemed - essentially an extra year’s dividend. This amount
shall be paid in shares valued at the lower of the conversion price or 90% of
the weighted average price of our common stock for the 10 consecutive trading
days immediately preceding the date of notice.





A
registration statement covering the public resale of the shares of common stock
underlying the Series A Preferred Stock and the warrants was declared effective
by the Securities and Exchange Commission on April 23, 2008.





As of
June 30, 2009, holders of our Series A Preferred Stock have converted 11,944
shares of the 12,950 shares of the Series A Preferred Stock. Each share of
Series A Preferred stock was convertible into 142.8541 shares of common stock.
As a result of the conversion of the Series A Preferred Stock, we have issued
1,706,250 shares of our common stock, 41,967 shares of common stock in payment
of the accrued dividends, and 144,206 shares of common stock, the Make-Whole
Additional Amount.





The
1,850,000 warrants issued to purchasers of the Series A Preferred Stock,
exclusive of the 300,000 warrants issued to Roth Capital Partners, LLC (“Roth
Capital”) as a fee, were determined to have a fair value of $2.07 per warrant
with a total valuation of $3,829,500. Inputs used in making this determination
included:





·
            Value
      of $6.83 per share of common stock;·
            Expected
      volatility factor of 90%;·
            $0
      dividend rate on the common stock;·
            Warrant
      exercise price of $8.00;·
            Estimated
      time to exercise of 1 year; and·
            Risk
      free rate of 2.06%.





The
relative fair value of the warrants of $2,765,946 has been recorded as a
dividend in the year ended December 31, 2008





- 21
-


In
addition, under the provisions of EITF 98-5‘Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios’(“EITF 98-5”),and EITF 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments’" ("EITF 00-27”), the
Series A Preferred Stock issuance carried an embedded beneficial conversion
feature at issuance. Accordingly, after first allocating the proceeds received
from the Series A Preferred Stock offering to the preferred shares and
detachable warrants on a relative fair value basis, we derived an intrinsic
value of the conversion feature of $2,451,446. As the Series A Preferred Stock
does not have a stated redemption date or finite life, the deemed dividend
was recognized immediately as a non-cash charge during 2008. This non-cash
one-time preferred stock deemed dividend was calculated as the difference
between the average of our common stock price of $6.83 per share and the
calculated effective conversion price of the Series A Preferred Stock. The
effective conversion price of the Series A Preferred Stock was determined with
reference to the relative fair value allocation of proceeds between the Series A
Preferred Stock and Warrants issued. The non-cash deemed dividend did not have
an effect on net earnings, or cash flows for the six months ended June 30, 2009.
The estimated fair market value of the Warrants of $2,765,946 has been recorded
as additional paid-in capital and a reduction to the recorded amount of the
Series A Preferred Stock.





We paid
Roth Capital a fee of $1,295,000 for serving as the placement agent in the
Series A Preferred Stock Offering. Roth Capital also received 300,000 common
stock purchase warrants, exercisable at $8.00 per share for five years as part
of their fee. At February 11, 2008, the warrants granted to Roth Capital had a
fair value of $2.07 per share, totaling $621,000. The warrants issued to Roth
Capital have the same terms, and were valued in the same manner as the warrants
issued to the purchasers of the Series A Preferred Stock.





As a
result of our June 15, 2009 registered direct offering of our common stock
discussed below, we reduced to $1.85 per share the exercise price of warrants to
purchase 143,750 shares of our common stock with an exercise price of $8.00 per
share and the conversion price of 1,006 shares of our series A convertible
preferred stock outstanding that are convertible into 143,750 shares of our
common stock at a conversion price of $7.00 per share. The terms of these
warrants and preferred stock provide that if we sell common stock at a price per
share less than the then exercise price of the warrants or the conversion price
of the preferred stock, then we are required to reduce the exercise price of
those warrants and the conversion price of the series A convertible preferred
stock to the lower price of the subsequent sale. Because the market price
of our common stock in our June 15, 2009 offering was $1.85 per share, an amount
that is less than the exercise price of the $8.00 per share warrants and the
$7.00 per share conversion price, we reduced the exercise price of those
outstanding securities.





Common
Stock





We have
1,000,000,000 shares of common stock, par value $.0001, authorized. At June 30,
2009 there were 26,519,623 shares of common stock issued and outstanding and
there were 23,530,642 shares of common stock issued and outstanding at
December 31, 2008.





For the
six months ended June 30, 2009 and 2008, amortization of stock-based
compensation amounted to $1,122,803 and $848,364, respectively.





During
the six months ended June 30, 2009, we issued 1,050,000 shares of common stock
in connection with the exercise of common stock options at an exercise price of
$.01 with net proceeds of $10,000.





During
the second quarter of 2009 we issued 21,000 shares of our common stock to
Bazelon Less & Feldman, P.C. as compensation for legal services it provided
to us.  These shares were issued at $1.71 per share for a total
consideration of $36,000.





On June
16, 2009 we sold 2,702,704 shares of our common stock and warrants to purchase
up to 1,351,352 of common stock to accredited investors. The purchase price
per share of the common stock was $1.85. The warrants have an exercise
price of $2.31 per share and will be exercisable beginning 183 days following
the closing date for a period ending on the fifth anniversary of the initial
exercise date. The gross proceeds of this offering were $5,000,000 with
offering expenses of $190,000.  Management intends to use the proceeds
from this offering for general working capital purposes which may include
acquisitions of additional operations in China.





Stock
Repurchase Program





On
September 10, 2008, our board of directors authorized a stock repurchase program
to repurchase up to $2.5 million of our common stock through June 30, 2009. The
stock repurchase program was announced on September 12, 2008. The amount and
timing of specific repurchases are subject to market conditions, applicable
legal requirements and other factors deemed appropriate by our CEO and
President. Repurchases may be in open-market transactions or through privately
negotiated transactions, and our board of directors may discontinue the
repurchase program at any time. In January 2009, we purchased 1,500,000 shares
of our common stock at a price of $1.10 per share under this program from
Marc Siegel, our former president and director. This stock repurchase program
expired on June 30, 2009.


- 22
-


Reverse
Split/Forward Split





On
September 10, 2008, our board of directors approved a 1 for 100 shares
reverse split of our common stock (the “Reverse Split”) to be immediately
followed by a 100 for 1 forward split of our common stock (the
“Forward Split”). The Reverse Split/Forward Split was announced on September 19,
2008. Shareholders who held in the aggregate less than one share of common stock
following the Reverse Split were not included in the Forward Split. Rather, such
shares received a cash payment of $5.07 per share, the closing price of our
common stock as of September 19, 2008. Accordingly in 2008, we purchased 69,583
shares at a purchase price of $5.07 per share, which were redeemed.
These stock purchases were not part of the stock repurchase
program.





Stock
Incentive Plans





On August
16, 2006, our board of directors authorized the 2006 Equity Plan (the “2006
Equity Plan”) covering 10,000,000 shares of our common stock, which was approved
by a majority of our shareholders on August 16, 2006. At June 30, 2009 and
December 31, 2008 there were options outstanding to purchase an aggregate of
276,250 and 365,000 shares, respectively, of common stock outstanding under the
2006 Equity Plan at exercise prices ranging from $2.50 to $7.50 per
share.





On
October 19, 2006, our board of directors authorized the 2006 Stock Compensation
Plan (the “2006 Stock Compensation Plan”) covering 2,000,000 shares of our
common stock. As the 2006 Stock Compensation Plan was not approved by our
shareholders prior to October 19, 2007, we may no longer award incentive stock
options under this plan and any incentive stock options previously awarded under
the 2006 Stock Plan were converted into non-qualified options upon terms and
conditions determined by the board of directors, as nearly as is reasonably
practicable in their sole determination, to the terms and conditions of the
incentive stock options being so converted. At June 30, 2009 and December 31,
2008, there were options outstanding to purchase an aggregate of 556,740 and
414,590 shares, respectively of common stock outstanding under the 2006 Stock
Plan at exercise prices ranging from $.01 to $5.00 per share.





During
2008, we granted 240,000 options under the 2006 Equity Plan to employees with an
exercise price of $5.00 to $7.50 per share, of these options, 231,000 options
were canceled as of June 30, 2009. The options were valued on the date of grant
using the Black-Scholes option-pricing model, in accordance with SFAS
No. 123R using the following weighted-average assumptions: expected
dividend yield 0%, risk-free interest rate of 2.51%, volatility of 78%
and expected term of 1.31 years.





On April
25, 2008, our board of directors adopted the 2008 Executive Stock Incentive Plan
covering 1,000,000 shares of our common stock, which was approved by a majority
vote of our shareholders on May 30, 2008. As of June 30, 2009 no awards had been
granted under this plan.





On April
25, 2008, our board of directors adopted the 2008 Non-Executive Stock Incentive
Plan covering 3,000,000 shares of our common stock, which was approved by a
majority vote of our shareholders on May 30, 2008. As of June 30, 2009 we
granted 268,648 shares of restricted stock under this plan with vesting dates
ranging from August 2008 to September 2010.





The
following table sets forth our stock option activity during the six months ended
June 30, 2009:








Shares
      underlying options
                  
                  
                  Weighted
      average exercise priceOutstanding
      at December 31, 2008
                  
                  
                  6,440,220
                  
                  
                  $
                  5.71Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  1,050,000
                  
                  
                  
                  0.01Expired
      or cancelled
                  
                  
                  103,750
                  
                  
                  
                  5.30Outstanding
      at June 30, 2009
                  
                  
                  5,286,470
                  
                  
                  $
                  10.30







- 23
-


The
weighted average remaining contractual life and weighted average exercise price
of options outstanding at June 30, 2009, for selected exercise price ranges, are
as follows:








Range
      of exercise prices
                          
                          
                          Number
      of options outstanding
                          
                          
                          Weighted
      average remaining contractual life (Years)
                          
                          
                          Weighted
      average exercise price
                          
                          
                          Options
      Exercisable
                          
                          
                          Weighted
      average exercise price of options exercisable$
                          2.25
                          
                          
                          
                          400
                          
                          
                          
                          5.81
                          
                          
                          $
                          2.25
                          
                          
                          
                          400
                          
                          
                          $
                          2.252.50
                          
                          
                          
                          492,490
                          
                          
                          
                          2.75
                          
                          
                          
                          2.50
                          
                          
                          
                          492,490
                          
                          
                          
                          2.503.00
                          
                          
                          
                          50,000
                          
                          
                          
                          1.75
                          
                          
                          
                          3.00
                          
                          
                          
                          50,000
                          
                          
                          
                          3.005.00
                          
                          
                          
                          1,221,000
                          
                          
                          
                          2.75
                          
                          
                          
                          5.00
                          
                          
                          
                          1,221,000
                          
                          
                          
                          5.007.50
                          
                          
                          
                          1,387,000
                          
                          
                          
                          3.75
                          
                          
                          
                          7.50
                          
                          
                          
                          1,387,000
                          
                          
                          
                          7.5010.00
                          
                          
                          
                          1,375,000
                          
                          
                          
                          4.75
                          
                          
                          
                          10.00
                          
                          
                          
                          1,375,000.00
                          
                          
                          
                          10.0015.00
                          
                          
                          
                          500
                          
                          
                          
                          1.43
                          
                          
                          
                          15.00
                          
                          
                          
                          500
                          
                          
                          
                          15.0030.00
                          
                          
                          
                          760,000
                          
                          
                          
                          3.75
                          
                          
                          
                          30.00
                          
                          
                          
                          760,000
                          
                          
                          
                          30.0056.25
                          
                          
                          
                          80
                          
                          
                          
                          5.92
                          
                          
                          
                          56.25
                          
                          
                          
                          80
                          
                          
                          
                          56.255,286,470
                          
                          
                          
                          
                          
                          
                          $
                          10.30
                          
                          
                          
                          5,286,470
                          
                          
                          $
                          10.30








During
the six months ended June 30, 2009, 1,050,000 options were exercised at an
exercise price of $.01 per share with an intrinsic value of $1,462,130. At June
30, 2009, the aggregate intrinsic value of outstanding and exercisable options
was $0. As of June 30, 2009, the unrecognized expense of options that have not
vested is $36,583.





Common
Stock Purchase Warrants





During
2008, we granted 25,000 common stock purchase warrants to consultants,
exercisable immediately at an exercise price of $11.00. These warrants were fair
valued on the date of grant at $103,707 using the Black-Scholes option-pricing
model, in accordance with SFAS No. 123R using the following weighted-average
assumptions: expected dividend yield of 0%, risk-free interest rate of 3.0%,
volatility factor of 100% and expected term of 3 years. The fair value of these
grants was recognized as selling, general and administrative
expenses.





In
February 2008, in connection with the $12,950,000 Series A Preferred Stock
offering, we issued a total of 2,150,000 common stock purchase warrants,
including 1,850,000 warrants issued to investors and 300,000 warrants issued to
Roth Capital as the placement agent as part of their fee. The warrants are
exercisable at $8.00 per share for a period of five years and were fair valued
at $2.07 per warrant using the Black-Scholes Option-pricing model. Assumptions
used in the calculation included: expected dividend yield of 0%; risk-free
interest rate of 2.06%; volatility factor of 90% and expected term of 1
year.





On June
16, 2009 we sold 2,702,704 shares of our common stock and warrants to purchase
up to 1,351,352 of common stock to accredited investors. The purchase price per
share of the common stock was $1.85. The warrants have an exercise price of
$2.31 per share and will be exercisable beginning 183 days following the closing
date for a period ending on the fifth anniversary of the initial exercise date.
The gross proceeds of this offering were $5,000,000 with offering expenses of
$190,000.  Management intends to use the proceeds from this offering
for general working capital purposes which may include acquisitions of
additional operations in China.





As a
result of our June 15, 2009 registered direct offering of our common stock, we
reduced the per share exercise price of warrants to purchase 143,750 shares of
our common stock from $8.00 to $1.85.  A summary of the status of our
outstanding common stock purchase warrants granted as of June 30, 2009 and
changes during the period is as follows:


- 24
-





Shares
      underlying warrants
                  
                  
                  Weighted
      average exercise priceOutstanding
      at December 31, 2008
                  
                  
                  4,618,312
                  
                  
                  $
                  8.49Granted
                  
                  
                  1,351,352
                  
                  
                  
                  2.31Exercised
                  
                  
                  -
                  
                  
                  
                  -Expired
      or cancelled
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at June 30, 2009
                  
                  
                  5,969,664
                  
                  
                  $
                  6.94Exercisable
      at June 30, 2009
                  
                  
                  4,618,312
                  
                  
                  $
                  8.29








The
following information applies to all warrants outstanding at June 30,
2009.










Warrants
      Outstanding
                    
                    
                    WarrantsExercisableWeightedAverage
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    WeightedRemaining
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageRange
      of
                    
                    
                    
                    
                    
                    Contractual
                    
                    
                    Exercise
                    
                    
                    
                    
                    
                    ExerciseExercise
      prices
                    
                    
                    Shares
                    
                    
                    Life
      (Years)
                    
                    
                    Price
                    
                    
                    Shares
                    
                    
                    Price$
                    1.85
                    
                    
                    
                    143,750
                    
                    
                    
                    4.12
                    
                    
                    $
                    1.85
                    
                    
                    
                    143,750
                    
                    
                    $
                    1.852.31
                    
                    
                    
                    1,351,352
                    
                    
                    
                    4.95
                    
                    
                    
                    2.31
                    
                    
                    
                    -
                    
                    
                    
                    2.312.5
                    
                    
                    
                    50,000
                    
                    
                    
                    2.92
                    
                    
                    
                    2.50
                    
                    
                    
                    50,000
                    
                    
                    
                    2.504
                    
                    
                    
                    473,750
                    
                    
                    
                    2.79
                    
                    
                    
                    4.00
                    
                    
                    
                    473,750
                    
                    
                    
                    4.007.50
                    
                    
                    
                    60,000
                    
                    
                    
                    1.39
                    
                    
                    
                    7.50
                    
                    
                    
                    60,000
                    
                    
                    
                    7.508.00
                    
                    
                    
                    1,906,250
                    
                    
                    
                    4.12
                    
                    
                    
                    8.00
                    
                    
                    
                    2,050,000
                    
                    
                    
                    8.0010.00
                    
                    
                    
                    1,869,562
                    
                    
                    
                    2.74
                    
                    
                    
                    10.00
                    
                    
                    
                    1,869,562
                    
                    
                    
                    10.0011.00
                    
                    
                    
                    25,000
                    
                    
                    
                    2.27
                    
                    
                    
                    11.00
                    
                    
                    
                    25,000
                    
                    
                    
                    11.0015.00
                    
                    
                    
                    90,000
                    
                    
                    
                    1.39
                    
                    
                    
                    15.00
                    
                    
                    
                    90,000
                    
                    
                    
                    15.005,969,664
                    
                    
                    
                    
                    
                    
                    $
                    6.94
                    
                    
                    
                    4,618,312
                    
                    
                    $
                    8.29











NOTE
12 - SEGMENT INFORMATION





The
following information is presented in accordance with SFAS No. 131, “Disclosure about segments of an
Enterprise and Related Information”. For second quarter of 2009, we
operated in three reportable business segments as follows:





Magnesium
segment:





•
                
                Chang
      Magnesium;•
                
                Chang
      Trading;•
                
                Excel
      Rise;•
                
                CDI
      Magnesium;•
                
                Asia
      Magnesium;•
                
                Golden
      Magnesium;•
                
                Pan
      Asia Magnesium;•
                
                Baotou
      Changxin Magnesium





- 25
-


Basic
Materials segment:





•
                
                Lang
      Chemical;•
                
                CDI
      Jingkun Zinc;•
                
                CDI
      Jixiang Metal;•
                
                CDI
      Metal Recycling; and•
                
                CDI
      Beijing.





Consulting
segment:





•
              
              China
      Direct Investments;•
              
              CDI
      Shanghai Management; and•
              
              Capital
      One Resource*.





* Capital
One Resource generated revenues in two reporting segments, Magnesium and
Consulting.





Our
reportable segments are strategic business units that offer different products
and services. Each segment is managed and reported separately based on the
fundamental differences in their operations. CDI Metal Recycling was formerly in
our Clean Technology Segment, which we exited during the third quarter in 2008.
CDI Metal Recycling is in its start up phase and has no significant operations.
Condensed consolidated information with respect to these reportable segments
after giving effect to our decision to exit the clean technology segment for the
three and six months ended June 30, 2009 and 2008 are as follows:





For the
three months ended June 30, 2009:








(In
      thousands)
                    
                    Magnesium
                    
                    
                    Basic
      Materials
                    
                    
                    Consulting
                    
                    
                    ConsolidatedRevenues
                    
                    $
                    8,091
                    
                    
                    $
                    10,005
                    
                    
                    $
                    322
                    
                    
                    $
                    18,418Revenues
      – related party
                    
                    
                    2,008
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    2,00810,099
                    
                    
                    
                    10,005
                    
                    
                    
                    322
                    
                    
                    
                    20,426Interest
      income (expense)
                    
                    
                    19
                    
                    
                    
                    54
                    
                    
                    
                    (160
                    )
                    
                    
                    (87
                    )Net
      income (loss) attributable to China Direct Industries,
Inc.
                    
                    
                    (1,126
                    )
                    
                    
                    56
                    
                    
                    
                    (1,818
                    )
                    
                    
                    (2,888
                    )Segment
      Assets at June 30, 2009
                    
                    $
                    45,750
                    
                    
                    $
                    10,615
                    
                    
                    $
                    44,449
                    
                    
                    $
                    100,814








For the
three months ended June 30, 2008:








(In
      thousands)
                    
                    Magnesium
                    
                    
                    Basic
      Materials
                    
                    
                    Consulting
                    
                    
                    ConsolidatedRevenues
                    
                    $
                    54,319
                    
                    
                    $
                    14,982
                    
                    
                    $
                    6,698
                    
                    
                    $
                    75,999Revenues
      – related party
                    
                    
                    1,345
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,34555,664
                    
                    
                    
                    14,982
                    
                    
                    
                    6,698
                    
                    
                    
                    77,344Interest
      income (expense)
                    
                    
                    (43
                    )
                    
                    
                    (29
                    )
                    
                    
                    215
                    
                    
                    
                    143Net
      income attributable to China Direct Industries, Inc.
                    
                    
                    3,001
                    
                    
                    
                    25
                    
                    
                    
                    4,559
                    
                    
                    
                    7,515Segment
      Assets
                    
                    $
                    84,883
                    
                    
                    $
                    10,770
                    
                    
                    $
                    27,997
                    
                    
                    $
                    123,650








- 26
-


For the
six months ended June 30, 2009:





(In
      thousands)
                  
                  Magnesium
                  
                  
                  Basic
      Materials
                  
                  
                  Consulting
                  
                  
                  ConsolidatedRevenues
                  
                  $
                  11,895
                  
                  
                  $
                  21,899
                  
                  
                  $
                  680
                  
                  
                  $
                  34,474Revenues
      – related party
                  
                  
                  6,637
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,63718,532
                  
                  
                  
                  21,899
                  
                  
                  
                  680
                  
                  
                  
                  41,111Interest
      income (expense)
                  
                  
                  (83
                  )
                  
                  
                  (14
                  )
                  
                  
                  56
                  
                  
                  
                  (41
                  )Net
      incomeattributable
      to China Direct Industries, Inc.
                  
                  
                  (1,123
                  )
                  
                  
                  16
                  
                  
                  
                  (3,236
                  )
                  
                  
                  (4,343
                  )Segment
      Assets
                  
                  $
                  45,750
                  
                  
                  $
                  10,615
                  
                  
                  $
                  44,449
                  
                  
                  $
                  100,814








For the
six months ended June 30, 2008








(In
      thousands)
                  
                  Magnesium
                  
                  
                  Basic
      Materials
                  
                  
                  Consulting
                  
                  
                  ConsolidatedRevenues
                  
                  $
                  98,263
                  
                  
                  $
                  27,380
                  
                  
                  $
                  9,016
                  
                  
                  $
                  134,659Revenues
      – related party
                  
                  
                  2,079
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  2,079100,342
                  
                  
                  
                  27,380
                  
                  
                  
                  9,016
                  
                  
                  
                  136,738Interest
      income (expense)
                  
                  
                  (63
                  )
                  
                  
                  (23
                  )
                  
                  
                  326
                  
                  
                  
                  240Net
      income attributable to China Direct Industries, Inc.
                  
                  
                  6,757
                  
                  
                  
                  134
                  
                  
                  
                  5,303
                  
                  
                  
                  12,194Segment
      Assets at December 31, 2008
                  
                  $
                  79,015
                  
                  
                  $
                  10,770
                  
                  
                  $
                  27,997
                  
                  
                  $
                  117,782








NOTE
13 - FOREIGN OPERATIONS





As of
June 30, 2009 the majority of our revenues and assets are associated with
subsidiaries located in the PRC. Assets at June 30, 2009, as well as
revenues for the second quarter and six months of 2009 were as
follows:








(In
      thousands)
                  
                  For
      the three months ended June 30, 2009United
      States
                  
                  
                  People’s
      Republic of China
                  
                  
                  TotalRevenues
                  
                  
                  243
                  
                  
                  
                  18,174
                  
                  
                  $
                  18,417Revenues
      – related party
                  
                  
                  -
                  
                  
                  
                  2,008
                  
                  
                  $
                  2,008243
                  
                  
                  
                  20,182
                  
                  
                  
                  20,425Identifiable
      assets
                  
                  
                  46,982
                  
                  
                  
                  53,831
                  
                  
                  $
                  100,813











(In
      thousands)
                  
                  For
      the six months ended June 30, 2009United
      States
                  
                  
                  People’s
      Republic of China
                  
                  
                  TotalRevenues
                  
                  
                  601
                  
                  
                  
                  33,873
                  
                  
                  $
                  34,474Revenues
      – related party
                  
                  
                  -
                  
                  
                  
                  6,637.00
                  
                  
                  $
                  6,637601
                  
                  
                  
                  40,510
                  
                  
                  
                  41,111Identifiable
      assets
                  
                  
                  46,982
                  
                  
                  
                  53,831
                  
                  
                  $
                  100,813








- 27
-


Assets at June 30, 2008, as well as revenues for the second quarter and six
months of 2008 were as follows:




(In
      thousands)
                    
                    For
      the three months ended June 30, 2008United
      States
                    
                    
                    People’s
      Republic of China
                    
                    
                    TotalRevenues
                    
                    $
                    6,632
                    
                    
                    $
                    69,367
                    
                    
                    $
                    75,999Revenues
      – related party
                    
                    
                    -
                    
                    
                    
                    1,345
                    
                    
                    
                    1,3456,632
                    
                    
                    
                    70,929
                    
                    
                    
                    77,344Identifiable
      assets
                    
                    $
                    26,557
                    
                    
                    $
                    97,093
                    
                    
                    $
                    123,650
 
 
 
 (In
      thousands)
                    
                    For
      the six months ended June 30, 2008United
      States
                    
                    
                    People’s
      Republic of China
                    
                    
                    TotalRevenues
                    
                    $
                    8,934
                    
                    
                    $
                    125,725
                    
                    
                    $
                    134,659Revenues
      – related party
                    
                    
                    -
                    
                    
                    
                    2,079
                    
                    
                    
                    2,0798,934
                    
                    
                    
                    128,601
                    
                    
                    
                    136,738Identifiable
      assets
                    
                    $
                    26,557
                    
                    
                    $
                    97,093
                    
                    
                    $
                    123,650




NOTE
14 – DISCONTINUED OPERATIONS





During
the third quarter of 2008, we elected to exit the alternative energy and
recycling business conducted by CDI Clean Technology. We devised a formal plan
of disposal of a majority ownership in these subsidiaries. The business of
CDI Clean Technology and its subsidiaries comprised substantially all of the
business of our Clean Technology segment. We classified the assets and
liabilities of CDI Clean Technology and its subsidiaries as “Subsidiaries held
for sale” in accordance with the provisions of FASB No. 144.





On
September 30, 2008, we ceased depreciating the assets of CDI Clean Technology
and its subsidiaries and as a result of the held for sale classification, we
assessed the estimated fair value of the subsidiary and no impairment charge was
recognized. The results of operations from CDI Clean Technology and its
subsidiaries are classified as discontinued operations in 2008 and previously
reported results of operations of CDI Clean Technology have been reclassified to
reflect this subsidiary as "Discontinued operations, net of tax". On October 30,
2008, we completed the sale of an 81% interest in our wholly owned subsidiary
CDI Clean Technology to PE Brothers Corp., for $1,240,000, recorded a gain of
$238,670 on the sale during the fourth quarter. We plan to maintain our 19%
ownership interest in CDI Clean Technology and recognize our investment
using the cost method.





The
following table sets forth the components of discontinued operations for the six
months ended June 30, 2008.





- 28
-


Subsidiaries
Held for Sale





For
      the six months
                            ended
      June 30, 2008Revenues
                          
                          $
                          796,682Cost
      of revenues
                          
                          
                          217,815Gross
      profit:
                          
                          
                          578,867Selling,
      general, and administrative
                          
                          
                          238,022Operating
      income
                          
                          
                          340,845Other
      income
                          
                          
                          (20,058
                          )Net
      (loss) income before income tax and non-controlling
    interest
                          
                          
                          320,787Income
      tax expense
                          
                          
                          (117,232
                          )Net
      income (loss) before non-controlling interest
                          
                          
                          203,555Non-controlling
      interest in income of subsidiary
                          
                          
                          (130,198
                          )Net
      Income
                          
                          
                          73,357





NOTE
15 – SUBSEQUENT EVENTS
 
 In
accordance with SFAS 165 Subsequent Events we have
evaluated all events that occurred after the balance sheet date but before
financial statements were available to be issued through August 14, 2009.
  In July
2009, we entered into a non-binding letter of intent to form Jinan Zhongsen
Machinery Manufacturing Company, Limited, a heavy truck parts manufacturer in
the PRC to invest approximately $3.3 million over the next two years to obtain a
45% interest in the venture. The letter of intent is intended to be non-binding
and is subject to all necessary due diligence, our board of directors’ approval
and execution of definitive agreements.


- 29
-


Item 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.





The
following discussion should be read in conjunction with the information
contained in our unaudited consolidated financial statements and the notes
thereto appearing elsewhere herein and in conjunction with the Management’s
Discussion and Analysis set forth in our Annual Report on Form 10-K for the year
ended December 31, 2008.





We are on
a calendar year, as such the three month period ending June 30, is our second
quarter and the six month period ending June 30 is referred to as the “six
months”. The year ended December 31, 2008 is referred to as “2008” and the
coming year ending December 31, 2009 is referred to as “2009”.





OVERVIEW
OF OUR PERFORMANCE AND OPERATIONS





Our
Business





We are a
U.S. company that manages a portfolio of Chinese entities. We also provide
consulting services to Chinese businesses. We operate in three identifiable
segments, Magnesium, Basic Materials, and Consulting, in accordance with SFAS
No. 131, “Disclosure about
segments of an Enterprise and Related Information”. In the fourth quarter
of 2006 we established our Magnesium and Basic Materials segments which have
grown through acquisitions of controlling interests of Chinese private
companies. We consolidate these acquisitions as either our wholly or majority
owned subsidiaries. Through this ownership control, we provide management advice
as well as investment capital to expand their businesses. We hold a controlling
interest in twelve subsidiaries operating in China, five of which comprise our
Magnesium segment and five comprise our Basic Materials segment. We have a total
of 1,297 full-time employees, of which 1,281 work in the PRC.





Our
Magnesium segment is currently our largest segment by revenues and assets. We
manufacture and sell pure magnesium and related by-products. We also purchase
and resell magnesium products manufactured by third parties. Magnesium is used
in a variety of markets and applications due to the physical and mechanical
properties of the element and its alloys. Magnesium is the lightest of the
structural metals; it is one fourth the weight of steel and two thirds the
weight of aluminum. Various forms of magnesium are also used in the manufacture
of electronic equipment such as computers, cameras, and cellular phones.
Magnesium powder is also used in flares, flashes and pyrotechnics. Global
production of magnesium was estimated to be approximately 805,000 metric tons in
2008. China produced an estimated 630,000 metric tons in 2008, of which 160,000
metric tons were consumed domestically. During the second quarter of 2009 our
Magnesium segment produced, sold or distributed approximately 4,007 metric tons
of magnesium generating revenues of $10.1 million compared to the production,
sale and distribution of 14,955 metric tons and revenues of $55.7 million in the
second quarter of 2008.





Our Basic
Materials segment engages in the sale and distribution of basic resources within
Asia. Our Basic Materials segment includes the sale and distribution of a
variety of products including (i) industrial grade synthetic chemicals, (ii)
steel products (iii) nonferrous metals, and (iv) recycled materials. As
well, within this segment we hold the rights to mining properties and are
evaluating the economic feasibility of commencing mining and production
operations at this site given the current weakness in the market price of zinc
and related products. Presently we do not have a timetable for when our
mining operations will commence. In the second quarter of 2009 this segment
generated revenues of $10.0 million compared to $15.0 million in the second
quarter of 2008.





Our
Consulting segment provides services to Chinese entities seeking access to the
U.S. capital markets. These services include general business consulting,
Chinese regulatory advice, translation services, formation of entities in the
PRC, coordination of professional resources, strategic alliances and
partnerships, advice on effective means of accessing U.S. capital markets,
mergers and acquisitions, coordination of Sarbanes-Oxley compliance, and
corporate asset evaluations. In the second quarter of 2009 this segment
generated revenues of $322,386 compared to $6.7 million in the second quarter of
2008.





Our
Performance





Total
revenues for the second quarter of 2009 totaled $20.4 million compared to $77.3
million during the second quarter in 2008 and $41.1 million for the six months
of 2009 compared to $136.7 million for the six months of 2008. The
decreases over the prior comparable periods for the second quarter of
approximately 74% and approximately 70% for the six months ended June 30, 2009,
were mainly due to the global economic slowdown which has adversely affected the
demand for magnesium and to a lesser extent affected our sales of basic
materials and revenues in our Consulting segment. Our gross profit (loss) for
the second quarter of 2009 totaled ($711,250) compared to $13.5 million in the
second quarter of 2008, and $657,566 for the six months of 2009 compared to
$23.4 million for the six months of 2008. This decrease in our profit margin was
mainly in our magnesium segment due to continued low market prices for
magnesium, higher historical costs of raw materials and inventory on hand and
the fixed costs of production and higher operating expenses in our Consulting
segment.


- 30
-


Our
Outlook





Over the
course of the last nine months we have witnessed a severe downturn in the demand
for and price of our magnesium products due to the continued weakness in the
global economy and the effects of a 10% export tax on magnesium products which
became effective in January 2008. Furthermore, in 2008 domestic magnesium
consumption in China decreased to 160,000 metric tons, the second domestic
decline since 2003. The continued weakness in the global economy has reduced
demand for magnesium and as a result the average price of magnesium during the
second quarter of 2009 was approximately $2,200, down from $2,400 in the first
quarter of 2009 and significantly lower than $4,500 average price during the
second quarter of 2008. Current magnesium prices have, however, shown signs of
stabilization and recovery. As a result, we are evaluating strategic initiatives
in our magnesium segment which may involve consolidation of our magnesium
holdings, opportunistic acquisitions and potential divestiture of non-strategic
assets. Additionally, we have formed International Magnesium Group, Inc. as the
vehicle to consolidate our strategic magnesium operations and to create an
identifiable brand name to unify our marketing efforts for these
operations.





We intend
to continue to explore external expansion in our basic materials related
businesses in an effort to further diversify our revenue base. An example of
this effort is the recent launch of our industrial commodities trading business
to leverage our relationships with our strategic partners and subsidiaries in
China. We also continue to work with the management of our subsidiaries to
identify strategies to maximize their potential within their segment and to the
consolidated group. Furthermore, we entered into a non-binding letter of intent
to form Jinan Zhongsen Machinery Manufacturing Company, Limited, a heavy truck
parts manufacturer in the PRC to invest approximately $3.3 million over the next
two years to obtain a 45% interest in the venture. The letter of intent is
intended to be non-binding and is subject to all necessary due diligence, our
board of directors’ approval and execution of definitive
agreements.





The
worldwide economic slowdown continues to negatively impact the market price for
zinc. At current market prices for zinc, it is not economically feasible for us
to commence operations at our zinc property or to complete construction of a
planned zinc mining facility. We believe that prices for lead and lead
concentrate will remain stable in 2009 because the uses for lead are more
widespread than zinc. We will continue to operate as a distributor of steel and
nonferrous metals and believe that demand for these materials will increase as
worldwide economic activity increases and domestic consumption increases as a
result of the November 2008 China domestic stimulus program.





Recycling. We continue
to evaluate the feasibility of the development of a proposed facility to create
aluminum powder from recycled aluminum. While the current market price of
aluminum does not support the economic viability of a recycling operation, we
believe aluminum wire recycling will become viable as natural resources continue
to be depleted.





While we
have made efforts to improve the caliber of the clients within our Consulting
segment, the global economy and severe liquidity crisis in the capital markets
have created a difficult environment for smaller companies to attract interest
in the financial community. Accordingly, we do not anticipate this segment
will grow in 2009.





PRC Government Programs. In
November 2008, the Chinese government announced a $586 billion domestic economic
stimulus program aimed at bolstering economic activity in China. The two year
program includes tax rebates, spending in housing, infrastructure, agriculture,
health care and social welfare, and a tax deduction for capital spending by
companies. In February 2009, China's State Council announced support plans for
the country's nonferrous metals and logistics sectors. The support plans include
subsidized loans to support technical innovations within the nonferrous metals
sector, adjustments to export rebate rates of nonferrous products, and the
establishment of a national reserve system for the industry. These programs
adopted by the PRC government are aimed towards supporting growth in some of the
sectors in which we operate and there have been signs that the program, along
with China’s significant foreign currency reserves, has resulted in heavy
accelerated spending on building infrastructures and domestic spending on
automobiles and appliances. It is, however, difficult to predict if any of our
businesses will benefit. It remains to be seen if domestic consumption can
compensate for slower worldwide demand, and the impact this will have on our
future revenues.





Presentation of Financial
Statements. The presentation of the statements of operations included in
this Form 10-Q have been modified to allow for the reporting of deductions from
net income to arrive at income (loss) applicable to common stockholders. Items
reflected in our comprehensive income for the periods reported are now included
in our notes to the consolidated financial statements included in this Form
10-Q. In addition, portion of our consolidated financial statements have been
reclassified to recognize discontinued operations treatment reflecting the sale
of an 81% interest in CDI Clean Technology.





RESULTS
OF OPERATIONS





Consolidated
revenues and operating expenses by segment for the second quarter and six months
of 2009 and 2008 are as follows:


- 31
-


Consolidated
Revenues





For
      the second quarter of(Dollars
      in thousands)
                
                2009
                
                
                2008Revenues
                
                
                %
      of Revenues
                
                
                Revenues
                
                
                %
      of Revenues
                
                
                %
      increase (decrease)Magnesium
      segment
                
                $
                10,099
                
                
                
                49
                %
                
                $
                55,665
                
                
                
                72
                %
                
                
                -82
                %Basic
      materials segment
                
                
                10,005
                
                
                
                49
                %
                
                
                14,982
                
                
                
                19
                %
                
                
                -33
                %Consulting
      segment
                
                
                322
                
                
                
                2
                %
                
                
                6,698
                
                
                
                9
                %
                
                
                -95
                %Total
      consolidated
                
                $
                20,426
                
                
                
                100
                %
                
                $
                77,345
                
                
                
                100
                %
                
                
                -74
                %








For
      the six months ended June 30,(Dollars
      in thousands)
                
                2009
                
                
                2008Revenues
                
                
                %
      of Revenues
                
                
                Revenues
                
                
                %
      of Revenues
                
                
                %
      increase (decrease)Magnesium
      segment
                
                $
                18,532
                
                
                
                45
                %
                
                $
                100,343
                
                
                
                72
                %
                
                
                -82
                %Basic
      materials segment
                
                
                21,899
                
                
                
                53
                %
                
                
                27,380
                
                
                
                19
                %
                
                
                -20
                %Consulting
      segment
                
                
                681
                
                
                
                2
                %
                
                
                9,016
                
                
                
                9
                %
                
                
                -92
                %Total
      consolidated
                
                $
                41,112
                
                
                
                100
                %
                
                $
                136,739
                
                
                
                100
                %
                
                
                -70
                %





Total
consolidated revenues for the second quarter of 2009 were $20.4 million, a
decrease of 74% compared to the first quarter of 2008, and for the six months of
2009 were $41.1 million, a decrease of 70% compared to the six months of 2008.
These decreases were primarily a result of a decrease in revenues within our
Magnesium segment as a result of weak world-wide demand for magnesium, a decline
in revenues in our Lang Chemical subsidiary, the absence of one-time transaction
fees in our Consulting segment in the first quarter of 2009 that we recognized
in the second quarter of 2008 and a reduction in recurring consulting fees for
the six months of 2009 as a result of the reduction in the market price of the
fixed number of securities we received from our client companies as fees. These
decreases were partially offset by increases in sales in our Basic materials
segment of wood and steel products from our CDI Beijing subsidiary which we
acquired in June 2008.





- 32
-


Consolidated
Operating Income and Expenses





For
      the second quarter of(Dollars
      in thousands)
                
                2009
                
                
                2008Amount
                
                
                %
      of Revenues
                
                
                Amount
                
                
                %
      of Revenues
                
                
                %
      increase (decrease)Revenues
                
                
                20,425
                
                
                
                -
                
                
                
                77,344
                
                
                
                -
                
                
                
                -74
                %Cost
      of revenues
                
                
                21,136
                
                
                
                103
                %
                
                
                63,894
                
                
                
                83
                %
                
                
                -67
                %Gross
      profit
                
                
                (711
                )
                
                
                -3
                %
                
                
                13,450
                
                
                
                17
                %
                
                
                -105
                %Total
      operating expenses
                
                
                2,420
                
                
                
                12
                %
                
                
                2,487
                
                
                
                3
                %
                
                
                -3
                %Operating
      (loss) income
                
                
                (3,131
                )
                
                
                -15
                %
                
                
                10,963
                
                
                
                14
                %
                
                
                -129
                %








For
      the six months ended June 30,(Dollars
      in thousands)
                
                2009
                
                
                2008Amount
                
                
                %
      of Revenues
                
                
                Amount
                
                
                %
      of Revenues
                
                
                %
      increase (decrease)Revenues
                
                
                41,112
                
                
                
                -
                
                
                
                136,738
                
                
                
                -
                
                
                
                -70
                %Cost
      of revenues
                
                
                40,454
                
                
                
                98
                %
                
                
                113,308
                
                
                
                83
                %
                
                
                -64
                %Gross
      profit
                
                
                658
                
                
                
                2
                %
                
                
                23,430
                
                
                
                17
                %
                
                
                -97
                %Total
      operating expenses
                
                
                5,519
                
                
                
                13
                %
                
                
                4,098
                
                
                
                3
                %
                
                
                35
                %Operating
      (loss) income
                
                
                (4,861
                )
                
                
                -12
                %
                
                
                19,333
                
                
                
                14
                %
                
                
                -125
                %





Total
consolidated operating loss for the second quarter in 2009 was $3.1 million
compared to the operating income during the second quarter of 2008 of $11.0
million, and for the six months of 2009 a loss of $4.9 million compared to
operating income of $19.3 million for the six months of 2008. The loss in 2009
compared to the income in 2008 was due primarily to the 82% decrease in revenues
in the Magnesium segment, the substantial reduction in the market price of
magnesium, higher historical costs of raw materials and inventory on hand
relative to current selling prices, the relatively higher costs of magnesium
production at lower volumes and increases in our operating expenses related to
increases in non-cash stock based compensation expenses, payroll expense and
professional fees.





In the
second quarter of 2009 our cost of revenues was $21.1 million, a 67% decrease
compared to the second quarter of 2008, and for the six months of 2009 was $40.5
million, a decrease of 64% compared to the six months of 2008. These decreases
are primarily a result of a decrease in production and raw material costs
associated with a reduction in sales volume. Our gross profit margin for the
second quarter of 2009 increased to (3%) from 17.4% in the second quarter of
2008. Our gross profit in the second quarter of 2009 was ($711,250), a decrease
of $14.2 million compared to the second quarter of 2008, and for the six months
of 2009 was $657,566, a decrease of $22.7 million compared to the six months of
2008. The changes in our cost of revenues and gross profit are primarily a
result of higher historical costs of raw materials and inventory on hand
relative to current magnesium selling prices and fixed production costs within
our Magnesium segment.





Operating
expenses decreased $66,904 in the second quarter of 2009 compared to the second
quarter of 2008, and for the six months of 2009 were $5.5 million, an increase
of $1.4 million or 35% compared to the six months of 2008. The
decrease in the second quarter was primarily a result of timing differences in
sales related expenses. The increase in the six month period was primarily
a result of non-cash stock based compensation expenses, payroll expense and
professional fees.


- 33
-


Segment
Information





A summary
of our operating results, by segment, for the second quarter and six month
periods of 2009 and 2008 are as follows:





Three
months ended June 30, 2009 and 2008:








(in
      thousands)
                      
                      Magnesium
                      
                      
                      Basic
      Materials
                      
                      
                      Consulting
                      
                      
                      Consolidated2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Revenues
                      
                      $
                      8,091
                      
                      
                      $
                      54,320
                      
                      
                      $
                      10,005
                      
                      
                      $
                      14,982
                      
                      
                      $
                      322
                      
                      
                      $
                      6,698
                      
                      
                      $
                      18,418
                      
                      
                      $
                      76,000Revenues
      - Related Party
                      
                      
                      2,008
                      
                      
                      
                      1,345
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      2,008
                      
                      
                      
                      1,34510,099
                      
                      
                      
                      55,665
                      
                      
                      
                      10,005
                      
                      
                      
                      14,982
                      
                      
                      
                      322
                      
                      
                      
                      6,698
                      
                      
                      
                      20,426
                      
                      
                      
                      77,345Cost
      of Revenues
                      
                      
                      11,430
                      
                      
                      
                      48,845
                      
                      
                      
                      9,478
                      
                      
                      
                      14,609
                      
                      
                      
                      229
                      
                      
                      
                      440
                      
                      
                      
                      21,137
                      
                      
                      
                      63,894Gross
      Profit
                      
                      
                      -1,331
                      
                      
                      
                      6,820
                      
                      
                      
                      527
                      
                      
                      
                      373
                      
                      
                      
                      93
                      
                      
                      
                      6,258
                      
                      
                      
                      (711
                      )
                      
                      
                      13,451Total
      Operatng Expenses
                      
                      
                      231
                      
                      
                      
                      506
                      
                      
                      
                      501
                      
                      
                      
                      320
                      
                      
                      
                      1,688
                      
                      
                      
                      1,661
                      
                      
                      
                      2,420
                      
                      
                      
                      2,487Operating
      Income (Loss)
                      
                      $
                      (1,562
                      )
                      
                      $
                      6,314
                      
                      
                      $
                      26
                      
                      
                      $
                      53
                      
                      
                      $
                      (1,595
                      )
                      
                      $
                      4,597
                      
                      
                      
                      (3,131
                      )
                      
                      $
                      10,964





Six
months ended June 30, 2009 and 2008:








Magnesium
                  
                  
                  Basic
      Materials
                  
                  
                  Consulting
                  
                  
                  Consolidated2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues
                  
                  $
                  11,895
                  
                  
                  $
                  98,264
                  
                  
                  $
                  21,899
                  
                  
                  $
                  27,380
                  
                  
                  $
                  680
                  
                  
                  $
                  9,016
                  
                  
                  $
                  34,474
                  
                  
                  $
                  134,660Revenues
      - Related Party
                  
                  
                  6,637
                  
                  
                  
                  2,079
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,637
                  
                  
                  
                  2,07918,532
                  
                  
                  
                  100,343
                  
                  
                  
                  21,899
                  
                  
                  
                  27,380
                  
                  
                  
                  680
                  
                  
                  
                  9,016
                  
                  
                  
                  41,111
                  
                  
                  
                  136,738Cost
      of Revenues
                  
                  
                  19,519
                  
                  
                  
                  85,939
                  
                  
                  
                  20,662
                  
                  
                  
                  26,516
                  
                  
                  
                  273
                  
                  
                  
                  853
                  
                  
                  
                  40,454
                  
                  
                  
                  113,308Gross
      Profit
                  
                  
                  (987
                  )
                  
                  
                  14,404
                  
                  
                  
                  1,237
                  
                  
                  
                  864
                  
                  
                  
                  407
                  
                  
                  
                  8,163
                  
                  
                  
                  657
                  
                  
                  
                  23,430Total
      Operatng Expenses
                  
                  
                  764
                  
                  
                  
                  812
                  
                  
                  
                  1,230
                  
                  
                  
                  650
                  
                  
                  
                  3,489
                  
                  
                  
                  2,636
                  
                  
                  
                  5,518
                  
                  
                  
                  4,098Operating
      Income (Loss)
                  
                  $
                  (1,751
                  )
                  
                  $
                  13,592
                  
                  
                  $
                  7
                  
                  
                  $
                  214
                  
                  
                  $
                  (3,082
                  )
                  
                  $
                  5,527
                  
                  
                  $
                  (4,861
                  )
                  
                  $
                  19,333





Magnesium
Segment Operating Results





Revenues.
Magnesium segment revenues in the second quarter of 2009 were $10.1 million, a
decrease of 82% compared to the second quarter of 2008, and for the six months
of 2009 were $18.5 million, a decrease of 82% compared to the six months of
2008. These overall decreases were mainly due to the weak global economy which
has reduced demand and prices for magnesium and were partially offset by a $1.7
million increase in sales in the second quarter of 2009 compared to the first
quarter of 2009. The average price of magnesium during the second quarter of
2009 was approximately $2,235 compared to $4,791 during the second quarter of
2008, or a decrease of 53%. Contributing to the variance between 2009 and 2008
was higher demand and stockpiling of inventory in 2008 in expectation of
production shortages and/or transportation interruptions associated with the
2008 Beijing Olympics.





Revenues
– Related Party in the second quarter of 2009 were $2.0 million, an increase of
49% compared to the second quarter of 2008, and $6.6 million for the six months
of 2009, an increase of $4.6 million compared to the six months of 2008. These
increases were a result of sales at market prices of our excess inventory to a
minority shareholder of our Magnesium segment subsidiaries.





In the
second quarter of 2009 we produced, sold and distributed approximately 8,292
metric tons of magnesium with an average price of $2,235 per metric ton. In
comparison, for the second quarter of 2008 we produced, sold and distributed
approximately 29,000 metric tons of magnesium with an average price of $4,791
per metric ton.





- 34
-


Gross Profit
(loss). In the second quarter of 2009 gross profit for the segment
decreased $8.1 million compared to the second quarter of 2008, and for the six
months of 2009 it decreased $15.4 million, compared to the six months of 2008.
The gross profit margin for this segment in the second quarter of 2009 was
(15.8%) compared to 12.25% for the second quarter of 2008 and for the six months
of 2009 it was (5.3%) compared to 14.4% in the six months of 2008. These
decreases are primarily a result of price concessions to a major customer, sales
of inventory on hand with a higher historical cost relative to current magnesium
selling prices and fixed production costs within our Magnesium segment. In
particular, in late 2009, we purchased material and finished product in
anticipation of the fulfillment of a fixed price supply contract with a major
customer. As magnesium prices declined rapidly, we made concessions under this
agreement to maintain our long term relationship with this customer that
contributed to our lower gross profit.





Operating
Expenses. In the second quarter of 2009 Magnesium segment operating
expenses were approximately $231,000, a decrease of 54% compared to
approximately $506,000 during the second quarter of 2008 primarily a result of
the collection of a bad debt previously written off and other adjustments,
partially offset by rising operating expenses. Operating expenses for the
six months of 2009 were about the same compared to the six months of 2008 while
sales were down from $100.3 million to $18.5 million about 80%
decrease. Sales were down while the operating expenses were up as a
percentage of sales because the Magnesium segments had to absorb the production
overhead that was normally included in the cost.





Basic
Materials segment





Revenues.
In the second quarter of 2009 Basic Materials segment revenues were $10.0
million, a decrease of 33% compared to the second quarter of 2008, and for the
six months of 2009 were $21.9 million, a decrease 20% compared to the six months
of 2008. Revenues in this segment benefited from the addition of $6.0 million in
sales of wood and steel products from CDI Beijing and were partially offset by a
decrease in sales of industrial chemical products by Lang Chemical as a result
of weak domestic demand for its industrial chemical products.





Gross
Profit. In the second quarter of 2009 gross profit for the segment
increased to $0.5 million, a gross profit margin of 6% compared to $0.4 million,
a gross profit margin of 2.5% for the second quarter of 2008. Gross profit
for the six months of 2009 were $1.2 million, a gross profit margin of 5.6%
compared to the 4.8% gross profit margin for the six months of 2008. This
margin improvement was due primarily to the contribution of CDI Beijing which
generated gross margins of 10% in the six months ended June 30, 2009 partially
offset by lower margins at Lang Chemical due to increases in shipping costs to
customers it incurred as it expands the size of its sales
territory.





Operating
Expenses. In the second quarter of 2009 Basic Materials segment operating
expenses were approximately $501,000 an increase compared to the second quarter
of 2008, and for the six months of 2009 were $1.2 million, an increase of 76%
compared to the six months of 2008. These increases are primarily a result of
increases in operating costs related to CDI Beijing which we acquired in June
2008 and increased operating expenses at Lang Chemical due to increases in
shipping costs to customers it incurred as it expands the size of its sales
territory.





Consulting
segment





Revenues.
In the second quarter of 2009 Consulting segment revenues were approximately
$322,000 compared to $6.7 million during the second quarter of 2008, and
approximately $681,000 for the six months of 2009, a decrease of $8.3 million
compared to the six months of 2008. These decreases are mainly due to the
absence of $5.39 million in one-time transaction fees in our Consulting segment
in the six months of 2009 that we recognized in the six months of 2008 and a
reduction in recurring consulting fees for the six months of 2009 as a result of
the reduction in the market price of the fixed number of securities we received
from our client companies as fees.





Gross
Profit. In the second quarter of 2009, gross profit for the segment
totaled approximately $93,000  compared to $6.3 million in the second
quarter of 2008, and for the six months of 2009 were $680,386 compared to $9
million for the second quarter of 2008 a decrease of 95% and 99%,
respectively. This decrease was primarily a result of a decrease in
revenues while overhead expenses increased. The gross profit margin in this
segment was 23% in the second quarter of 2009 compared to 91% in the second
quarter of 2008, and for the six months of 2009 was 59%, a decrease of 36 basis
points compared to the six months of 2008. The decrease in the margin was mainly
attributable to a reduction in revenues partially offset by a decrease in
professional fees associated with this segment as we provided these services
internally.





Operating
Expenses. In the second quarter of 2009 operating expenses, which include
general and administrative expenses for our U.S. headquarters and executive
management, were approximately $1.7 million, nearly the same as the second
quarter of 2008, and for the six months of 2009 were $3.5 million an increase of
38% compared to the six months of 2008. The increase was mainly due to increases
in non-cash stock based compensation expenses, payroll expense, professional
fees and approximately $94,000 in severance costs related to the elimination of
four employees. The estimated future savings as a result of the elimination of
these positions is approximately $250,000 per year.


- 35
-


Total
Other (Expense) Income





Total
other expense in the second quarter of 2009 was $569,680 compared to total other
income of $249,648 in the second quarter of 2008, and for the six months of 2009
total other expense was $684,692 and total other income of $500,664 for the
six months of 2008. Interest income is mainly comprised of interest from
short-term loans, largely offset by a net realized loss of $79,221 for the
quarter ended and $311,932 associated with the sale of marketable securities
available for sale during the second quarter of 2009.





Income
Tax Expense





Income
tax expense for the second quarter of 2009 was $13,492 compared to the income
tax expense of $716,791 during the second quarter of 2008, and for the six
months of 2009 an income tax benefit of $58,087, compared to an income tax
expense of $1.0 million for the six months of 2008. Income tax expense decreased
as a result of our net loss of $2.9 million in the second quarter of 2009
compared to net income of $7.5 million in the second quarter of 2008. Our income
tax benefit for the six months ended June 30, 2009 was mainly due to our year to
date net loss of $4.4 million compared to net income of $12.3 million in the six
months of 2008.





Net
(Loss) Income





Net loss
during the second quarter of 2009 was $2.9 million, a reduction of $10.4 million
compared to net income of $7.5 million in the second quarter of 2008. Net loss
for the six months of 2009 was $4.3 million, a decrease of $16.6 million
compared to net income of $12.3 million for six months of 2008. These
decreases are mainly due to the decrease in our total revenues and gross profit
margins while our operating expenses remained relatively high due to increases
in our operating expenses.





Foreign
Currency Translation Gain





The
functional currency of our subsidiaries operating in the PRC is the Chinese
dollar or Renminbi (“RMB”). The financial statements of our subsidiaries are
translated to U.S. dollars using period end rates of exchange for assets and
liabilities, and average rates of exchange (for the period) for revenues, costs,
and expenses. Net gains and losses resulting from foreign exchange transactions
are included in the consolidated statements of operations. As a result of these
translations, we reported a foreign currency translation loss of $64,083 for the
second quarter of 2009 and a gain of approximately $1.3 million for the second
quarter of 2008, and for the six months of 2009 a gain of $380,875 and a
gain of $3.1 million for the six months of 2008. This non-cash gain had the
effect of increasing our reported comprehensive income. See “Note 4 -
Comprehensive Income” included in the Notes to our unaudited consolidated
financial statements appearing elsewhere in this report.





Unrealized
Loss on Marketable Securities Available for Sale, Net of Income Tax





The
unrealized loss on marketable securities available for sale, net of income taxes
for the second quarter of 2009 totaled $207,261, compared to an unrealized loss
of $1.6 million for the second quarter of 2008, and for the six months of 2009
were $2.1 million, compared to an unrealized loss of $3.2 million for the six
months of 2008. These declines reflect a reduction in the fair value of
securities received from our client companies for consulting services. We
believe the declines are due in large part to the overall decline in global
market conditions during the first and second quarter of 2009.





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
At June 30, 2009 our working capital was $33.5 million compared to $37.5 million
atDecember 31,
2008.





Our cash
balance at June 30, 2009 totaled $13.8 million, a decrease of approximately $0.4
million over the balance at December 31, 2008. We have commitments of $2.2
million to increase the registered capital of CDI Beijing which will be
satisfied from working capital. We have no additional material capital
commitments.





The
continued implementation of our business model, which includes providing
investment capital to augment the growth of our portfolio companies and expand
our business through new accretive acquisitions, will in all likelihood require
additional capital. On June 15, 2009 we sold 2,702,702 shares of our common
stock, at a price of $1.85 per share and warrants to purchase up to an
additional 1,351,352 shares of common stock in a registered direct
offering. We received gross proceeds of approximately $5,000,000 before
placement agent fees of $150,000 and other expenses of the offering of
approximately $25,000. In addition, we have formed International Magnesium
Group, Inc. as the vehicle to consolidate our strategic magnesium operations and
to create an identifiable brand name to unify our marketing efforts for these
operations. Accordingly, we may raise additional capital through private or
public financing for this initiative and other acquisitions.


- 36
-


We have
an effective registration statement on Form S-3 which permits us to sell on
a delayed or continuous basis, shares of our common stock or other securities
along with certain selling shareholders at any time pursuant to a registration
statement that we filed pursuant to Rule 415 under the Securities Act of 1933.
The amount of our common stock which we or the selling shareholders are
permitted to sell pursuant to our prospectus dated August 1, 2008 is limited to
no more than one-third of the aggregate market value, during the period of 12
calendar months prior to the sale, of the voting and non-voting common equity
held by non-affiliates of our company. Based on this limitation and subtracting
the $5,000,000 raised in our June 15, 2008 offering, as of June 30, 2009, we and
the selling shareholders would be limited to selling no more than approximately
$7,400,000 of our common stock assuming there were no other sales within a 12
month period and a market price for our common stock of $1.72. We are evaluating
our ability to continue to use the Form S-3 registration statement.








The
following table provides certain selected balance sheet comparisons between June
30, 2009 and December 31, 2008








June
      30,
                      
                      
                      December
      31,
                      
                      
                      Increase
      /(in
      thousands)
                      
                      2009
                      
                      
                      2008
                      
                      
                      (decrease)
                      
                      
                      %Cash
                      
                      $
                      13,793
                      
                      
                      $
                      14,205
                      
                      
                      $
                      (412
                      )
                      
                      
                      -3
                      %Marketable
      securities
                      
                      
                      5,314
                      
                      
                      
                      7,730
                      
                      
                      
                      (2,416
                      )
                      
                      
                      -31
                      %Accounts
      receivable, net
                      
                      
                      5,874
                      
                      
                      
                      9,457
                      
                      
                      
                      (3,583
                      )
                      
                      
                      -38
                      %Inventories,
      net
                      
                      
                      9,993
                      
                      
                      
                      8,560
                      
                      
                      
                      1,433
                      
                      
                      
                      17
                      %Prepaid
      expenses and other assets
                      
                      
                      6,509
                      
                      
                      
                      8,127
                      
                      
                      
                      (1,618
                      )
                      
                      
                      -20
                      %Total
      current assets
                      
                      
                      51,427
                      
                      
                      
                      59,742
                      
                      
                      
                      (8,315
                      )
                      
                      
                      -14
                      %Property
      and equipment, net
                      
                      
                      44,642
                      
                      
                      
                      43,456
                      
                      
                      
                      1,186
                      
                      
                      
                      3
                      %Total
      assets
                      
                      
                      100,814
                      
                      
                      
                      107,379
                      
                      
                      
                      (6,565
                      )
                      
                      
                      -6
                      %-Accounts
      payable and accrued expenses
                      
                      
                      9,737
                      
                      
                      
                      8,590
                      
                      
                      
                      1,147
                      
                      
                      
                      13
                      %Advances
      from customers
                      
                      
                      1,504
                      
                      
                      
                      1,545
                      
                      
                      
                      (41
                      )
                      
                      
                      -3
                      %Other
      payables
                      
                      
                      1,406
                      
                      
                      
                      1,624
                      
                      
                      
                      (218
                      )
                      
                      
                      -13
                      %Total
      current liabilities
                      
                      $
                      17,883
                      
                      
                      $
                      22,228
                      
                      
                      $
                      (4,345
                      )
                      
                      
                      -20
                      %





We
maintain cash balances in the United States and China. At June 30, 2009 and
December 31, 2008, bank deposits by geographic area, was as
follows:





Country
                      
                      June
      30, 2009
                      
                      
                      December
      31, 2008United
      States
                      
                      $
                      8,689,503
                      
                      
                      
                      63
                      %
                      
                      $
                      6,640,672
                      
                      
                      
                      47
                      %China
                      
                      
                      5,103,222
                      
                      
                      
                      37
                      %
                      
                      
                      7,564,557
                      
                      
                      
                      53
                      %Total
      cash and cash equivalents
                      
                      $
                      13,792,725
                      
                      
                      
                      100
                      %
                      
                      $
                      14,205,229
                      
                      
                      
                      100
                      %








A
substantial portion of our cash balance, approximately $5.1 million at June 30,
2009, is in the form of RMB held in bank accounts at financial institutions
located in the PRC. Cash held in banks in the PRC is not insured. The value of
cash on deposit in China at June 30, 2009 has been converted based on the
exchange rate as of June 30, 2009. In 1996, the Chinese government introduced
regulations, which relaxed restrictions on the conversion of the RMB; however
restrictions still remain, including but not limited to restrictions on foreign
invested entities. Foreign invested entities may only buy, sell or remit foreign
currencies after providing valid commercial documents at only those banks
authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for
capital account items, including direct investments and loans, is subject to PRC
government approval. Chinese entities are required to establish and maintain
separate foreign exchange accounts for capital account items. We cannot be
certain Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB, especially with respect to
foreign exchange transactions. Accordingly, cash on deposit in banks in the PRC
is not readily deployable by us for purposes outside of China.


- 37
-


Current
assets as of June 30, 2009 totaled $51.4 million, a decrease of 14%, compared to
December 31, 2008. This decrease was mainly due to a decrease in prepaid
expenses and other current assets including related parties of $5.4 million, a
decrease in our accounts receivables of $3.6 million and a reduction in our
marketable securities held for sale of $2.5 million partially offset by an
increase in inventories of $1.4 million and accounts receivable – related
party of $2.7 million. Current liabilities as of June 30, 2009 totaled $17.9
million, a 20% decrease from our December 31, 2008 balance.





A summary
of total assets by segment at June 30, 2009 and at December 31, 2008 is as
follows:





(Dollars
      in thousands)
                            
                            June
      30, 2009
                            
                            
                            December
      31, 2008Magnesium
      segment
                            
                            $
                            55,365
                            
                            
                            $
                            62,646Basic
      materials segment
                            
                            
                            12,825
                            
                            
                            
                            9,158Consulting
      segment
                            
                            
                            32,624
                            
                            
                            
                            35,575Total
                            
                            $
                            100,814
                            
                            
                            $
                            107,379








Our
accounts receivables and accounts receivables related parties, net of allowances
for doubtful accounts, as of June 30, 2009 was $10.2 million, compared to $11.1
million as of December 31, 2008. Although this amount decreased by $0.9 million,
our accounts remained high as a result of longer payment terms offered to
customers. Our Magnesium and Basic Materials segments generally offer payment
terms to its customers of 90 days. We may, however, offer longer payment terms
to our customers in order remain competitive and increase sales. Our Consulting
segment generally receives full payment in advance for consulting services to be
provided, upon entering into a consulting agreement.





Inventories
as of June 30, 2009 were $10.0 million, an increase of $1.4 million compared to
December 31, 2008. This increase is due primarily to higher magnesium
inventories as a result of weak demand and increases in inventory in our Basic
Materials segment in anticipation of increased demand. Magnesium inventories
accounted for 80% and 91% of consolidated inventory levels at June 30, 2009 and
December 31, 2008, respectively.





Prepaid
expenses and other current assets consist of prepayments to vendors for
inventory, other receivables, loans receivable, assets acquired in the
acquisition of Pan Asia Magnesium, VAT tax refunds, and security deposits.
Prepaid expenses and other current assets as of June 30, 2009 were $6.5 million
compared to $8.1 million at December 31, 2008. This decrease is primarily a
result of amortization of the intangible asset that was part of the Pan Asia
Magnesium acquisition.





As of
June 30, 2009, restricted cash was $1.7 million, a 97% increase compared to
December 31, 2008.  Restricted cash is the cash deposited in banks to
help secure bank notes that businesses need for various reasons. Lang Chemical
currently issued a promissory note in the amount of $2.0 million secured by
restricted cash of $800,000.





Investment
in marketable securities decreased by $2.5 million in the second quarter
compared to December 31, 2008. This 33% decrease was due to the decrease in the
fair market value of our securities available for sale.





Property
plant and equipment increased by $1.2 million as of the second quarter compared
to December 31, 2008. This increase was due to additional equipment Golden
Magnesium acquired in 2009.


As of June 30, 2009, property use rights, net of allowances, increased by 117%
compared to December 31, 2008. The increase is due to a reclassification of
$689,087, net of accumulated amortization of $41,394,  from Pre-paid
expenses to land use rights to reflect Senrun Coal’s contribution of land use
rights to Golden Magnesium pursuant to the November 11, 2006 joint venture
agreement entered into among the parties. Pursuant to these land use rights
which permit construction of a magnesium production plant capable of producing
up to 20,000 tons of magnesium alloy products per year, Golden Magnesium built
its magnesium production plant on this land. The land use rights expire in
2057.





Accounts
payable and accrued expenses were $9.7 million in 2009, an increase of $1.2
million compared to $7.5 million in 2008. Accounts payable and accrued
expenses represent payables associated with the general operation of each
segment, including accrued payrolls. Advances from customers represent
prepayments for products, which have not yet been shipped. The increase was
primarily attributable to increased inventory purchases in our Basic Materials
segment.


- 38
-


Accounts
Payable related party as of June 30, 2009 was $1.6 million, a decrease of $5.9
million compared to $7.5 million at December 31, 2008. This decrease was a
result of payment or satisfaction of the amounts due to Pine Capital in the
amount of $2.9 million and Wheaton Group in the amount of $3.0
million.





CONSOLIDATED
STATEMENT OF CASH FLOWS





As of
June 30, 2009, our net decrease in cash totaled $412,504 and was comprised of
$2.8 million used in operating activities, $1.8 million used in investing
activities, $3.8 million provided by financing activities, and the effect
of prevailing exchange rates on our cash position of a positive
$413,591.





Cash
Used in Operating Activities





Net cash
used in operating activities for the six months of 2009 totaled $2,795,117 which
was primarily due to our net loss during the six months of 2009 of $4.3 million,
a decrease in our accounts payable and accounts payable-related parties of $6.0
million, and an increase in inventories of $1.4 million. These amounts were
mainly offset by a decrease in prepaid expenses and prepaid expenses-related
parties of $6.0 million, a net decrease in accounts receivable and accounts
receivable - related party of $1.0 million, our non-cash charges in depreciation
and amortization of $1.5 million, and stock-based compensation of $1.1
million.





As of
June 30, 2008 cash used inoperations of $2.8 million included our net
income of $12.3 million, our non-cash charges for depreciation and amortization
of $962,281, and stock-based compensation of $0.8 million, an increase in
accounts payable and accrued expenses of $2.6 million, and an increase in other
payables of $1 million. These increases in cash funds provided were partially
offset by an increase in inventories of $6.9 million, an increase in prepaid
expenses and other assets of $4.9 million, and an increase in accounts
receivable of $14.7 million.





Cash
Provided by (Used in) Investing Activities





Net cash
used in investing activities as of June 30, 2009 totaled $1,849,628. Cash used
was comprised of purchases of property plant and equipments of $2.9 million,
partially offset by payments received from loans granted to related party of
$546,881 and $483,723 of proceeds from the sale of marketable
securities.





Net cash
used in investing activities as of June 30, 2008 totaled $8.6 million. Cash used
was comprised of purchases of property plant and equipments of $7.4 million, an
increase in loans receivable of $1.1 million, and payments of loans to related
party of $1.6 million. These were partially offset by proceeds from the sale of
marketable securities of $428,395.





Cash
Used in Financing Activities





Net cash
provided by financing activities as of June 30, 2009 was $3.8 million. Cash
provided by financing activities was mainly comprised of proceeds from sale of
common stock of $5.0 million, proceeds from loans payable of $0.9 million, and
capital contributions from minority owners of $0.7 million. These were partially
offset by $1.7 million of payment for stock split/forward and stock repurchase,
and $0.8 million increase in restricted cash.





Net cash provided by financing
activities as of June 30, 2008 was $14.0 million. Cash provided by financing
activities was mainly comprised of proceeds from sale of preferred stock of
$13.0 million, proceeds from exercise of warrants and options of $2.8 million.
These were partially offset by a decrease in due to related party of $2.6
million, a decrease in loans payable of $1.9 million, and $1.5 million in
offering expenses.





Off
Balance Sheet Items





Under SEC
regulations, we are required to disclose our off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our
financial condition, such as changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. An off-balance sheet arrangement means
a transaction, agreement or contractual arrangement to which any entity that is
not consolidated with us is a party, under which we have:


- 39
-





•
                  
                  Any
      obligation under certain guarantee contracts,•
                  
                  Any
      retained or contingent interest in assets transferred to an unconsolidated
      entity or similar arrangement that serves as credit, liquidity or market
      risk support to that entity for such assets,•
                  
                  Any
      obligation under a contract that would be accounted for as a derivative
      instrument, except that it is both indexed to our stock and classified in
      stockholder’s equity in our statement of financial position,
      and•
                  
                  Any
      obligation arising out of a material variable interest held by us in an
      unconsolidated entity that provides financing, liquidity, market risk or
      credit risk support to us, or engages in leasing, hedging or research and
      development services with
us.





We do not
have any off-balance sheet arrangements that we are required to disclose
pursuant to these regulations. In the ordinary course of business, we enter into
operating lease commitments, purchase commitments and other contractual
obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United
States.





Critical
Accounting Policies





The
discussion and analysis of our financial condition and results of operations are
based upon our unaudited consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these unaudited consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.





A summary
of significant accounting policies is included in Note 2 to the unaudited
consolidated financial statements included in this quarterly report. Management
believes that the application of these policies on a consistent basis enables us
to provide useful and reliable financial information about our operating results
and financial condition.





Acquisitions





We
account for acquisitions using the purchase method of accounting in accordance
with SFAS No. 141. In each of our acquisitions for the periods presented, we
determined that fair values were equivalent to the acquired historical carrying
costs.





Recent
Accounting Pronouncements





In April
2009, the FASB issued three final Staff Positions (FSPs) intended to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities. FSP FAS 157-4,Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,
provides guidelines for making fair value measurements more consistent with the
principles presented in FASB Statement No. 157, Fair Value Measurements. FSP FAS
107-1 and APB 28-1,Interim
Disclosures about Fair Value of Financial Instruments, enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures. FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of
Other-Than-Temporary Impairments, provides additional guidance designed
to create greater clarity and consistency in accounting for and presenting
impairment losses on securities. We are currently evaluating the requirements of
these FSPs as well as the impact of the adoption on our consolidated financial
statements, if any.





In
January 2009, the FASB issued FSP EITF 99-20-1 to amend the impairment
guidance in EITF Issue No. 99-20 in order to achieve more consistent
determination of whether an other-than-temporary impairment (“OTTI”) has
occurred. This FSP amended EITF 99-20 to more closely align the OTTI guidance
therein to the guidance in Statement No. 115. Retrospective application to
a prior interim or annual period is prohibited. The guidance in this FSP was
considered in the assessment of OTTI for various securities at March 31,
2009.





In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities” ("SFAS 161”). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We have evaluated the requirements of SFAS 161 and it had no
impact on the preparation of our consolidated financial statements as of March
31, 2009.


- 40
-





In May
2008, the FASB issued FSP APB 14-1,Accounting for
Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 clarifies that convertible debt instruments
that may be settled in cash upon either mandatory or optional conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14,Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. We will adopt FSP APB 14-1 beginning in the
first quarter of fiscal 2009, and this standard must be
applied on a retrospective basis. We have evaluated the requirements of APB 14-1
and it had no impact on the preparation of our consolidated financial statements
as of March 31, 2009.





In May
2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted
Accounting Principles. This standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with generally accepted accounting principles in the
United States for non-governmental entities. SFAS No. 162 is effective 60 days
following approval by the U.S. Securities and Exchange Commission of the
Public Company Accounting Oversight Board’s amendments to AU Section 411,The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. We do not
expect SFAS No. 162 to have a material impact on the preparation of our
consolidated financial statements.





On
September 16, 2008, the FASB issued final FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-BasedPayment Transactions Are Participating Securities,” to address the
question of whether instruments granted in share-based payment transactions are
participating securities prior to vesting. The FSP determines that unvested
share-based payment awards that contain rights to dividend payments should be
included in earnings per share calculations. The guidance will be effective for
fiscal years beginning after December 15, 2008. We have evaluated the
requirements of EITF 03-6-1 and it had no impact on the preparation of our
consolidated financial statements as of March 31, 2009.





On
October 10, 2008, the FASB issued SFP No. 157-3,Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. This
FASB Staff Position clarifies the application of FASB Statement No. 157,
Fair Value Measurements, in a market that is not active and provides an example
to illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. Statement 157 was
issued in September 2006, and is effective for financial assets and financial
liabilities for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. We have adopted SFAS 157-3 and determined that it had no impact as
of March 31, 2009, and we will continue to evaluate the impact, if any, of SFAS
157-3 on our financial statements.





A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to our consolidated financial statements.





Cautionary
Note Regarding Forward-Looking Information and Factors That May Affect Future
Results





This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The Securities and Exchange Commission
encourages companies to disclose forward-looking information so that investors
can better understand a company’s future prospects and make informed investment
decisions. This Annual Report on Form 10-K and other written and oral statements
that we make from time to time contain such forward-looking statements that set
out anticipated results based on management’s plans and assumptions regarding
future events or performance. We have tried, wherever possible, to identify such
statements by using words such as “anticipate,” “estimate,” “expect,” “project,”
“intend,” “plan,” “believe,” “will” and similar expressions in connection with
any discussion of future operating or financial performance. In particular,
these include statements relating to future actions, future performance or
results of current and anticipated sales efforts, expenses, the outcome of
contingencies, such as legal proceedings, and financial results. A list of
factors that could cause our actual results of operations and financial
condition to differ materially is set forth below, and these factors are
discussed in greater detail under Item 1A – “Risk Factors” of our Annual Report
on Form 10-K for the year ended December 31, 2008:


- 41
-





•
                  
                  Continued
      global economic weakness is expected to reduce demand for our products in
      each of our segments.•
                  
                  Fluctuations
      in the availability of magnesium and in levels of customer
      demand.•
                  
                  Changes
      in the prices of magnesium and magnesium-related
  products.•
                  
                  Our
      ability to implement our business strategy of growing our business through
      increased magnesium production capacity and
  acquisitions.•
                  
                  Fluctuations
      in the cost or availability of coke gas and coal.•
                  
                  Loss
      of orders from any of our major customers.•
                  
                  The
      value of the equity securities we accept as compensation is subject to
      adjustment which could result in losses to us in future
      periods.•
                  
                  Our
      ability to effectively integrate our acquisitions and to manage our growth
      and our inability to fully realize any anticipated benefits of acquired
      business.•
                  
                  Our
      need for additional financing which we may not be able to obtain on
      acceptable terms, the dilutive effect additional capital raising efforts
      in future periods may have on our current shareholders and the increased
      interest expense in future periods related to additional debt
      financing.•
                  
                  Our
      dependence on certain key personnel.•
                  
                  Our
      ability to establish adequate management, cash, legal and financial
      controls in the PRC.•
                  
                  The
      lack various legal protections in certain agreements to which we are a
      party and which are material to our operations which are customarily
      contained in similar contracts prepared in the United
    States.•
                  
                  Potential
      impact of PRC regulations on our intercompany loans.•
                  
                  Our
      ability to assure that related party transactions are fair to our
      company.•
                  
                  Yuwei
      Huang, our executive vice president – magnesium, director and an officer
      of several of our magnesium subsidiaries is also an owner and executive
      officer of several companies which directly compete with our magnesium
      business.•
                  
                  Our
      ability to comply with the United States Foreign Corrupt Practices Act
      which could subject us to penalties and other adverse
      consequences.•
                  
                  Limits
      under the Investment Company Act of 1940 on the value of securities we can
      accept as payment for our business consulting services.•
                  
                  Our
      acquisition efforts in future periods may be dilutive to our then current
      shareholders.•
                  
                  The
      risks and hazards inherent in the mining industry on the operations of our
      basic materials segment.•
                  
                  The
      effect of changes resulting from the political and economic policies of
      the Chinese government on our assets and operations located in the
      PRC.•
                  
                  The
      impact of Chinese economic reform policies.•
                  
                  The
      influence of the Chinese government over the manner in which our Chinese
      subsidiaries must conduct our business activities.•
                  
                  The
      impact on future inflation in China on economic activity in
      China.•
                  
                  The
      impact of any recurrence of severe acute respiratory syndrome, or SAR’s,
      or another widespread public health problem.•
                  
                  The
      limitation on our ability to receive and use our revenues effectively as a
      result of restrictions on currency exchange in China.•
                  
                  Our
      ability to enforce our rights due to policies regarding the regulation of
      foreign investments in China.•
                  
                  Recent
      substantial declines in the market price for shares of our common stock
      and continued highly volatile and wide market price
      fluctuations.•
                  
                  The
      impact on our stock price due to sales of our stock by existing
      shareholders and stock option and warrant exercises and sales of shares of
      stock exercised pursuant to stock options.•
                  
                  Possible
      claim for underwriting fees and
expenses.





We
caution that the factors described herein and other factors could cause our
actual results of operations and financial condition to differ materially from
those expressed in any forward-looking statements we make and that investors
should not place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of anticipated or unanticipated events or
circumstances. New factors emerge from time to time, and it is not possible for
us to predict all of such factors. Further, we cannot assess the impact of each
such factor on our results of operations or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.


- 42
-





Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk.





Foreign
Currency Exchange Rate Risk





We
maintain our books and records in Renminbi, the functional currency of the PRC,
however, we use the U.S. dollar as the reporting currency of our financial
statements. The exchange rate between the U.S. dollar and the Renminbi is
subject to the foreign exchange quotation publicized by the People’s Bank of
China daily. Results of operations are translated at average exchange rates
during the period. Assets, liabilities, and stockholder’s equity are translated
at the unified exchange rate as quoted by the People’s Bank of China at the end
of the period.





Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than Renminbi are included in the results of
operations as incurred. Gains and losses from foreign currency transactions are
included in the results of operations. There were no material transaction gains
or losses for the six months ended June 30, 2009.





Although
the conversion of the Renminbi is highly regulated in China, the value of the
Renminbi against the U.S. dollar fluctuates and is affected by, among other
things, changes in China’s political and economic conditions. On July 2, 2005,
the Chinese government changed its decade-old policy of benchmarking the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate in value within a narrow band against a basket of certain
foreign currencies. There remains significant international pressure on the
Chinese government to further liberalize this currency policy, and if such
liberalization occurs, the value of the Renminbi could appreciate or depreciate
against the U.S. dollar. This floating exchange rate, and any appreciation of
the Renminbi that may result from such rate, could have various adverse effects
on our business.





Our
exposure to foreign exchange risk primarily relates to cash and cash equivalents
denominated in U.S. dollars as a result of earnings in China and our obligations
to invest in our subsidiaries. For example, to the extent that we need to
convert U.S. dollars into Renminbi for our China based operations, appreciation
of the Renminbi against the U.S. dollar would have an adverse effect on the
Renminbi amount that we receive from the conversion. Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of making dividend
payments on our common stock or for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar
amount available to us. In addition, fluctuations in the exchange rate would
affect our financial results reported in U.S. dollar terms without giving effect
to any underlying change in our business or results of
operations.




We currently do not hedge our exposure
to fluctuations in the Renminbi to U.S. dollar exchange rate. In the future, we
may choose to reduce our exposures through financial instruments (hedges) that
provide offsets or limits to our exposures when considered
appropriate.





Item
      4.
            Controls
      and Procedures.





Disclosure
Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer who serves as our principal executive officer and our
Controller and Internal Audit Manager who serves as our principal financial and
accounting officer, we conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of
the period ended June 30, 2009 (the “Evaluation Dates”). Based on this
evaluation, and as described below under “Changes in Internal Control over
Financial Reporting”, we indentified material weaknesses in the lack of controls
over the accounting for cash receipts and disbursements and related party
transactions as previously reported and control deficiencies at one of our
subsidiaries that resulted in a delay in the preparation of its financial
statements. Because of these material weaknesses, which are in the process
of being remediated as described below under “Changes in Internal Control over
Financial Reporting”, our management, including our Chief Executive Officer and
our Controller and Internal Audit Manager, concluded that our disclosure
controls and procedures were not effective as of June 30, 2009, which is the end
of the period covered by this report.





A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements would not be prevented or detected on a timely basis.





- 43
-


Our
"disclosure controls and procedures" are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management to allow timely
decisions regarding required disclosure.





The
certifications attached as Exhibits 31 and 32 to this report should be read in
conjunction with the disclosures set forth herein.





Changes
in Internal Control over Financial Reporting





The
specific material weaknesses identified by our management were as
follows:





•
                    
                    The
      lack of controls over the accounting for cash receipts and disbursements.
      Specifically the lack of these controls permitted employees and vendors to
      be paid in cash. We discovered that some of these transactions took place
      without sufficient externally prepared documentation or
      approvals.•
                    
                    The
      lack of controls over the accounting for related party
      transactions. Specifically the lack of these controls caused related
      party sales to be classified as regular sales. These sales
      totaled $16.8 million in 2008.•
                    
                    The
      lack of an integrated financial accounting system to collect and record
      data across all of our subsidiaries; and•
                    
                    Management
      at one of our foreign majority controlled subsidiaries continues to fail
      to provide adequate oversight to ensure the timely completion of its
      financial statements and did not engage in adequate communication with our
      management to inform them of their lack of
  progress.





Although
these material weaknesses did not result in a material misstatement for the
period ended June 30, 2009 or any prior periods, the lack of controls over the
accounting for cash receipts and disbursements and related party transactions
did result in accounting adjustments in prior periods and a reasonable
probability that a material misstatement of income or expenses in our annual or
interim financial statements would not have been prevented or timely
detected. In addition, the control deficiencies at one of our subsidiaries
resulted in a delay in the preparation of its financial statements, limited our
ability to perform a thorough review of this subsidiary’s financial statements
and supporting financial statement disclosure schedules independent of the
preparer.




We
believe the following actions we have taken and are taking will be sufficient to
remediate the material weaknesses described above:





•
                      
                      Internal
      audit activities and resources have been expanded. We added a position for
      an internal auditor who will manage an internal audit team that will test
      and monitor the implementation of our accounting and internal control
      procedures;•
                      
                      We
      are in the process of completing a review and revision of our existing
      documentation of our accounting and internal control procedures and
      policies which will include appropriate controls and procedures for cash
      management in China and related party transactions;•
                      
                      We
      are in the process of implementing an initiative to ensure the importance
      of internal controls and compliance with established policies and
      procedures are fully understood throughout the organization. These
      initiatives will be managed by our Controller and Internal Audit
      Manager;•
                      
                      Our
      board of directors is evaluating the adoption of a Related Person
      Transaction Policy to govern our accounting and internal control
      procedures and policies;•
                      
                      We
      are in the process of implementing a financial software system both in our
      U.S. office and in our subsidiaries to standardize the process and access
      to financial reports on a timely manner;•
                      
                      Provide
      training to our employees to ensure these procedures are properly
      performed; and•
                      
                      We
      will evaluate our strategic alternatives related to Pan Asia Magnesium
      including, among other things, appointment of new management or a sale of
      our interest or other transactions in light of the performance of this
      entity and difficulties we have encountered with its management concerning
      strict compliance with our accounting policies and
    procedures.





Except as
described above, there were no changes in our internal control over financial
reporting during the quarter ended June 30, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.


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-


Management
believes the actions described above will remediate the material weaknesses we
have identified and strengthen our internal control over financial reporting. We
expect the material weakness will be remediated prior to December 31, 2009.
As we improve our internal control over financial reporting and implement
remediation measures, we may supplement or modify the remediation measures
described above.





A
company's "internal control over financial reporting" is a process designed by,
or under the supervision of, a company's principal executive and principal
financial officers, and effected by a company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.





Our
management, including our Chief Executive Officer and our Controller and
Internal Audit Manager, does not expect that our disclosure controls and
procedures or our internal controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints and the benefits of controls must be considered
relative to their costs. Due to the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been
detected.





PART
II - OTHER INFORMATION





Item
      1.
            Legal
      Proceedings.





None.





Item
      1A.
            Risk
      Factors





Risk
factors describing the major risks to our business can be found under Item 1A,
“Risk Factors”, in our Annual Report on Form 10-K for the year ended December
31, 2008. Except as provided for below. there has been no material change in our
risk factors from those previously discussed in the Annual Report on Form
10-K:





The
sale of our common stock in our June15, 2009 offering will result in the reset
of the exercise price of certain outstanding warrants and our Series A
Convertible Preferred Stock.





Included
in our outstanding warrants are warrants to purchase 143,750 shares of our
common stock with an exercise price of $8.00 per share. We also have 1,006
shares of our series A convertible preferred stock outstanding that are
convertible into 143,750 shares of our common stock at a conversion price of
$7.00 per share. The terms of these warrants and preferred stock provide that if
we sell common stock at a price per share less than the then exercise price of
the warrants or the conversion price of the preferred stock, then we are
required to reduce the exercise price of those warrants and the conversion price
of the series A convertible preferred stock to the lower price of the subsequent
sale. Because the market price of our common stock in our June 15, 2009 offering
is less than the exercise price of the $8.00 per share warrants, the sale of
shares of our common stock in our June 15, 2009 offering will result in a
reduction of the exercise price of those outstanding warrants which will reduce
the proceeds we might receive from their possible exercise. Also, because the
market price of our common stock in our June 15, 2009 offering is less than the
conversion price of our series A convertible preferred stock, the sale of shares
of our common stock in June 15, 2009 offering will result in a reduction of the
conversion price of the outstanding preferred stock which will dilute our
existing shareholders upon conversion.





Possible
Claim for Underwriting Fees and Expenses.





In
addition to any fees we pay Rodman & Renshaw, LLC in connection with our
June 15, 2009 offering, we may be obligated to pay additional
fees associated with that offering to our former investment banker. If our
former investment banker makes a claim for a fee in connection with our June 15,
2009 offering, we intend to dispute such claim. If we are unsuccessful in
disputing such claim, the costs of the June 15, 2009 offering may be higher than
the amounts set forth in our June 15, 2009 prospectus
supplement.


- 45
-





Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds.





(a)
Recent Sales of Unregistered Securities





During
the second quarter of 2009 we issued 21,000 shares of our common stock to
Bazelon Less & Feldman, P.C. as compensation for services it provided to us.
The shares were issued pursuant to an exemption from registration under Section
4(2) of the Securities Act of 1933 since the issuance by us did not involve a
public offering. The issuance was not a "public offering" as defined in Section
4(2) of the Securities Act of 1933 due to the insubstantial number of persons
involved, size of the offering, manner of the offering and number of shares
issued. In addition, the recipient had the necessary investment intent as
required by Section 4(2) of the Securities Act since it agreed to allow us to
include a legend on the shares issued stating that such shares are restricted
pursuant to Rule 144 of the Securities Act of 1933. Based on an analysis of
the above factors, we have met the requirements to qualify for exemption under
Section 4(2) of the Securities Act of 1933 for this issuance.








(b) Issuer
Purchases of Equity Securities





None.





Item
      3.
            Defaults
      Upon Senior Securities.





None.





Item
      4.
            Submission
      of Matters to a Vote of Security
Holders.








(a)
              The
      Annual Meeting of Shareholders (the Annual Meeting”) of the Company was
      held on May 29, 2009, in Deerfield Beach, Florida.(b)
              The
      following directors were elected at the Annual Meeting:Yuejian
      (James) WangYuwei
      HuangDavid
      BarnesSheldon
      SteinerPhilip
      Y. Shen, Ph.D.(c)
              The
      shareholders voted at the Annual Meeting on the following
      matters:





1.
              
              The
      vote on the election of directors to serve until the next annual meeting
      of shareholders or until their successors are duly elected and qualified
      was as follows:





Votes
      CastFor
              
              Against
              WithheldYuejian
      (James) Wang
              
              
              11,926,796
              
              139,685
              185,046Yuwei
      Huang
              
              
              11,846,515
              
              132,860
              272,152David
      Barnes
              
              
              11,685,197
              
              151,665
              335,020Sheldon
      Steiner
              
              
              11,679,475
              
              151,665
              420,087Philip
      Y. Shen, Ph.D.
              
              
              11,907,201
              
              150,985
              193,341





2.
              
              The
      vote on the ratification of the appointment of Sherb & Co., LLP as our
      independent registered public accounting firm for the year ending December
      31, 2009 was as follows:


- 46
-





For
              
              
              Against
              
              
              Withheld12,193,170
              
              
              
              44,557
              
              
              
              13,800





3.
              
              The
      vote on the approval of our name change from China Direct, Inc. to China
      Direct Industries, Inc. was as
follows:





Votes
      CastFor
              
              Against
              
              Broker
                Non-Votes
              
              Withheld12,209,369
              
              35,358
              
              0
              
              6,800





Item
      5.
            Other
      Information.





On August
13, 2009, our board of directors approved a resolution changing the our fiscal
year end to September 30th of each
year pursuant to the board of director’s authority provided for in Section 10.03
of the company’s by-laws. Previously, our fiscal year ended on December 31 of
each year. The change in fiscal year end was made to avoid conflicts and delays
that affect our China based subsidiaries which occur as a result of the
observance and celebration of the Chinese New Year.  We will file a
transition report for the transition period from January 1, 2009 through
September 30, 2009 on a Form 10-K.





Item
      6.
            Exhibits





Exhibit No.
              
              Description
      of Exhibit1.1
              
              Engagement
      Letter dated June 15, 2009 between the China Direct Industries, Inc. and
      Rodman & Renshaw, LLC (incorporated herein by reference to
      Exhibit 1.1 as part of the Company’s Current Report on Form 8-K filed with
      the Commission on June 17, 2009 (Commission File No.
      001-33694)).2.2
              
              Certificate
      of Ownership and Merger (incorporated herein by reference to Exhibit
      99.1.1 as part of the Company’s Current Report on Form 8-K filed with the
      Commission on December 83, 1999 (Commission File No.
      000-26415)).3.1
              
              Certificate
      of Incorporation Incorporated by reference to the Form 10-SB as filed
      on June 17, 1999 (incorporated herein by reference to Exhibit 3.1 as
      part of the Company’s Form 10-SB as filed with the Commission on
      June 17, 1999 (Commission File No.
  000-26415)).3.2
              
              Bylaws
      (incorporated herein by reference to Exhibit 3.2 filed as a part of the
      Company’s Form 10-Q filed with the Commission on August 8, 2008
      (Commission File No. 001-33694)).3.3
              
              Certificate
      of Amendment to the Certificate of Incorporation (incorporated herein by
      reference to Exhibit 3.3 as part of the Company’s Current Report on Form
      8-K filed with the Commission on August 17, 2006 (Commission File No.
      000-26415)).3.4
              
              Certificate
      of Domestication of China Direct, Inc. (incorporated herein by reference
      to Exhibit 3.4 as part of the Company’s Current Report on Form 8-K filed
      with the Commission on June 27, 2007 (Commission File No.
      000-26415)).3.5
              
              Form
      of Certificate of Designations, Preferences and Rights of Series A
      Convertible Preferred Stock (incorporated herein by reference to Exhibit
      3.5 as part of the Company’s Current Report on Form 8-K filed with the
      Commission on February 12, 2008 (Commission File No.
      001-33694)).4.1
              
              Form
      of common stock purchase warrant (incorporated herein by reference to
      Exhibit 4.1 as part of the Company’s Current Report on Form 8-K filed with
      the Commission on February 12, 2008 (Commission File No.
      001-33694)).4.2
              
              Form
      of common stock purchase warrant (incorporated herein by reference to
      Exhibit 10.2 as part of the Company’s Current Report on Form 8-K filed
      with the Commission on June 17, 2009 (Commission File No.
      001-33694)).10.1
              +
              Employment
      Agreement dated August 16, 2006 with Dr. Yuejian (James) Wang
      (incorporated herein by reference to Exhibit 10.9 as part of the Company’s
      Current Report on Form 8-K filed with the Commission on August 17,
      2006 (Commission File No. 000-26415)).10.2
              +
              Employment
      Agreement dated August 16, 2006 with Mr. Marc Siegel
      (incorporated herein by reference to Exhibit 10.10 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on August
      17, 2006 (Commission File No. 000-26415)).10.3
              +
              Employment
      Agreement dated August 16, 2006 with Mr. David Stein
      (incorporated herein by reference to Exhibit 10.11 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on August
      17, 2006 (Commission File No.
000-26415)).


- 47
-





10.4
              +
              Employment
      Agreement dated August 16, 2006 with Yi (Jenny) Liu (incorporated
      herein by reference to Exhibit 10.12 as part of the Company’s Current
      Report on Form 8-K filed with the Commission on August 17, 2006
      (Commission File No. 000-26415)).10.5
              +
              Evolve
      One, Inc. Stock Option Plan, as amended (incorporated herein by reference
      to Exhibit 10.1 as part of the Company’s Form S-8 filed with the
      Commission on January 11, 2005 (Commission File No.
      333-121963)).10.6
              +
              2005
      Equity Compensation Plan (incorporated herein by reference to Exhibit 99.1
      as part of the Company’s Registration Statement on Form S-8 filed with the
      Commission on June 16, 2005 (Commission File No.
      333-125871)).10.7
              +
              2006
      Equity Compensation Plan (incorporated herein by reference to Exhibit
      10.14 as part of the Company’s Current Report on Form 8-K filed with the
      Commission on August 17, 2006 (Commission File No.
      000-26415)).10.8
              +
              2006
      Stock Compensation Plan (incorporated herein by reference to Exhibit 10.1
      as part of the Company’s Registration Statement on Form S-8 filed with the
      Commission on October 30, 2006 (Commission File No.
      333-138297)).10.12
              
              CDI
      China, Inc., Jinan Alternative Energy Group Corp. and CDI Wanda New Energy
      Co., Ltd. Amended Agreement dated as of May 8, 2007 (incorporated herein
      by reference to Exhibit 10.1 as part of the Company’s Quarterly Report on
      Form 10-QSB for the period ended March 31, 2007 filed with the
      Commission on May 9, 2007 (Commission File No.
      000-26415)).10.13
              
              Contract
      for Sino-Foreign Equity Joint Venture between Asia Magnesium Co., Ltd.,
      Shanxi Senrun Coal Chemistry Co., Ltd. and Taiyuan YiWei Magnesium
      Industry Co., Ltd. dated December 12, 2006 (incorporated herein by
      reference to Exhibit 10.1 as part of the Company’s Quarterly Report on
      Form 10-QSB for the period ended June 30, 2007 filed with the Commission
      on August 8, 2007 (Commission File No.
  000-26415)).10.14
              
              Asia
      Magnesium Ownership Transfer Agreement dated July 1, 2007 between Jiang
      Dong and Capital One Resource Co., Ltd. (incorporated herein by reference
      to Exhibit 10.2 as part of the Company’s Quarterly Report on Form
      10-QSB for the period ended June 30, 2007 filed with the Commission on
      August 8, 2007 (Commission File No. 000-26415)).10.15
              
              Shangxi
      Gu County Golden Magnesium Co., Ltd. Investment Agreement Supplement dated
      May 30, 2007 among Taiyuan YiWei Magnesium Co., Ltd., Asia Magnesium
      Co., Ltd. and Shanxi Senrun Coal Chemistry Co. Ltd. (incorporated herein
      by reference to Exhibit 10.3 as part of the Company’s Quarterly Report on
      Form 10-QSB for the period ended June 30, 2007 filed with the Commission
      on August 8, 2007 (Commission File No.
  000-26415)).10.16
              
              Consulting
      and Management Agreement dated June 27, 2007 between Mr. Aihua Hu and
      Capital One Resource Co., Ltd. (incorporated herein by reference to
      Exhibit 10.4 as part of the Company’s Quarterly Report on Form 10-QSB for
      the period ended June 30, 2007 filed with the Commission on August 8, 2007
      (Commission File No. 000-26415)).10.17
              
              Stock
      Purchase Agreement dated August 24, 2007 between CDI China, Inc., China
      Direct, Inc. and Sense Holdings, Inc. (incorporated herein by reference to
      Exhibit 10.1 as part of the Company’s Current Report on Form 8-K filed
      with the Commission on August 28, 2007 (Commission File No.
      000-26415)).10.18
              
              Joint
      Venture Agreement dated September 28, 2007 among Shanxi Jinyang Coal And
      Coke Group Co., Ltd., Runlian Tian and CDI China, Inc. (incorporated
      herein by reference to Exhibit 10.1 as part of the Company’s Quarterly
      Report on Form 10-QSB for the period ended September 30, 2007 filed with
      the Commission on November 14, 2007 (Commission File No.
      000-26415)).10.19
              
              Securities
      Purchase Agreement dated February 11, 2008 (incorporated herein by
      reference to Exhibit 10.19 as part of the Company’s Current Report on Form
      8-K filed with the Commission on February 12, 2008 (Commission File No.
      001-33694)).10.20
              
              Registration
      Rights Agreement dated February 11, 2008 (incorporated herein by reference
      to Exhibit 10.20 as part of the Company’s Current Report on Form 8-K filed
      with the Commission on February 12, 2008 (Commission File No.
      001-33694)).10.21
              +
              Option
      Agreement dated August 16, 2006 between China Direct, Inc. and David Stein
      (incorporated herein by reference to Exhibit 10.3 filed as a part of the
      Company’s Form S-8 filed with the Commission on November 11, 2007
      (Commission File No. 333-147603)).10.22
              +
              Employment
      Agreement dated August 7, 2008 between China Direct, Inc. and Dr. Yuejian
      (James) Wang (incorporated herein by reference to Exhibit 10.22 filed as a
      part of the Company’s Form 10-Q filed with the Commission on August 8,
      2008 (Commission File No.
001-33694)).


- 48
-





10.23
              +
              Employment
      Agreement dated August 7, 2008 between China Direct, Inc. and Marc Siegel
      (incorporated herein by reference to Exhibit 10.23 filed as a part of the
      Company’s Form 10-Q filed with the Commission on August 8, 2008
      (Commission File No. 001-33694)).10.24
              +
              Employment
      Agreement dated August 7, 2008 between China Direct, Inc. and David Stein
      (incorporated herein by reference to Exhibit 10.24 filed as a part of the
      Company?痵 Form 10-Q filed with the Commission on August 8, 2008
      (Commission File No. 001-33694)).10.25
              +
              Form
      of Restricted Stock Agreement for Executive Officer awards under the
      Company’s 2008 Executive Stock Incentive Plan (incorporated herein by
      reference to Exhibit 10.25 filed as a part of the Company’s Form 10-Q
      filed with the Commission on August 8, 2008 (Commission File No.
      001-33694)).10.26
              +
              Form
      of Restricted Stock Agreement for Non-Executive Officer awards under the
      Company’s 2008 Non-Executive Stock Incentive Plan (incorporated herein by
      reference to Exhibit 10.26 filed as a part of the Company’s Form 10-Q
      filed with the Commission on August 8, 2008 (Commission File No.
      001-33694)).10.27
              +
              Form
      of Restricted Stock Agreement for awards to Directors under the Company’s
      2008 Non-Executive Stock Incentive Plan (incorporated herein by reference
      to Exhibit10.27 filed as a part of the Company’s Form 10-Q filed with the
      Commission on August 8, 2008 (Commission File No.
      001-33694)).10.28
              
              Joint
      Venture Agreement entered into between CDI Shanghai Management Co., Ltd.
      and Chi Chen dated September 20, 2008 (incorporated herein by reference to
      Exhibit 10.28 filed as a part of the Company’s Form 10-Q filed with the
      Commission on August 8, 2008 (Commission File No.
      001-33694)).10.29
              +
              Form
      of November 13, 2008 Amendment to Employment Agreements dated August 7,
      2008 between China Direct, Inc. and Dr. Yuejian (James) Wang, Marc Siegel
      and David Stein (incorporated herein by reference to Exhibit 10.29 filed
      as a part of the Company’s Current Report on Form 10-Q for the period
      ended September 30, 2008 filed with the Commission on November
      13, 2008 (Commission File No. 001-33694)).10.30
              +
              Option
      Agreement dated August 16, 2006 between China Direct, Inc. and Dr. Yuejian
      (James) Wang (incorporated herein by reference to Exhibit 10.1 filed as a
      part of the Company’s Form S-8 filed with the Commission on November 11,
      2007 (Commission File No. 333-147603)).10.31
              +
              Option
      Agreement dated August 16, 2006 between China Direct, Inc. and Marc Siegel
      (incorporated herein by reference to Exhibit 10.2 filed as a part of the
      Company?痵 Form S-8 filed with the Commission on November 11, 2007
      (Commission File No. 333-147603)).10.32
              
              Baotou
      Changxin Magnesium Co., Ltd. Investment Agreement dated February 20, 2008
      among CDI China, Inc., Excel Rise Technology Co., Ltd. and Three Harmony
      (Australia) Pty, Ltd. (incorporated herein by reference to Exhibit 10.1 as
      part of the Company’s Current Report on Form 8-K filed with the Commission
      on February 26, 2008 (Commission File No.
    001-33694)).10.33
              
              Baotou
      Changxin Magnesium Co., Ltd. Articles of Association dated January 31,
      2008 (incorporated herein by reference to Exhibit 3.1 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on February
      26, 2008 (Commission File No. 001-33694)).10.34
              
              Investment
      Framework Agreement dated as of April 26, 2008 by and between Baotou
      Xinjin Magnesium Co., Ltd. and CDI China, Inc. (incorporated herein by
      reference to Exhibit 10.18 as part of the Company’s Current Report on Form
      8-K filed with the Commission on May 1, 2008 (Commission File No.
      001-33694)).10.35
              +
              Independent
      Board of Directors Compensation Plan (incorporated herein by reference to
      the Company’s Current Report on Form 8-K filed with the Commission on June
      3, 2008 (Commission File No. 001-33694)).10.36
              +
              Compensation
      Award to Yi (Jenny) Liu on December 3, 2008 (incorporated herein by
      reference to the Company’s Current Report on Form 8-K filed with the
      Commission on December 5, 2008 (Commission File No.
      001-33694)).10.37
              
              Lease
      Agreement dated August 21, 2007 between 431 Fairway Associates, LLC and
      China Direct, Inc. (incorporated herein by reference to Exhibit 10.37
      filed as a part of the Company’s Form 10-K filed with the Commission on
      March 31, 2009 (Commission File No. 001-33694)).10.38
              +
              Consulting
      Agreement dated January 23, 2006 between China Direct, Inc. and Marc
      Siegel (incorporated herein by reference to Exhibit 10.1 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on January
      26, 2009 (Commission File No.
001-33694)).


- 49
-





10.39
              +
              Separation
      and Severance Agreement dated January 23, 2006 between China Direct, Inc.
      and Marc Siegel (incorporated herein by reference to Exhibit 10.2 as part
      of the Company’s Current Report on Form 8-K filed with the Commission on
      January 26, 2009 (Commission File No.
001-33694)).10.40
              
              Stock
      Purchase Agreement dated January 23, 2006 between China Direct, Inc. and
      Marc Siegel (incorporated herein by reference to Exhibit 10.3 as part of
      the Company’s Current Report on Form 8-K filed with the Commission on
      January 26, 2009 (Commission File No.
001-33694)).10.41
              
              Lock-Up
      Agreement dated January 23, 2006 between China Direct, Inc. and Marc
      Siegel (incorporated herein by reference to Exhibit 10.4 as part of the
      Company’s Current Report on Form 8-K filed with the Commission on January
      26, 2009 (Commission File No. 001-33694)).10.42
              +
              Compensation
      Arrangements with I. Andrew Weeraratne (incorporated herein by reference
      to the Company’s Current Report on Form 8-K filed with the Commission on
      January 26, 2009 (Commission File No.
001-33694)).10.43
              +
              Compensation
      Arrangements with Philip Y. Shen, Ph.D. effective January 26, 2009
      (incorporated herein by reference to the Company’s Current Report on Form
      8-K filed with the Commission on January 26, 2009 (Commission File No.
      001-33694)).10.44
              +
              Amendment
      dated January 23, 2009 to Yuejian (James) Wang, Ph.D.’s Employment
      Agreement (incorporated herein by reference to the Company’s Current
      Report on Form 8-K filed with the Commission on January 26, 2009
      (Commission File No. 001-33694)).10.45
              
              Stock
      Purchase Agreement dated August 24, 2007 between Sense Holdings, Inc., CDI
      China, Inc. and China Direct, Inc. (incorporated herein by reference to
      Exhibit 10.1 as part of the Company’s Current Report on Form 8-K filed
      with the Commission on August 28, 2007 (Commission File No.
      000-26415)).10.46
              +
              Severance
      Agreement dated May 23, 2008 between China Direct, Inc. and Lazarus
      Rothstein.*10.47
              
              Form of
      Securities Purchase Agreement dated as of March 23, 2009 between the
      Company and the Purchasers (incorporated herein by reference to Exhibit
      10.1 as part of the Company’s Current Report on Form 8-K filed with the
      Commission on June 17, 2009 (Commission File No.
    001-33694)).31.1
              
              Section 302
      Certificate of Chief Executive Officer. *31.2
              
              Section 302
      Certificate of Principal Financial and Accounting
      Officer.*32.1
              
              Section 906
      Certificate of Chief Executive Officer and Principal Financial and
      Accounting Officer.*





+
              
              Management
      contract or compensatory plan or arrangement.*
              
              Filed
      herewith.





* Filed
herewith





- 50
-





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





CHINA
      DIRECT INDUSTRIES, INC.Date:
      August 14, 2009
            By:
      /s/ Yuejian (James) WangYuejian
      (James) Wang,Chairman
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      August 14, 2009
            By:
      /s/ Huaqin (Kim) ChenHuaqin
      (Kim) Chen,Controller
      and Internal Audit Manager(Principal
      Financial and Accounting Officer)