|                                   |
|----------------------------------------|
| **UNITED STATES**                      |
| **SECURITIES AND EXCHANGE COMMISSION** |
| **Washington, D.C. 20549**             |
|                                   |
| (Mark One)                             |
|                                   |
| **Form 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, 2008

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, 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 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 23,503,916 shares of common stock are issued and outstanding as of August 7, 2008.

----

|   |
|--------|
|        |

|                                |                                                                                         |   |         |
|-------------------------------------|----------------------------------------------------------------------------------------------|--------|--------------|
|                                |                                                                                         |   | **Page No.** |
|                                |                                                                                         |   |         |
| **PART I. - FINANCIAL INFORMATION** |                                                                                         |   |
| Item 1.                             | Financial Statements.                                                                        |   | 5            |
| Item 2.                             | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |   | 28           |
| Item 3.                             | Quantitative and Qualitative Disclosures About Market Risk.                                  |   | 43           |
| Item 4T                             | Controls and Procedures.                                                                     |   | 43           |
|                                |                                                                                         |   |         |
| **PART II - OTHER INFORMATION**     |                                                                                         |   |
| Item 1.                             | Legal Proceedings.                                                                           |   | 44           |
| Item 1A.                            | Risk Factors.                                                                                |   | 44           |
| Item 2.                             | Unregistered Sales of Equity Securities and Use of Proceeds.                                 |   | 44           |
| Item 3.                             | Defaults Upon Senior Securities.                                                             |   | 44           |
| Item 4.                             | Submission of Matters to a Vote of Security Holders.                                         |   | 44           |
| Item 5.                             | Other Information.                                                                           |   | 45           |
| Item 6.                             | Exhibits.                                                                                    |   | 46           |

2

----

**ORGANIZATIONAL CHART**

          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 chart reflects our current organizational            structure.

3

----

**INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT**

|    |                                                                                                                                                                                                                                                                           |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    | When used in this report the terms:                                                                                                                                                                                                                                            |
|    |                                                                                                                                                                                                                                                                           |
| – | “China Direct”, “we”, “us” or “our” refers to China Direct, Inc., a Florida corporation, and our subsidiaries,                                                                                                                 |
|    |                                                                                                                                                                                                                                                                           |
| – | “China Direct Investments”, refers to China Direct Investments, Inc., a Florida corporation and a wholly owned subsidiary of China Direct,                                                                                                                         |
|    |                                                                                                                                                                                                                                                                           |
| – | “CDI China”, refers to CDI China, Inc., a Florida corporation, and a wholly owned subsidiary of China Direct,                                                                                                                                                      |
|    |                                                                                                                                                                                                                                                                           |
| – | “CDI Shanghai Management”, refers to CDI Shanghai Management Co., Ltd., a Chinese limited liability company and a wholly owned subsidiary of CDI China,                                                                                                            |
|    |                                                                                                                                                                                                                                                                           |
| – | “Capital One Resource”, refers to Capital One Resource Co., Ltd., a Brunei company and a wholly owned subsidiary of CDI Shanghai Management,                                                                                                                       |
|    |                                                                                                                                                                                                                                                                           |
| – | “Lang Chemical”, refers to Shanghai Lang Chemical Co., Ltd. a Chinese limited liability company and a 51% majority owned subsidiary of CDI China,                                                                                                                  |
|    |                                                                                                                                                                                                                                                                           |
| – | “Chang Magnesium”, refers to Taiyuan Changxin Magnesium Co., Ltd., a Chinese limited liability company and a 51% majority owned subsidiary of CDI China,                                                                                                           |
|    |                                                                                                                                                                                                                                                                           |
| – | “Chang Trading”, refers to Taiyuan Changxin YiWei Trading Co., Ltd., a Chinese limited liability company 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% majority owned subsidiary of Capital One Resource,                                                                                                                                  |
|    |                                                                                                                                                                                                                                                                           |
| – | “Asia Magnesium”, refers to Asia Magnesium Corporation Ltd., a Hong Kong limited liability company and a wholly owned subsidiary of Capital One Resource                                                                                                           |
|    |                                                                                                                                                                                                                                                                           |
| – | “Golden Magnesium”, refers to Shanxi Gu County Golden Magnesium Co., Ltd., a Chinese limited liability company, formerly referred to by us in filings and press releases as “Jinwei Magnesium”, and a 52% majority owned subsidiary of Asia Magnesium, |
|    |                                                                                                                                                                                                                                                                           |
| – | “Pan Asia Magnesium”, refers to Pan Asia Magnesium Co., Ltd., a Chinese limited liability company and a 51% majority owned subsidiary of CDI China,                                                                                                                |
|    |                                                                                                                                                                                                                                                                           |
| – | “Baotou Changxin Magnesium”, refers to Baotou Changxin Magnesium Co., Ltd., a Chinese limited liability company and a 51% majority owned subsidiary of CDI China,                                                                                                  |
|    |                                                                                                                                                                                                                                                                           |
| – | “Xinjin Magnesium”, refers to Baotou Xinjin Magnesium Co., Ltd., a Chinese limited liability company. In April 2008 CDI China entered into an agreement to acquire a 51% majority owned subsidiary of Xinjin Magnesium,                                            |
|    |                                                                                                                                                                                                                                                                           |
| – | “CDI Clean Technology”, refers to CDI Clean Technology Group, Inc., a Florida corporation formerly known as Jinan Alternative Energy Group Corp., and a wholly owned subsidiary of CDI China,                                                                      |
|    |                                                                                                                                                                                                                                                                           |
| – | “CDI Wanda”, refers to Shandong CDI Wanda New Energy Co., Ltd., a Chinese limited liability company and a 51% majority owned subsidiary of CDI Clean Technology,                                                                                                   |
|    |                                                                                                                                                                                                                                                                           |
| – | “Yantai CDI Wanda”, refers to Yantai CDI Wanda Renewable Resources Co., Ltd., a Chinese limited liability company and a 52% majority owned subsidiary of CDI Wanda,                                                                                                |
|    |                                                                                                                                                                                                                                                                           |
| – | “CDI Jingkun Zinc”, refers to CDI Jingkun Zinc Industry Co., Ltd., a Chinese limited liability company and a 95% majority owned subsidiary of CDI Shanghai Management,                                                                                             |
|    |                                                                                                                                                                                                                                                                           |
| – | “CDI Jixiang Metal”, refers to CDI Jixiang Metal Co., Ltd., a Chinese limited liability company and a wholly owned subsidiary of CDI China                                                                                                                         |
|    |                                                                                                                                                                                                                                                                           |
| – | “CDI Metal Recycling”, refers to Shanghai CDI Metal Recycling Co., Ltd., a Chinese limited liability company and an 83% majority owned subsidiary of CDI Shanghai Management                                                                                       |
|    |                                                                                                                                                                                                                                                                           |
| – | “CDI Beijing”, refers to CDI (Beijing) International Trading Co., Ltd, a Chinese limited liabilitycompany.                                                                                                                                                         |

4

----

**PART 1 - FINANCIAL INFORMATION**

|        |                      |
|-------------|---------------------------|
| **Item 1.** | **Financial Statements.** |

**CHINA DIRECT, INC. AND SUBSIDIARIES            CONSOLIDATED BALANCE SHEETS**

|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|-------------|----------------------------------------------|--------|------------|--------|
|                                                                                                                                                                                           |   | **June 30,                        2008** |        | **December 31,                        2007** |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |
|                                                                                                                                                                                           |   | **Unaudited**                            |        |                                         |   |       |
| ASSETS                                                                                                                                                                                         |   |                                     |        |                                         |   |       |   |
| Current Assets:                                                                                                                                                                                |   |                                     |        |                                         |   |       |   |
| Cash and cash equivalents                                                                                                                                                                      |   | $                                        | 26,424,935  |                                         | $      | 20,394,931 |   |
| Investment in marketable securities available for sale                                                                                                                                         |   |                                     | 4,732,593   |                                         |   | 7,820,500  |   |
| Investment in marketable securities available for sale-related party                                                                                                                           |   |                                     | 766,019     |                                         |   | 1,315,488  |   |
| Accounts receivable, net of allowance for doubtful accounts of $335,851 and $290,456 at June 30, 2008 and December 31, 2007, respectively                                                      |   |                                     | 24,415,061  |                                         |   | 10,655,661 |   |
| Accounts receivable-related parties                                                                                                                                                            |   |                                     | 556,687     |                                         |   | 2,283,600  |   |
| Inventories                                                                                                                                                                                    |   |                                     | 12,286,538  |                                         |   | 5,293,986  |   |
| Prepaid expenses and other current assets                                                                                                                                                      |   |                                     | 21,564,895  |                                         |   | 15,439,462 |   |
| Prepaid expenses-related parties                                                                                                                                                               |   |                                     | 4,821,163   |                                         |   | 4,150,943  |   |
| Loans receivable-related parties                                                                                                                                                               |   |                                     | 1,597,305   |                                         |   | —    |   |
| Due from related parties                                                                                                                                                                       |   |                                     | 14,552      |                                         |   | 1,287,877  |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Total current assets                                                                                                                                                                           |   |                                     | 97,179,748  |                                         |   | 68,642,448 |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Restricted cash                                                                                                                                                                                |   |                                     | 2,874       |                                         |   | 646,970    |   |
| Property, plant and equipment, net of accumulated depreciation of $1,499,088 and $577,801 at June 30, 2008 and December 31, 2007, respectively                                                 |   |                                     | 25,650,264  |                                         |   | 18,010,524 |   |
| Prepaid expenses and other assets                                                                                                                                                              |   |                                     | 234,683     |                                         |   | 433,075    |   |
| Property use rights, net                                                                                                                                                                       |   |                                     | 582,733     |                                         |   | 553,304    |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Total assets                                                                                                                                                                                   |   | $                                        | 123,650,302 |                                         | $      | 88,286,321 |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                     |   |                                     |        |                                         |   |       |   |
| Current Liabilities:                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Loans payable-short term                                                                                                                                                                       |   | $                                        | 1,229,663   |                                         | $      | 1,978,142  |   |
| Accounts payable and accrued expenses                                                                                                                                                          |   |                                     | 11,584,094  |                                         |   | 9,649,797  |   |
| Accounts payable-related parties                                                                                                                                                               |   |                                     | 735,184     |                                         |   | 964,114    |   |
| Notes payable-related party                                                                                                                                                                    |   |                                     | —     |                                         |   | 410,167    |   |
| Accrued dividends payable                                                                                                                                                                      |   |                                     | 20,015      |                                         |   | —    |   |
| Advances from customers                                                                                                                                                                        |   |                                     | 5,785,605   |                                         |   | 6,963,061  |   |
| Other payables                                                                                                                                                                                 |   |                                     | 6,229,216   |                                         |   | 4,097,716  |   |
| Taxes payable                                                                                                                                                                                  |   |                                     | 943,779     |                                         |   | 560,116    |   |
| Due to related parties                                                                                                                                                                         |   |                                     | 576,890     |                                         |   | 3,137,233  |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Total current liabilities                                                                                                                                                                      |   |                                     | 27,104,446  |                                         |   | 27,760,346 |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Loans payable-long term                                                                                                                                                                        |   |                                     | 210,280     |                                         |   | 166,573    |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Minority interest                                                                                                                                                                              |   |                                     | 26,351,743  |                                         |   | 17,535,909 |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Stockholders’ Equity:                                                                                                                                                                    |   |                                     |        |                                         |   |       |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Preferred Stock: $.0001 par value, stated value $1,000 per share; 10,000,000 authorized, 1,006 shares and 0 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively |   |                                     | 1,006,250   |                                         |   | —    |   |
| Common Stock: $.0001 par value, 1,000,000,000 authorized, 23,501,056 and 20,982,010 issued and outstanding at June 30, 2008 and December 31, 2007, respectively                                |   |                                     | 2,350       |                                         |   | 2,098      |   |
| Additional paid-in capital                                                                                                                                                                     |   |                                     | 50,654,559  |                                         |   | 30,257,644 |   |
| Deferred compensation                                                                                                                                                                          |   |                                     | (33,000     | )                                            |   | (55,000    | )      |
| Accumulated comprehensive income                                                                                                                                                               |   |                                     | 36,076      |                                         |   | 162,045    |   |
| Retained earnings                                                                                                                                                                              |   |                                     | 18,317,598  |                                         |   | 12,456,706 |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Total stockholders’ equity                                                                                                                                                               |   |                                     | 69,983,833  |                                         |   | 42,823,493 |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |
| Total liabilities and stockholders’ equity                                                                                                                                               |   | $                                        | 123,650,302 |                                         | $      | 88,286,321 |   |
|                                                                                                                                                                                           |   |                                     |        |                                         |   |       |   |

See notes to unaudited consolidated financial statements

5

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

|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|------------|--------------------------------------------------------------|--------|------------|--------|----------|-------------|--------|--------|------------|--------|
|                                                                                                                                                                                                                                                         |   | **For the Three Months                        Ended June 30,** |       | **For the Six Months                        Ended June 30,** |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |
|                                                                                                                                                                                                                                                         |   | **2008**                                                       |       | **2007**                                                     |   | **2008**   |   | **2007** |        |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Revenues                                                                                                                                                                                                                                                     |   | $                                                              | 76,215,437 |                                                         | $      | 40,012,970 |   | $        | 135,456,235 |   | $      | 70,511,910 |   |
| Revenues-related parties                                                                                                                                                                                                                                     |   |                                                           | 1,344,725  |                                                         |   | 440,000    |   |     | 2,078,646   |   |   | 880,000    |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Total revenues                                                                                                                                                                                                                                               |   |                                                           | 77,560,162 |                                                         |   | 40,452,970 |   |     | 137,534,881 |   |   | 71,391,910 |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Cost of revenues                                                                                                                                                                                                                                             |   |                                                           | 64,045,927 |                                                         |   | 36,742,381 |   |     | 113,525,741 |   |   | 64,209,395 |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Gross profit                                                                                                                                                                                                                                                 |   |                                                           | 13,514,235 |                                                         |   | 3,710,589  |   |     | 24,009,140  |   |   | 7,182,515  |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Operating expenses:                                                                                                                                                                                                                                          |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Selling, general, and administrative                                                                                                                                                                                                                         |   |                                                           | 2,635,633  |                                                         |   | 847,417    |   |     | 4,335,603   |   |   | 1,684,926  |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Operating income                                                                                                                                                                                                                                             |   |                                                           | 10,878,602 |                                                         |   | 2,863,172  |   |     | 19,673,537  |   |   | 5,497,589  |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Other income (expense):                                                                                                                                                                                                                                      |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Other income                                                                                                                                                                                                                                                 |   |                                                           | 102,521    |                                                         |   | 371,433    |   |     | 296,139     |   |   | 381,369    |   |
| Interest income                                                                                                                                                                                                                                              |   |                                                           | 129,470    |                                                         |   | 41,855     |   |     | 220,172     |   |   | 71,021     |   |
| Realized gain (loss) on sale of marketable securities                                                                                                                                                                                                        |   |                                                           | 3,756      |                                                         |   | 206,236    |   |     | (35,705     | )      |   | 206,236    |   |
| Realized loss on sale of marketable                        securities-related party                                                                                                                                                                          |   |                                                           | —    |                                                         |   | (16,041    | )      |     | —     |   |   | (32,014    | )      |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Total other income                                                                                                                                                                                                                                           |   |                                                           | 235,747    |                                                         |   | 603,483    |   |     | 480,606     |   |   | 626,612    |   |
|                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Income before income taxes and minority interest                                                                                                                                                                                                             |   |                                                           | 11,114,349 |                                                         |   | 3,466,655  |   |     | 20,154,143  |   |   | 6,124,201  |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Income tax expense                                                                                                                                                                                                                                           |   |                                                           | (705,176   | )                                                            |   | (522,159   | )      |     | (1,157,656  | )      |   | (754,731   | )      |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Income before minority interest                                                                                                                                                                                                                              |   |                                                           | 10,409,173 |                                                         |   | 2,944,496  |   |     | 18,996,487  |   |   | 5,369,470  |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Minority interest                                                                                                                                                                                                                                            |   |                                                           | (2,894,298 | )                                                            |   | (676,754   | )      |     | (6,728,736  | )      |   | (1,230,859 | )      |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Net income                                                                                                                                                                                                                                                   |   |                                                           | 7,514,875  |                                                         |   | 2,267,742  |   |     | 12,267,751  |   |   | 4,138,611  |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Deduct dividends on Series A Preferred Stock:                                                                                                                                                                                                                |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Preferred stock dividend                                                                                                                                                                                                                                     |   |                                                           | (1,047,937 | )                                                            |   | —    |   |     | (1,189,467  | )      |   | —    |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Relative fair value of detachable warrants issued                                                                                                                                                                                                            |   |                                                           | —    |                                                         |   | —    |   |     | (2,765,946  | )      |   | —    |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Preferred stock beneficial conversion feature                                                                                                                                                                                                                |   |                                                           | —    |                                                         |   | —    |   |     | (2,451,446  | )      |   | —    |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Income applicable to common stockholders                                                                                                                                                                                                                     |   | $                                                              | 6,466,938  |                                                         | $      | 2,267,742  |   | $        | 5,860,892   |   | $      | 4,138,611  |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Basic and diluted income per common share after deduction in thefirst quarter of 2008, of noncash deemed dividends attributable to Series A Preferred Stock as described in Notes 3 & 11 of theNotes to the Unaudited Consolidated Financial Statements: |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Basic                                                                                                                                                                                                                                                        |   | $                                                              | 0.29       |                                                         | $      | 0.16       |   | $        | 0.27        |   | $      | 0.31       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Diluted                                                                                                                                                                                                                                                      |   | $                                                              | 0.26       |                                                         | $      | 0.15       |   | $        | 0.24        |   | $      | 0.27       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Basic weighted average common shares outstanding                                                                                                                                                                                                             |   |                                                           | 22,663,337 |                                                         |   | 13,882,955 |   |     | 21,833,388  |   |   | 13,464,666 |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |
| Diluted weighted average common shares outstanding                                                                                                                                                                                                           |   |                                                           | 25,427,385 |                                                         |   | 15,380,420 |   |     | 24,160,683  |   |   | 15,174,110 |   |
|                                                                                                                                                                                                                                                         |   |                                                           |       |                                                         |   |       |   |     |        |   |   |       |   |

See notes to unaudited consolidated financial statements

6

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**CHINA DIRECT, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

|                                                                                        |   |                                                         |        |     |   |       |   |
|---------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|-------------|----------|--------|------------|--------|
|                                                                                        |   | **For the Six Months                        Ended June 30,** |        |
|                                                                                        |   |                                                         |        |
|                                                                                        |   | **2008**                                                     |        | **2007** |   |
|                                                                                        |   |                                                         |        |     |   |
| Cash flows from operating activities:                                                       |   |                                                         |        |     |   |       |   |
| Net income                                                                                  |   | $                                                            | 12,267,751  |     | $      | 4,138,611  |   |
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: |   |                                                         |        |     |   |       |   |
| Depreciation                                                                                |   |                                                         | 921,287     |     |   | 122,810    |   |
| Bad debt recovery                                                                           |   |                                                         | —     |     |   | (102,126   | )      |
| Allowance for doubtful accounts                                                             |   |                                                         | 45,395      |     |   | —    |   |
| Stock based compensation                                                                    |   |                                                         | 848,364     |     |   | 196,010    |   |
| Realized gain on investment in marketable securities                                        |   |                                                         | 35,705      |     |   | (206,236   | )      |
| Realized loss on investment in marketable securities-related party                          |   |                                                         | —     |     |   | 32,014     |   |
| Fair value of securities received for services                                              |   |                                                         | (392,942    | )        |   | (3,275,450 | )      |
| Minority interest                                                                           |   |                                                         | 8,815,834   |     |   | 1,230,859  |   |
| Changes in operating assets and liabilities:                                                |   |                                                         |        |     |   |       |   |
| Prepaid expenses and other current assets                                                   |   |                                                         | (4,857,996  | )        |   | (4,189,986 | )      |
| Prepaid expenses-related parties                                                            |   |                                                         | (670,220    | )        |   | (418,875   | )      |
| Inventories                                                                                 |   |                                                         | (6,992,552  | )        |   | 4,523,227  |   |
| Accounts receivable                                                                         |   |                                                         | (14,751,692 | )        |   | (7,455,735 | )      |
| Accounts receivable-related parties                                                         |   |                                                         | 1,726,913   |     |   | —    |   |
| Accounts payable and accrued expenses                                                       |   |                                                         | 2,526,304   |     |   | 697,606    |   |
| Accounts payable-related party                                                              |   |                                                         | (228,930    | )        |   | 3,145,428  |   |
| Advances from customers                                                                     |   |                                                         | (1,177,456  | )        |   | 825,145    |   |
| Other payables                                                                              |   |                                                         | 2,131,500   |     |   | 2,940,552  |   |
| Deferred income taxes                                                                       |   |                                                         | —     |     |   | 12,929     |   |
| Income taxes payable                                                                        |   |                                                         | 820,686     |     |   | (71,600    | )      |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Net cash provided by operating activities                                                   |   |                                                         | 1,067,951   |     |   | 2,145,183  |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Cash flows from investing activities:                                                       |   |                                                         |        |     |   |       |   |
| Cash acquired from acquisitions                                                             |   |                                                         | —     |     |   | 55,777     |   |
| Decrease in notes receivable                                                                |   |                                                         | 946,897     |     |   | 750,086    |   |
| Increase in loans receivable                                                                |   |                                                         | (1,060,156  | )        |   | —    |   |
| Increase in loans receivable-related parties                                                |   |                                                         | (1,597,305  | )        |   | —    |   |
| Proceeds from the sale of marketable securities available for sale                          |   |                                                         | 428,395     |     |   | 1,192,487  |   |
| Purchases of property, plant and equipment                                                  |   |                                                         | (7,364,599  | )        |   | (152,273   | )      |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Net cash (used in) provided by investing activities                                         |   |                                                         | (8,646,768  | )        |   | 1,846,077  |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Cash flows from financing activities:                                                       |   |                                                         |        |     |   |       |   |
| Decrease in restricted cash                                                                 |   |                                                         | 644,096     |     |   | 447,713    |   |
| Proceeds from loans payable                                                                 |   |                                                         | 1,161,303   |     |   | —    |   |
| Payment of loans payable                                                                    |   |                                                         | (1,866,075  | )        |   | (1,455,746 | )      |
| Payments of notes payable                                                                   |   |                                                         | (592,007    | )        |   | —    |   |
| Payments of notes payable-related party                                                     |   |                                                         | (410,167    | )        |   | —    |   |
| Payment of advances from executive officers                                                 |   |                                                         | —     |     |   | (140,893   | )      |
| Due from related parties                                                                    |   |                                                         | 1,273,325   |     |   | (996,525   | )      |
| Due to related parties                                                                      |   |                                                         | (2,560,343  | )        |   | 17,336     |   |
| Gross proceeds from sale of preferred stock                                                 |   |                                                         | 12,950,000  |     |   | —    |   |
| Proceeds from exercise of warrants/options                                                  |   |                                                         | 2,782,376   |     |   | 3,062,500  |   |
| Cash dividend payment to preferred stock holders                                            |   |                                                         | (141,530    | )        |   |       |   |
| Offering expenses                                                                           |   |                                                         | (1,504,345  | )        |   | —    |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Net cash provided by financing activities                                                   |   |                                                         | 11,736,633  |     |   | 934,385    |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| EFFECT OF EXCHANGE RATE ON CASH                                                             |   |                                                         | 1,872,188   |     |   | 176,805    |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Net increase in cash                                                                        |   |                                                         | 6,030,004   |     |   | 5,102,450  |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Cash, beginning of year                                                                     |   |                                                         | 20,394,931  |     |   | 3,030,345  |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Cash, end of period                                                                         |   | $                                                            | 26,424,935  |     | $      | 8,132,795  |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| **Supplemental disclosures of cash flow information:**                                      |   |                                                         |        |     |   |       |   |
| Cash paid for taxes                                                                         |   | $                                                            | 146,716     |     | $      | 476,995    |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Cash paid for interest                                                                      |   | $                                                            | 169,385     |     | $      | 5,036      |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Dividend payment in stock to preferred stock shareholders                                   |   | $                                                            | 1,027,922   |     | $      | —    |   |
|                                                                                        |   |                                                         |        |     |   |       |   |
| Non-cash preferred stock deemed dividend                                                    |   | $                                                            | 5,217,392   |     | $      | —    |   |
|                                                                                        |   |                                                         |        |     |   |       |   |

See notes to unaudited consolidated financial statements

7

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

**NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS**

*Business and Organization*

China Direct, Inc., a Florida corporation formerly known as Evolve One, Inc., and its subsidiaries are referred to in this report as the “Company”, “we”, “us”, “our”, or “China Direct”. China Direct Investments, Inc., a Florida corporation and a wholly owned subsidiary of China Direct is referred to in this report as “China Direct Investments”. CDI China, Inc., a Florida corporation and a            wholly owned subsidiary of China Direct is referred to in this report as “CDI China”.

China Direct is a management and advisory services organization which owns and consults with business entities operating in the People’s Republic of China (“PRC”). China Direct operates in two primary divisions; (i) Management Services and (ii) Advisory Services. Our Management Services division acquires controlling interests of Chinese business entities which we consolidate as either our wholly or majority owned subsidiaries. Through this            ownership control, we provide management advice as well as investment capital. We refer to these subsidiaries as our portfolio companies. Our Advisory Services division provides consulting services to Chinese entities seeking access to the U.S. capital markets. We currently have service contracts with various clients who conduct business within China or seek to conduct business in China. We refer to these companies as client companies.

Our primary, but not exclusive, method of acquiring a portfolio company in the PRC is to create a foreign invested entity (“FIE”), or a joint venture entity (“JV”). Generally, to create a FIE or a JV, an application is made to the local PRC government to increase the “registered capital” of a Chinese domestic company. The Chinese domestic company will contribute assets and we will contribute investment capital. A new FIE or JV is            created; our ownership is determined by the value of our capital contribution as compared to the new total registered capital amount, giving effect to the value of assets contributed. Our investments in the PRC adhere to the rules and regulations governing foreign investment in China and we obtain all relevant and necessary governmental approvals and business licenses.

**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 accounting principles generally accepted in the United States of America 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, 2007 was derived from the audited consolidated            financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. These interim financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2007. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

In January 2008, our majority owned subsidiary, CDI Wanda, formed Yantai CDI Wanda Renewable Resources Co., Ltd., a Chinese limited liability company (“Yantai CDI Wanda”) as a joint venture entity. CDI Wanda contributed $712,329 as registered capital to acquire its 52% interest. Yantai CDI Wanda is constructing and will operate a scrap tire recycling center utilizing a recycling process developed by CDI Wanda.

In February 2008, our subsidiary, CDI Shanghai Management formed Shanghai CDI Metal Recycling Co., Ltd., a Chinese limited liability company (“CDI Metal Recycling”) as a joint venture entity. CDI Shanghai Management contributed $347,222 to the registered capital of the joint venture, representing an 83% interest. CDI Metal Recycling will recycle aluminum wire into aluminum powder. CDI Metal Recycling expects to commence operations in            October 2008.

In February 2008, our subsidiary, CDI China, entered into an agreement with Excel Rise and Three Harmony(Australia) Party, Ltd. (“Three Harmony”) to form Baotou Changxin Magnesium Co., Ltd., a Chinese limited liabilitycompany (“Baotou Changxin Magnesium”) as a FIE. CDI China contributed approximately $7,084,000 to the registered capitalof this entity, Excel Rise $5,417,000 and Three Harmony $1,389,000, representing a 51%, 39% and 10% interest, respectively. BaotouChangxin Magnesium is a 51% owned subsidiary of CDI China and a 39% owned subsidiary of Excel Rise. Accordingly, China Direct holdsa 70.9% interest in Baotou Changxin Magnesium. As of the date of this report, CDI China has contributed $7,084,000 to the registeredcapital of this entity.

8

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

On April 26, 2008 CDI China entered into an Investment Framework Agreement with Baotou Xinjin Magnesium Co., Ltd.,a Chinese limited liability company (“Xinjin Magnesium”) to jointly invest and increase the registered capital of XinjinMagnesium thereby forming a foreign invested enterprise (“FIE”). Under the terms of the agreement, prior to forming theFIE, Xinjin Magnesium will increase its registered capital from approximately $285,714 to approximately $4.7 million. Upon formingthe FIE, CDI China will invest a total of approximately $7.3 million to obtain a 51% interest in the new entity and the currentowners of Xinjin Magnesium will invest approximately $2.3 million in the form of cash and fixed assets representing the remaining49% interest. CDI China's investment will be made over the course of two years, once the business license has been approved, inaccordance with PRC law. On August 1, 2008, CDI China and Xinjin Magnesium agreed to amend the April 26, 2008 Investment FrameworkAgreement to extend the date on which CDI China’s initial investment is due until December 31, 2008.

On June 20, 2008, CDI Shanghai Management entered into a Joint Venture Agreement (the “Agreement”)with Chen Chi, an individual, to form CDI (Beijing) International Trade Co., Ltd., a Chinese limited liability company (“CDIBeijing”). Under the terms of the Agreement, CDI Shanghai Management will acquire a 51% interest in CDI Beijing upon approvalof a business license from the Chinese government. CDI Beijing plans to engage in the sale and distribution of steel, non ferrousmetals and lumber products in China. Under the terms of the Agreement, the initial registered investment amount of CDI Beijing to becontributed by Mr. Chi and CDI Shanghai Management is an aggregate of $7.27 million. Mr. Chi and CDI Shanghai Management havesubscribed to invest $3.57 million and $3.7 million, respectively, in installments over a 12 month period after approval of CDIBeijing’s business license. Chen Chi is a minority interest owner in Yantai CDI Wanda.

*Estimates*

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results when ultimately realized could differ            from those estimates. Significant estimates include the allowance for doubtful accounts of accounts receivable, certain assumptions underlying the calculation of stock-based compensation, and the useful life of property, plant and equipment.

*Cash and Cash Equivalents*

For purposes of the consolidated statements of cash flows, 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, 2008, bank deposits in the United States exceeded federally insured limits by $1,520,009. At June 30, 2008, we had deposits of $14,536,425 in banks in China. Our deposits in China are not insured as there is no            equivalent of the FDIC as in the United States. We have not experienced any losses in such bank accounts through June 30, 2008.

At June 30, 2008 and December 31, 2007, our bank deposits by geographic area were as follows:

|                            |   |              |       |                  |   |   |   |   |       |   |   |      |   |
|---------------------------------|--------|-------------------|------------|-----------------------|--------|--------|--------|--------|------------|--------|--------|-----------|--------|
| **Country**                     |   | **June 30, 2008** |       | **December 31, 2007** |   |
|                            |   |              |       |                  |   |
| United States                   |   | $                 | 11,888,510 |                  |   | 45     | %      | $      | 9,942,948  |   |   | 49        | %      |
| China                           |   |              | 14,536,425 |                  |   | 55     | %      |   | 10,451,983 |   |   | 51        | %      |
|                            |   |              |       |                  |   |   |   |   |       |   |   |      |   |
| Total cash and cash equivalents |   | $                 | 26,424,935 |                  |   | 100    | %      | $      | 20,394,931 |   |   | 100  | %      |
|                            |   |              |       |                  |   |   |   |   |       |   |   |      |   |

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

Marketable securities available for sale at June 30, 2008 and December 31, 2007 consist of the following;

|                                           |   |              |      |                  |   |   |   |   |      |   |   |   |   |
|------------------------------------------------|--------|-------------------|-----------|-----------------------|--------|--------|--------|--------|-----------|--------|--------|--------|--------|
| **Client Name**                                |   | **June 30, 2008** |      | **December 31, 2007** |   |
|                                           |   |              |      |                  |   |
| China America Holdings, Inc.                   |   | $                 | 860,840   |                  |   | 18     | %      | $      | 1,828,481 |   |   | 23     | %      |
| China Logistics Group, Inc.                    |   |              | 2,488,250 |                  |   | 53     | %      |   | 4,042,500 |   |   | 52     | %      |
| Dragon International Group Corp.               |   |              | 1,012,403 |                  |   | 21     | %      |   | 1,171,844 |   |   | 15     | %      |
| Other                                          |   |              | 371,100   |                  |   | 8      | %      |   | 777,675   |   |   | 10     | %      |
|                                           |   |              |      |                  |   |   |   |   |      |   |   |   |   |
| Total Marketable securities available for sale |   | $                 | 4,732,593 |                  |   | 100    | %      | $      | 7,820,500 |   |   | 100    | %      |
|                                           |   |              |      |                  |   |   |   |   |      |   |   |   |   |

9

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

We categorize securities as investment in marketable securities available for sale and investment in marketable securities available for sale-related party. The securities of one client, Dragon Capital Group Corp., accounted for all investment in marketable securities available for sale–related party and totaled $766,019 and $1,315,488 at June 30, 2008 and December 31, 2007, respectively.

Dragon Capital Group Corp. (“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 of 1933. Dragon Capital does not intend to register the securities.

Accordingly, while under generally accepted accounting principles we are required to reflect the fair market value of these securities on our consolidated balance sheet, they are not readily convertible into cash and we may never realize the carrying value of these securities.

At June 30, 2008 our consolidated balance sheet includes accounts receivable–related party of $556,687. The total amount is due from Taiyuan YiWei Magnesium Industry Co., Ltd. to our majority owned subsidiary Chang Magnesium and resulted from other income generated in the six month period ended June 30, 2008, for which payment had not yet been collected.

Yuwei Huang, CEO and Chairman of Chang Magnesium, Chairman of Baotou Changxin Magnesium, and CEO and Vice Chairman of Golden Magnesium, is the Chairman of Taiyuan YiWei Magnesium Industry Co., Ltd., a Chinese limited liability company (“YiWei Magnesium”).

*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, 2008 and December 31, 2007, allowances for doubtful accounts were $335,851 and $290,456, respectively.

*Inventories*

Inventories, consisting of raw materials and finished goods related to our products, are stated at the lower of cost or market utilizing the weighted average method.

*Accounts payable-related parties*

At June 30, 2008 our consolidated balance sheet reflects accounts payable–related party of $735,184, which is comprised of $640,113 and $95,071 due YiWei Magnesium for the purchase of inventory by our majority owned subsidiaries, Chang Magnesium and Golden Magnesium, respectively. At December 31, 2007 our consolidated balance sheet reflects accounts payable–related party of $964,114 comprised of $604,596 and $359,518 due YiWei Magnesium for the purchase            of inventory by Chang Magnesium and Golden Magnesium, 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

10

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

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 are classified as available for sale securities 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. We did not elect to adopt SFAS 157 for            acquired non-financial assets and assumed non-financial liabilities.

*Marketable Securities*

Through our Advisory Services division, we receive securities which include common stock and common stock purchase warrants from client companies as compensation for consulting services. 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 #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 statement of operations when the securities are liquidated.

To date, all securities received from our client companies 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 recognizes revenue for 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.

Other-than-temporary impairment of securities, securities are 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.

The unrealized (loss) gain on marketable securities available for sale, net of the effect of taxes, for the three months ended June 30, 2008 and 2007 was ($1,646,180) and $ 48,315, respectively. The unrealized gain (loss) on marketable securities available for sale-related party, net of the effect of taxes, for the three months ended June 30, 2008 and 2007 was $3,625 and ($214,624) respectively.

The unrealized loss on marketable securities available for sale, net of the effect of taxes, for the six months ended June 30, 2008 and 2007 was $2,774,304 and $ 559,224, respectively. The unrealized loss on marketable securities available for sale-related party, net of the effect of taxes, for the six months ended June 30, 2008 and 2007 was $458,598 and $556,082 respectively.

11

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

The realized gain related to investments in marketable securities available for sale for the three months ended June 30, 2008 and 2007 was $3,756 and $206,236, respectively. Net realized loss on the sale of marketable securities available for sale-related party for the three months ended June 30, 2008 and 2007 was $0 and $16,041, respectively.

The realized (loss) gain related to investments in marketable securities available for sale for the six months ended June 30, 2008 and 2007 was ($35,705) and $206,236, respectively. Net realized loss on the sale of marketable securities available for sale-related party for the six months ended June 30, 2008 and 2007 was $0 and $32,014, 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, 2008 and December 31, 2007 our            consolidated balance sheets include prepaid expenses and other current assets of $21,564,895 and $15,439,462, respectively.

Prepaid expenses–related parties were $4,821,163 and $4,150,943, at June 30, 2008 and December 31, 2007, respectively. Chang Magnesium and Golden Magnesium advanced $1,917,468 and $28,544, respectively to YiWei Magnesium for the future delivery of inventory which has not yet been received. Golden Magnesium advanced $1,658,143 to Shanxi Senrun Coal Chemistry Co., Ltd., for the future supply of gas which had not yet been provided. Pan Asia Magnesium advanced            $1,217,008 to Shanxi Jinyang Coal and Coke Group Co., Ltd., for the future supply of gas which had not yet been provided.

Non-current prepaid expenses and other assets consist of (i) the fair value of client company securities 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. Accordingly, non-current prepaid expenses totaled $234,683 and            $433,075 at June 30, 2008 and December 31, 2007, respectively.

*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 SFAS No. 141. In each of our acquisitions we determined that fair values were equivalent to the acquired historical carrying costs. The estimated purchase price and the preliminary adjustments to historical book value of business entities acquired were recorded by us at the pre-acquisition carrying amount.

*Advances from customers*

Advances from customers represent (i) prepayments to us for merchandise that had not yet been shipped to customers of approximately $5.5 million, and (ii) the fair value of securities received as compensation which will be amortized over the term of the respective consulting agreement totaled approximately $248,900. We will recognize these advances as revenues as customers take delivery of the goods, in compliance with our revenue recognition policy. Advances from            customers totaled $5,785,605 and $6,963,061 at June 30, 2008 and December 31, 2007, respectively.

*Comprehensive income*

We follow Statement of Financial Accounting Standards No. 130 (SFAS 130) “*Reporting ComprehensiveIncome*” to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changesto the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital anddistributions to stockholders. Comprehensive income for the six months ended June 30, 2008 and 2007 included net income, foreigncurrency translation adjustments, unrealized gains or losses on marketable securities available for sale, net of income taxes, andunrealized gains or losses on marketable securities available for sale-related party, net of income taxes.

12

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

*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 rate during the six months ended June 30, 2008.

|                                                 |   |         |   |     |   |   |   |
|------------------------------------------------------|--------|--------------|--------|----------|--------|--------|--------|
|                                                 |   | **June 30,** |   |
|                                                 |   |         |   |
|                                                 |   | **2008**     |   | **2007** |   |
|                                                 |   |         |   |     |   |
| Quarter end RMB : U.S. Dollar exchange rate          |   |         | 6.8718 |     |   | 7.6248 |   |
| Average year-to-date RMB : U.S. Dollar exchange rate |   |         | 7.0726 |     |   | 7.7299 |   |

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 the six months ended June 30, 2008 or 2007.

*Minority interest*

Under generally accepted accounting principles when losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, the excess is not charged to the majority interest since there is no obligation of the minority interest to make good on such losses. We, therefore, absorbed all losses applicable to a minority interest where applicable. If future earnings do materialize, we shall be credited to the            extent of such losses previously absorbed.

*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.

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

*Revenue Recognition*

We follow the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin 104 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 February 2007, the FASB issued SFAS No. 159, “*The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FAS 115*”. SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair            value in subsequent reporting periods must be recognized in current earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We have adopted SFAS 159 and determined that it had no impact as of June 30, 2008, and we will continue to evaluate the impact, if any, of SFAS 159 on its financial statements.

In December 2007, the FASB issued SFAS 141 (revised 2007), “*Business Combinations*”. SFAS 141R is a revision to SFAS 141 and includes substantial changes to the acquisition method used to account for business combinations (formerly the “purchase accounting” method), including broadening the definition of a business, as well as revisions to accounting methods for contingent consideration and other contingencies related to the acquired            business, accounting for transaction costs, and accounting for adjustments to provisional amounts recorded in connection with acquisitions. SFAS 141R retains the fundamental requirement of SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R is effective for periods beginning on or after December 15, 2008, and will apply to all business combinations occurring after the            effective date. We are currently evaluating the requirements of SFAS 141R and the impact of adoption on our consolidated financial statements.

In December 2007, the FASB issued SFAS 160, “*Non-controlling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements*” (“ARB 51”). This Statement amends ARB 51 to establish new standards that will govern the (1) accounting for and reporting of non-controlling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries.            A non-controlling interest will be reported as part of equity in the consolidated financial statements. Losses will be allocated to the non-controlling interest, and, if control is maintained, changes in ownership interests will be treated as equity transactions. Upon a loss of control, any gain or loss on the interest sold will be recognized in earnings. SFAS 160 is effective for periods beginning after December 15, 2008. We are currently evaluating the requirements of SFAS 160 and            the impact of adoption on our consolidated financial statements.

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 are currently evaluating the requirements of SFAS 161 and the impact of adoption on our consolidated financial statements.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“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

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

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 2010,            and this standard must be applied on a retrospective basis. We are evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated financial position and results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards (“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 (“SEC”) 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 June 16, 2008, the FASB issued final Staff Position (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 are currently evaluating the requirements of (FSP) No. EITF 03-6-1, as well as the impact of the adoption on our consolidated financial statements.

**NOTE 3 – EARNINGS (LOSS) 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.

|                                                                                                                                     |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|------------|--------------------------------------|--------|----------|--------|--------------------------------------|------------|--------|--------|--------|--------|
|                                                                                                                                     |   | **Three Months Ended                        June 30,** |       |
|                                                                                                                                     |   |                                                   |       |
|                                                                                                                                     |   | **2008**                                               |       | **Per                        Share** |   | **2007** |   | **Per                        Share** |       |
|                                                                                                                                     |   |
| **Numerator:**                                                                                                                           |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Net income                                                                                                                               |   | $                                                      | 7,514,875  |                                 |   | 0.33     |   | $                                    | 2,267,742  |   |   | 0.16   |   |
| Series A preferred stock:                                                                                                                |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Preferred stock dividend                                                                                                                 |   |                                                   | (1,047,937 | )                                    |   | (0.05    | )      |                                 | —    |   |   |   |   |
| Relative fair value of detachable warrants issued                                                                                        |   |                                                   | —    |                                 |   |     |   |                                 | —    |   |   |   |   |
| Preferred stock beneficial conversion feature                                                                                            |   |                                                   | —    |                                 |   |     |   |                                 | —    |   |   |   |   |
|                                                                                                                                     |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Numerator for basic EPS, Income applicable to common stock                        holders (A)                                            |   |                                                   | 6,466,938  |                                 |   | 0.29     |   |                                 | 2,267,742  |   |   | 0.16   |   |
|                                                                                                                                     |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Plus: Income impact of assumed conversions                                                                                               |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
|   Preferred stock dividends – unconverted                                                                                |   |                                                   | 20,015     |                                 |   |     |   |                                 | —    |   |   |   |   |
|                                                                                                                                     |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Numerator for diluted EPS, Income applicable to common stock holders plus assumed conversions (*)(B)                                     |   | $                                                      | 6,486,953  |                                 |   | 0.26     |   | $                                    | 2,267,742  |   |   | 0.15   |   |
|                                                                                                                                     |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| **Denominator:**                                                                                                                         |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Denominator for basic earnings per share - weighted average number of common shares outstanding (C)                                      |   |                                                   | 22,663,337 |                                 |   |     |   |                                 | 13,882,955 |   |   |   |   |
| Stock Awards, Options, and Warrants                                                                                                      |   |                                                   | 2,620,298  |                                 |   |     |   |                                 | 1,497,465  |   |   |   |   |
| Preferred stock dividends – unconverted                                                                                            |   |                                                   | 143,750    |                                 |   |     |   |                                 | —    |   |   |   |   |
|                                                                                                                                     |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Denominator for diluted earnings per share – adjusted weighted average outstanding average number of common shares outstanding (D) |   |                                                   | 25,427,385 |                                 |   |     |   |                                 | 15,380,420 |   |   |   |   |
|                                                                                                                                     |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| **Basic and Diluted Income Per Common Share:**                                                                                           |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Earnings per share - basic (A)/(C)                                                                                                       |   | $                                                      | 0.29       |                                 |   |     |   | $                                    | 0.16       |   |   |   |   |
|                                                                                                                                     |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Earnings per share - diluted (B)/(D)                                                                                                     |   | $                                                      | 0.26       |                                 |   |     |   | $                                    | 0.15       |   |   |   |   |
|                                                                                                                                     |   |                                                   |       |                                 |   |     |   |                                 |       |   |   |   |   |

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

|                                                                                                                                     |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|------------|--------------------------------------|--------|----------|--------|--------------------------------------|------------|--------|--------|--------|--------|
|                                                                                                                                     |   | **Six Months Ended                        June 30,** |       |
|                                                                                                                                     |   |                                                 |       |
|                                                                                                                                     |   | **2008**                                             |       | **Per                        Share** |   | **2007** |   | **Per                        Share** |       |
|                                                                                                                                     |   |
| **Numerator:**                                                                                                                           |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Net income                                                                                                                               |   | $                                                    | 12,267,751 |                                 |   | 0.56     |   | $                                    | 4,138,611  |   |   | 0.31   |   |
| Series A preferred stock:                                                                                                                |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Preferred stock dividend                                                                                                                 |   |                                                 | (1,189,467 | )                                    |   | (0.05    | )      |                                 | —    |   |   |   |   |
| Relative fair value of detachable warrants issued                                                                                        |   |                                                 | (2,765,946 | )                                    |   | (0.13    | )      |                                 | —    |   |   |   |   |
| Preferred stock beneficial conversion feature                                                                                            |   |                                                 | (2,451,446 | )                                    |   | (0.11    | )      |                                 | —    |   |   |   |   |
|                                                                                                                                     |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Numerator for basic EPS, Income applicable to common stock                        holders (A)                                            |   |                                                 | 5,860,892  |                                 |   | 0.27     |   |                                 | 4,138,611  |   |   | 0.31   |   |
|                                                                                                                                     |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Plus: Income impact of assumed conversions                                                                                               |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
|   Preferred stock dividends – unconverted                                                                                |   |                                                 | 31,097     |                                 |   |     |   |                                 | —    |   |   |   |   |
|                                                                                                                                     |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Numerator for diluted EPS, Income applicable to common stock holders plus assumed conversions (*)(B)                                     |   | $                                                    | 5,891,989  |                                 |   | 0.24     |   | $                                    | 4,138,611  |   |   | 0.27   |   |
|                                                                                                                                     |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| **Denominator:**                                                                                                                         |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Denominator for basic earnings per share - weighted average number of common shares outstanding (C)                                      |   |                                                 | 21,833,388 |                                 |   |     |   |                                 | 13,464,666 |   |   |   |   |
| Stock Awards, Options, and Warrants                                                                                                      |   |                                                 | 2,215,928  |                                 |   |     |   |                                 | 1,709,444  |   |   |   |   |
| Preferred stock dividends – unconverted                                                                                            |   |                                                 | 111,367    |                                 |   |     |   |                                 | —    |   |   |   |   |
|                                                                                                                                     |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Denominator for diluted earnings per share – adjusted weighted average outstanding average number of common shares outstanding (D) |   |                                                 | 24,160,683 |                                 |   |     |   |                                 | 15,174,110 |   |   |   |   |
|                                                                                                                                     |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| **Basic and Diluted Income Per Common Share:**                                                                                           |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Earnings per share - basic (A)/(C)                                                                                                       |   | $                                                    | 0.27       |                                 |   |     |   | $                                    | 0.31       |   |   |   |   |
|                                                                                                                                     |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |
| Earnings per share - diluted (B)/(D)                                                                                                     |   | $                                                    | 0.24       |                                 |   |     |   | $                                    | 0.27       |   |   |   |   |
|                                                                                                                                     |   |                                                 |       |                                 |   |     |   |                                 |       |   |   |   |   |

* The denominator in diluted earnings per share for the three months period and six month period ended June 30, 2008 does not include assumed shares outstanding prior to conversion under the “if converted” method of 518,764 shares and 728,134 shares, respectively, as such inclusion would be anti-dilutive.

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 are 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 six month periods ended June 30, 2008 and 2007, respectively.

16

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

|                                                                                               |   |                                                   |       |                                                 |   |      |   |     |       |   |   |      |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|------------|------------------------------------------------------|--------|-----------|--------|----------|------------|--------|--------|-----------|--------|
|                                                                                               |   | **Three Months Ended                        June 30,** |       | **Six Months Ended                        June 30,** |   |
|                                                                                               |   |                                                   |       |                                                 |   |
|                                                                                               |   | **2008**                                               |       | **2007**                                             |   | **2008**  |   | **2007** |       |
|                                                                                               |   |                                                   |       |                                                 |   |      |   |     |       |
| Comprehensive Income                                                                               |   |                                                   |       |                                                 |   |      |   |     |       |   |   |      |   |
|                                                                                               |   |                                                   |       |                                                 |   |      |   |     |       |   |   |      |   |
| Net Income                                                                                         |   | $                                                      | 7,514,875  |                                                 | $      | 2,267,742 |   | $        | 12,267,751 |   | $      | 4,138,611 |   |
|                                                                                               |   |                                                   |       |                                                 |   |      |   |     |       |   |   |      |   |
| Other Comprehensive Income (Loss)                                                                  |   |                                                   |       |                                                 |   |      |   |     |       |   |   |      |   |
|                                                                                               |
| Foreign currency translation gains                                                                 |   |                                                   | 1,309,234  |                                                 |   | 167,891   |   |     | 3,106,933  |   |   | 248,049   |   |
| Unrealized loss on marketable securities held for sale, net of income taxes                        |   |                                                   | (1,646,180 | )                                                    |   | 48,315    |   |     | (2,774,304 | )      |   | (559,224  | )      |
| Unrealized gain (loss) on marketable securities held for sale-related parties, net of income taxes |   |                                                   | 3,625      |                                                 |   | (214,624  | )      |     | (458,598   | )      |   | (556,082  | )      |
|                                                                                               |   |                                                   |       |                                                 |   |      |   |     |       |   |   |      |   |
| Total Other Comprehensive Income (Loss)                                                            |   |                                                   | (333,321   | )                                                    |   | 1,582     |   |     | (125,969   | )      |   | (867,257  | )      |
|                                                                                               |   |                                                   |       |                                                 |   |      |   |     |       |   |   |      |   |
| Total Comprehensive Income                                                                         |   | $                                                      | 7,181,554  |                                                 | $      | 2,269,324 |   | $        | 12,141,782 |   | $      | 3,271,354 |   |
|                                                                                               |   |                                                   |       |                                                 |   |      |   |     |       |   |   |      |   |

**NOTE 5 – INVENTORIES**

At June 30, 2008 and December 31, 2007, inventories consisted of the following:

|           |   |              |       |                  |   |      |   |
|----------------|--------|-------------------|------------|-----------------------|--------|-----------|--------|
|           |   | **June 30, 2008** |       | **December 31, 2007** |   |
|           |   |              |       |                  |   |
|           |   |              |       |                  |   |      |   |
| Raw materials  |   | $                 | 9,969,438  |                  | $      | 4,217,788 |   |
| Finished goods |   |              | 2,317,100  |                  |   | 1,076,198 |   |
|           |   |              |       |                  |   |      |   |
|           |   | $                 | 12,286,538 |                  | $      | 5,293,986 |   |
|           |   |              |       |                  |   |      |   |

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, 2008 and December 31, 2007.

**NOTE 6 – PREPAID EXPENSES AND OTHER ASSETS**

At June 30, 2008 and December 31, 2007, prepaid expenses and other assets consist of the following:

|                                                                                                                          |   |              |        |                  |   |        |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|-----------------------|--------|-------------|--------|
|                                                                                                                          |   | **June 30, 2008** |        | **December 31, 2007** |   |
|                                                                                                                          |   |              |        |                  |   |
|                                                                                                                          |   |              |        |                  |   |        |   |
| Prepayments to vendors for merchandise that had not yet been shipped                                                          |   | $                 | 14,795,191  |                  | $      | 11,557,231  |   |
| Other receivables                                                                                                             |   |              | 4,348,620   |                  |   | 3,043,193   |   |
| Fair value of client securities received for payment of services assigned to executive officers and employees as compensation |   |              | 295,775     |                  |   | 638,961     |   |
| Loans receivable                                                                                                              |   |              | 1,060,156   |                  |   | —     |   |
| Other assets acquired in connection with acquisition of CDI Pan Asia                                                          |   |              | 146,978     |                  |   | 138,089     |   |
| VAT Tax refund available from Chinese government                                                                              |   |              | 1,109,361   |                  |   | 143,784     |   |
| Security deposits                                                                                                             |   |              | 43,497      |                  |   | 351,279     |   |
|                                                                                                                          |   |              |        |                  |   |        |   |
|                                                                                                                          |   |              |        |                  |   |        |   |
| Total                                                                                                                         |   |              | 21,799,578  |                  |   | 15,872,537  |   |
|                                                                                                                          |   |              |        |                  |   |        |   |
| Less: Current Portion                                                                                                         |   |              | (21,564,895 | )                     |   | (15,439,462 | )      |
|                                                                                                                          |   |              |        |                  |   |        |   |
|                                                                                                                          |   |              |        |                  |   |        |   |
| Prepaid expenses and other assets, non-current                                                                                |   | $                 | 234,683     |                  | $      | 433,075     |   |
|                                                                                                                          |   |              |        |                  |   |        |   |

17

----

**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

**NOTE 7 – PROPERTY****, PLANT AND EQUIPMENT**

At June 30, 2008 and December 31, 2007, property, plant and equipment consisted of the following:

|                           |   |            |        |              |   |                  |   |   |       |   |
|--------------------------------|--------|-----------------|-------------|-------------------|--------|-----------------------|--------|--------|------------|--------|
|                           |   | **Useful Life** |        | **June 30, 2008** |   | **December 31, 2007** |   |
|                           |   |            |        |              |   |                  |   |
|                           |   |            |        |              |   |                  |   |   |       |   |
| Building                       |   |            | 10-40 years |              | $      | 5,335,130             |   | $      | 4,904,304  |   |
| Manufacturing equipment        |   |            | 10 years    |              |   | 12,070,906            |   |   | 7,765,130  |   |
| Office equipment and furniture |   |            | 3-5 years   |              |   | 570,812               |   |   | 380,846    |   |
| Autos and trucks               |   |            | 5 years     |              |   | 766,328               |   |   | 468,761    |   |
| Construction in progress       |   |            | N/A         |              |   | 8,406,176             |   |   | 5,069,284  |   |
|                           |   |            |        |              |   |                  |   |   |       |   |
|                           |   |            |        |              |   |                  |   |   |       |   |
| Total                          |   |            |        |              |   | 27,149,352            |   |   | 18,588,325 |   |
|                           |   |            |        |              |   |                  |   |   |       |   |
| Less: Accumulated Depreciation |   |            |        |              |   | (1,499,088            | )      |   | (577,801   | )      |
|                           |   |            |        |              |   |                  |   |   |       |   |
|                           |   |            |        |              | $      | 25,650,264            |   | $      | 18,010,524 |   |
|                           |   |            |        |              |   |                  |   |   |       |   |

For the three and six months ended June 30, 2008 depreciation expense totaled $494,967 and $921,287, respectively. For the three and six months ended June 30, 2007 depreciation expense totaled $65,989 and $122,810, respectively.

**NOTE 8 – PROPERTY USE RIGHTS**

Property use rights, consisting of mining and property use rights amounted to $582,733 and $553,304 at June 30, 2008 and December 31, 2007, respectively.

We acquired property use rights valued at $96,078, in connection with the acquisition of CDI Magnesium in February 2007. The property use rights provide for the use of certain properties located in China until February 12, 2010. We will begin to amortize the value of the property use rights when the magnesium refinery commences operations.

In connection with our acquisition of CDI Jixiang Metal in December 2007, we acquired mining rights to approximately 51 acres located in the Yongshun Kaxi Lake Mining area of China. Acquisition costs for the mining rights as of June 30, 2008 are $486,655 (RMB 3,344,193). CDI Jixiang Metal is presently in the exploration stage of its business operations and is engaged in the search of mineral deposits or reserves. We intend to conduct exploration activities on this            property and 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. Interest costs are capitalized on mineral properties and mineral interests in development. 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 ofproven and probable reserves are charged to operations as incurred. Development costs incurred on mineral interests with proven andprobable reserves will be capitalized as mineral properties. We regularly evaluate our investments in mineral interests to assessthe recoverability and/or the residual value of the investments in these assets. All mineral interests and mineral properties arereviewed for impairment whenever events or circumstances change which indicate the carrying amount of an asset may not berecoverable, utilizing established guidelines based upon undiscounted future net cash flows from the asset or upon the determinationthat certain exploration properties do not have sufficient potential for economic mineralization.

18

----

**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

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, 2008 and December 31, 2007 consisted of the following:

|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|------------|----------------------------------------------|--------|------------|--------|
| **Description**                                                                                                                                                                   |   | **June 30,                        2008** |       | **December 31,                        2007** |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |
| Loan due to Shanxi Xinglong Foundry Co., Ltd. Due on demand. Non-interest bearing.                                                                                                |   | $                                        | —    |                                         | $      | 410,167    |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
| Loan due to Taiyuan YanKang Industrial Co., Ltd. Due on demand. Non-interest bearing.                                                                                             |   |                                     | —    |                                         |   | 410,167    |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
| Loan due to Xu XianJun. Due on demand. Non-interest bearing.                                                                                                                      |   |                                     | —    |                                         |   | 492,200    |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
| Loan due to ShanXi Rural Credit Union. Due on demand. 17.18% annual interest rate.                                                                                                |   |                                     | 429,291    |                                         |   | —    |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
| Loan due to China MinSheng Bank. Due July 24, 2008. 7.89% annual interest rate. Secured by Lang Chemical’s restricted cash.                                                 |   |                                     | 727,611    |                                         |   | —    |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
| Loan due to China Commercial Bank, dated July 3, 2007, due in quarterly installments through July 3, 2012. 8.13% annual interest rate. Secured by Lang Chemical’s property. |   |                                     | 210,280    |                                         |   | 216,932    |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
| Loan due to JiNan Commercial Bank due October 15, 2008. 9.72% annual interest rate. Guaranteed by JiNan WuFa Boiler Co., Ltd.                                                     |   |                                     | 72,761     |                                         |   | 68,360     |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
| Loan due to ShanXi Rural Credit Union. Due on demand. 12.58% annual interest rate.                                                                                                |   |                                     | —    |                                         |   | 546,889    |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
| Total                                                                                                                                                                             |   |                                     | 1,439,943  |                                         |   | 2,144,715  |   |
| Less: Current Portion                                                                                                                                                             |   |                                     | (1,229,663 | )                                            |   | (1,978,142 | )      |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |
| Loans payable, long-term                                                                                                                                                          |   | $                                        | 210,280    |                                         | $      | 166,573    |   |
|                                                                                                                                                                              |   |                                     |       |                                         |   |       |   |

**NOTE 10 – RELATED PARTY TRANSACTIONS**

At June 30, 2008 we reported accounts receivable–related party of $556,687 due Chang Magnesium from YiWei Magnesium for services provided during the six months ended June 30, 2008. Income generated from these services is reflected in other income for the six months ended June 30, 2008.

At June 30, 2008, we reported prepaid expenses-related parties of $4,821,163 comprised of:

|   |    |                                                                                                                                                                                              |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | – | $1,917,468 prepaid by Chang Magnesium to YiWei Magnesium, the minority interest holder in Chang Magnesium and Golden Magnesium, for future delivery of inventory which has not yet been received, |
|   |    |                                                                                                                                                                                              |
|   | – | $28,544 prepaid by Golden Magnesium to YiWei Magnesium for future delivery of inventory which has not yet been received,                                                                          |

19

----

**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

|    |                                                                                                                                                                                                                                                                                                                         |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| – | $1,658,143 prepaid by Golden Magnesium to Shanxi Senrun Coal Chemistry Co., Ltd., for the future supply of gas which has not yet been provided, Shanxi Senrun Coal Chemistry Co., ltd., a Chinese limited liability company, holds a 20% interest in Golden Magnesium (“Senrun Coal”), and                       |
|    |                                                                                                                                                                                                                                                                                                                         |
| – | $1,217,008 prepaid by Pan Asia Magnesium to Shanxi Jinyang Coal and Coke Group Co., Ltd. for the future supply of gas supplies which has not yet been provided. Shanxi Jinyang Coal and Coke Group Co., Ltd., a Chinese limited liability company, holds a 49% interest in Pan Asia Magnesium (“Jinyang Group”). |

At June 30, 2008 we reported due from related party of $14,552 due CDI Metal Recycling from Zhou Weiyi, the minority interest holder, for the contribution of registered capital related to the formation of CDI Metal Recycling.

At June 30, 2008 we reported accounts payable–related parties of $735,184 comprised of:

|    |                                                      |
|---------|-----------------------------------------------------------|
| – | $640,113 due from Chang Magnesium to YiWei Magnesium, and |
|    |                                                      |
| – | $95,071 due from Golden Magnesium to YiWei Magnesium.     |

At June 30, 2008, we reported due to related party of $576,890 due YiWei Magnesium from Golden Magnesium. YiWeiMagnesium advanced funds to Golden Magnesium for working capital purposes in 2007 prior to our contribution of investment.

At June 30, 2008 we reported Loans receivable–related parties of $1,597,305 comprised of:

|    |                                              |
|---------|---------------------------------------------------|
| – | $74,216 loan receivable from Dragon Capital; and  |
|    |                                              |
| – | $1,523,089 loan receivable from NanTong Chemical. |

NanTong Chemical Co., Ltd. is a Chinese limited liability company, (“NanTong Chemical”) owned byJingdong Chen and Qian Zhu, the two minority shareholders of Lang Chemical.

At June 30, 2008 our consolidated balance sheet includes accounts receivable–related party of $556,687. The total amount is due from Taiyuan YiWei Magnesium Industry Co., Ltd. to our majority owned subsidiary Chang Magnesium and resulted from other income generated in the six month period ended June 30, 2008, for which payment had not yet been collected.

Yuwei Huang, CEO and Chairman of Chang Magnesium, Chairman of Baotou Changxin Magnesium, and CEO and Vice Chairman of Golden Magnesium, is the Chairman of Taiyuan YiWei Magnesium Industry Co., Ltd., a Chinese limited liability company (“YiWei Magnesium”).

**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, 2008, there were 1,006 shares of Series A Convertible Preferred Stock issued and outstanding and there were no shares of Series A Convertible Preferred Stock issued and outstanding as of December 31, 2007.

*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.

20

----

**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

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, 2008, 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, 10,346 shares of common stock in payment of the accrued dividends, and 136,500 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     |
|    |                                     |
| – | risk free rate of 2.06%                  |

The relative fair value of the warrants of $2,765,946 was recorded as a return to the Preferred Stockholder (dividend) by debiting Retained Earnings and crediting Additional Paid-In Capital.

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 the six months ended June 30, 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 three and six months            ended June 30, 2008 or have an impact on total stockholders’ equity as of that date. 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.

In addition, at closing of the Series A Preferred Stock Offering, Dr. James Wang and Messrs. Marc Siegel, David Stein and Richard Galterio, entered into “lock up” agreements whereby they agreed not to sell any shares of common stock beneficially owned by them for a sale price of less than $7.70 per share.

21

----

**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

*Common Stock*

China Direct has 1,000,000,000 shares of common stock, par value $.0001, authorized. At June 30, 2008 there were 23,501,056 shares of common stock issued and outstanding and there were 20,982,010 shares of common stock issued and outstanding at December 31, 2007.

For the six months ended June 30, 2008 and 2007, amortization of stock based compensation amounted to $848,364 and $196,010, respectively.

During the six months ended June 30, 2008, we issued 155,000 shares of common stock in connection with the exercise of common stock warrants. Of these warrants, 25,000 were exercised at $4.00 per share; 30,000 were exercised at $7.50 per share and 100,000 were exercised at $8.00 per share.

During the six months ended June 30, 2008, we issued 510,950 shares of common stock in connection with the exercise of common stock options for net proceeds of $1,757,376. Of these options, 298,950 were exercised at $2.50 per share; 25,000 were exercised at $3.00 per share and 187,000 were exercised at $5.00 per share.

We issued 1,706,250 shares of our common stock upon conversion of the Series A Preferred Stock, 10,346 shares of common stock in payment of the accrued dividends, and 136,500 shares of common stock pursuant to the Make Whole Additional Amount feature of the Series A Preferred Stock.

A registration statement on Form S-3 covering the public sale of shares of up to $70 million of our common stock or other securities and the resale of shares of our common stock by certain selling shareholders pursuant to Rule 415 under the Securities Act of 1933 was declared effective by the Securities and Exchange Commission on August 1, 2008.

*Stock Option Plans*

On August 16, 2006, our board of directors authorized 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, 2008, and December 31, 2007 there were options outstanding to purchase an aggregate of 365,000 and 390,000 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 Plan covering 2,000,000 shares of our commonstock. As the 2006 Stock Plan was not approved by our shareholders prior to October 19, 2007, we may no longer award incentive stockoptions under the 2006 Stock Plan and any incentive stock options previously awarded under the 2006 Stock Plan were converted intonon-qualified options upon terms and conditions determined by the board of directors, as nearly as is reasonably practicable in itssole determination, to the terms and conditions of the incentive stock options being so converted. At June 30, 2008 and December 31,2007, there were options outstanding to purchase an aggregate of 1,993,750 and 1,615,000 shares, respectively of common stockoutstanding under the 2006 Stock Plan at exercise prices ranging from $.01 to $5.00 per share.

During the six months ended June 30, 2008, we granted 115,000 options under the 2006 equity plan to employees with an exercise price of $7.50 per share, of these option, 90,000 options were canceled during the quarter ended June 30, 2008. 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 3.28%, volatility of 90% and expected term of 3 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, 2008 no awards had been made 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, 2008 we granted 32,900 shares of restricted stock with vesting dates ranging from August 2008 to June 2010 under this plan.

22

----

**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

The following table sets forth our stock option activity during the six months ended June 30, 2008:

|                                                                 |   |                          |      |                                |   |   |   |
|----------------------------------------------------------------------|--------|-------------------------------|-----------|-------------------------------------|--------|--------|--------|
|                                                                 |   | **Shares underlying options** |      | **Weighted average exercise price** |   |
|                                                                 |   |                          |      |                                |   |
| Outstanding at December 31, 2007                                     |   |                          | 6,940,620 |                                | $      | 8.14   |   |
| Granted                                                              |   |                          | 115,000   |                                |   | 7.50   |   |
| Exercised                                                            |   |                          | (510,950  | )                                   |   | 3.44   |   |
| Expired or cancelled                                                 |   |                          | (90,000   | )                                   |   | 7.50   |   |
|                                                                 |   |                          |      |                                |   |   |   |
| Outstanding at June 30, 2008                                         |   |                          | 6,454,670 |                                | $      | 8.51   |   |
|                                                                 |   |                          |      |                                |   |   |   |
| Exercisable at June 30, 2008                                         |   |                          | 5,042,670 |                                | $      | 8.08   |   |
|                                                                 |   |                          |      |                                |   |   |   |
|                                                                 |   |                          |      |                                |   |   |   |
| Weighted-average exercise price of options granted during the period |   |                          |      |                                | $      | 7.50   |   |
|                                                                 |   |                          |      |                                |   |   |   |

The weighted average remaining contractual life and weighted average exercise price of options outstanding at June 30, 2008, 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** |   |
|                                                                       |   |                                                                            |   |                                                                                                                                                |   |                                                                              |   |                                           |   |                                                                                                                                                                          |   |   |      |   |   |
|                                                                       |   |                                                                            |   |                                                                                                                                                |   |                                                                              |   |                                           |   |                                                                                                                                                                          |   |   |      |   |   |    |   |
| $                                                                          | 0.01   |                                                                            |   | 1,050,000                                                                                                                                           |   |                                                                              | 1.65   |                                           | $      | 0.01                                                                                                                                                                          |   |   | 1,050,000 |   | $      | 0.01    |   |
|                                                                       | 2.25   |                                                                            |   | 400                                                                                                                                                 |   |                                                                              | 6.31   |                                           |   | 2.25                                                                                                                                                                          |   |   | 400       |   |   | 2.25    |   |
|                                                                       | 2.50   |                                                                            |   | 579,690                                                                                                                                             |   |                                                                              | 3      |                                           |   | 2.50                                                                                                                                                                          |   |   | 579,690   |   |   | 2.50    |   |
|                                                                       | 3.00   |                                                                            |   | 50,000                                                                                                                                              |   |                                                                              | 3      |                                           |   | 3.00                                                                                                                                                                          |   |   | 50,000    |   |   | 3.00    |   |
|                                                                       | 5.00   |                                                                            |   | 1,227,000                                                                                                                                           |   |                                                                              | 3      |                                           |   | 5.00                                                                                                                                                                          |   |   | 1,227,000 |   |   | 5.00    |   |
|                                                                       | 7.50   |                                                                            |   | 1,412,000                                                                                                                                           |   |                                                                              | 4      |                                           |   | 7.50                                                                                                                                                                          |   |   | 1,375,000 |   |   | 7.50    |   |
|                                                                       | 10.00  |                                                                            |   | 1,375,000                                                                                                                                           |   |                                                                              | 6      |                                           |   | 10.00                                                                                                                                                                         |   |   | —   |   |   | — |   |
|                                                                       | 15.00  |                                                                            |   | 500                                                                                                                                                 |   |                                                                              | 1.94   |                                           |   | 15.00                                                                                                                                                                         |   |   | 500       |   |   | 15.00   |   |
|                                                                       | 30.00  |                                                                            |   | 760,000                                                                                                                                             |   |                                                                              | 4      |                                           |   | 30.00                                                                                                                                                                         |   |   | 760,000   |   |   | 30.00   |   |
|                                                                       | 56.25  |                                                                            |   | 80                                                                                                                                                  |   |                                                                              | 6.42   |                                           |   | 56.25                                                                                                                                                                         |   |   | 80        |   |   | 56.25   |   |
|                                                                       |   |                                                                            |   |                                                                                                                                                |   |                                                                              |   |                                           |   |                                                                                                                                                                          |   |   |      |   |   |    |   |
|                                                                       |   |                                                                            |   | 6,454,670                                                                                                                                           |   |                                                                              | 3.83   |                                           | $      | 8.51                                                                                                                                                                          |   |   | 5,042,670 |   | $      | 8.08    |   |
|                                                                       |   |                                                                            |   |                                                                                                                                                |   |                                                                              |   |                                           |   |                                                                                                                                                                          |   |   |      |   |   |    |   |

          During the six months ended June 30, 2008, 510,950 options were exercised at an average excercise price of $3.44 per share with an intrinsic value of $2,998,055. At June 30, 2008, the aggregate intrinsic value of outstanding and exercisable options was $13,592,416.

*Common Stock Purchase Warrants*

During the six months ended June 30, 2008, we granted 25,000 common stock purchase warrants to consultants. The warrants are 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.

23

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

A summary of the status of our outstanding common stock purchase warrants granted as of June 30, 2008 and changes during the period is as follows:

|                             |   |           |      |         |         |    |   |
|----------------------------------|--------|----------------|-----------|--------------|--------------|---------|--------|
|                             |   |           |      |         | **Weighted** |    |
|                             |   | **Shares**     |      | **Average**  |         |
|                             |   | **Underlying** |      | **Exercise** |         |
|                             |   | **Warrants**   |      | **Price**    |         |
|                             |   |           |      |         |         |
| Outstanding at December 31, 2007 |   |           | 2,648,312 |         | $            | 8.70    |   |
| Granted                          |   |           | 2,175,000 |         |         | 8.03    |   |
| Exercised                        |   |           | (155,000  | )            |         | 7.26    |   |
| Expired or cancelled             |   |           | —   |         |         | — |   |
|                             |   |           |      |         |         |    |   |
| Outstanding at June 30, 2008     |   |           | 4,668,312 |         | $            | 8.44    |   |
|                             |   |           |      |         |         |    |   |
| Exercisable at June 30, 2008     |   |           | 4,668,312 |         | $            | 8.44    |   |
|                             |   |           |      |         |         |    |   |

The following information applies to all warrants outstanding at June 30, 2008.

|         |   |       |                     |             |                     |         |         |         |   |      |   |         |         |   |   |   |   |
|--------------|--------|------------|--------------------------|------------------|--------------------------|--------------|--------------|--------------|--------|-----------|--------|--------------|--------------|--------|--------|--------|--------|
|         |   |       | **Warrants Outstanding** |             | **Warrants Exercisable** |
|         |   |       |                     |             |                     |
|         |   |       |                     |             |                     | **Weighted** |         |         |   |      |   |         |         |   |   |
|         |   |       |                     |             |                     | **Average**  |         | **Weighted** |   |      |   |         | **Weighted** |
| **Range of** |   |       |                     |             | **Remaining**            |         | **Average**  |         |   |      |   | **Average**  |
| **Exercise** |   |       |                     |             | **Contractual**          |         | **Exercise** |         |   |      |   | **Exercise** |
| **Prices**   |   | **Shares** |                     | **Life (Years)** |                     | **Price**    |         | **Shares**   |   | **Price** |
|         |   |       |                     |             |                     |         |         |         |   |      |
|         |   |       |                     |             |                     |         |         |         |   |      |   |         |         |   |   |   |
| $            | 2.50   |       |                     | 50,000           |                     |         | 3.42         |         | $      | 2.50      |   |         | 50,000       |   | $      | 2.50   |
|         | 4.00   |       |                     | 523,750          |                     |         | 3.28         |         |   | 4.00      |   |         | 523,750      |   |   | 4.00   |
|         | 7.50   |       |                     | 60,000           |                     |         | 1.89         |         |   | 7.50      |   |         | 60,000       |   |   | 7.50   |
|         | 8.00   |       |                     | 2,050,000        |                     |         | 4.62         |         |   | 8.00      |   |         | 2,050,000    |   |   | 8.00   |
|         | 10.00  |       |                     | 1,869,562        |                     |         | 3.24         |         |   | 10.00     |   |         | 1,869,562    |   |   | 10.00  |
|         | 11.00  |       |                     | 25,000           |                     |         | 2.78         |         |   | 11.00     |   |         | 25,000       |   |   | 11.00  |
|         | 15.00  |       |                     | 90,000           |                     |         | 1.89         |         |   | 15.00     |   |         | 90,000       |   |   | 15.00  |
|         |   |       |                     |             |                     |         |         |         |   |      |   |         |         |   |   |   |
|         |   |       |                     | 4,668,312        |                     |         | 3.81         |         |   |      |   |         | 4,668,312    |   |   |   |
|         |   |       |                     |             |                     |         |         |         |   |      |   |         |         |   |   |   |

**NOTE 12 – SEGMENT INFORMATION**

The following information is presented in accordance with SFAS No. 131, “*Disclosure about segments of an Enterprise and Related Information”*. For the six month period ending June 30, 2008, we operated in four reportable business segments as follows;

|   |   |                    |                                                                         |
|--------|--------|-------------------------|------------------------------------------------------------------------------|
|   | 1.     | Magnesium segment       |
|   |   |                    |
|   |   | –                 | Chang Magnesium, a 51% majority owned subsidiary of CDI China                |
|   |   |                         |                                                                         |
|   |   | –                 | Chang Trading, a wholly owned subsidiary of Chang Magnesium                  |
|   |   |                         |                                                                         |
|   |   | –                 | Excel Rise, a wholly owned subsidiary of Chang Magnesium                     |
|   |   |                         |                                                                         |
|   |   | –                 | CDI Magnesium, a 51% majority owned subsidiary of Capital One Resource       |
|   |   |                    |                                                                         |
|   |   | –                 | Asia Magnesium, a wholly owned subsidiary of Capital One Resource            |
|   |   |                    |                                                                         |
|   |   | –                 | Golden Magnesium, a 52% majority owned subsidiary of Asia Magnesium          |
|   |   |                    |                                                                         |
|   |   | –                 | Pan Asia Magnesium, a 51% majority owned subsidiary of CDI China             |
|   |   |                    |                                                                         |
|   |   | –                 | Baotou Changxin Magnesium, a 51% majority owned subsidiary of CDI China      |
|   |   |                    |                                                                         |
|   |   | –                 | Capital One Resource, a wholly owned subsidiary of CDI Shanghai Management A |
|   |   |                    |                                                                         |
|   | 2.     | Basic Materials segment |
|   |   |                    |
|   |   | –                 | Lang Chemical, a 51% majority owned subsidiary of CDI China                  |
|   |   |                    |                                                                         |
|   |   | –                 | CDI Jingkun Zinc, a 95% majority owned subsidiary of CDI Shanghai Management |
|   |   |                    |                                                                         |
|   |   | –                 | CDI Jixiang Metal, a wholly owned subsidiary of CDI China                    |
|   |   |                    |                                                                         |
|   |   | –                 | CDI Wanda, a 51% majority owned subsidiary of CDI Clean Technology B         |

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

|   |   |                     |                                                                             |
|--------|--------|--------------------------|----------------------------------------------------------------------------------|
|   | 3.     | Consulting segment       |
|   |
|   |   | –                  | China Direct Investments, a wholly owned subsidiary of China Direct              |
|   |
|   |   | –                  | CDI Shanghai Management, a wholly owned subsidiary of CDI China                  |
|   |
|   |   | –                  | Capital One Resource, a wholly owned subsidiary of CDI Shanghai Management       |
|   |   |                     |                                                                             |
|   | 4.     | Clean Technology segment |
|   |
|   |   | –                  | CDI Clean Technology, a wholly owned subsidiary of CDI China                     |
|   |
|   |   | –                  | CDI Wanda, a 51% majority owned subsidiary of CDI Clean Technology               |
|   |
|   |   | –                  | Yantai CDI Wanda, a 52% majority owned subsidiary of CDI Wanda                   |
|   |
|   |   | –                  | CDI Metal Recycling, an 83% majority owned subsidiary of CDI Shanghai Management |

|   |   |                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------|
|   | A.     | Capital One Resource generated revenues in two reporting segments; Magnesium and Consulting.  |
|   |   |                                                                                          |
|   | B.     | CDI Wanda generated revenues in two reporting segments; Basic Materials and Clean Technology. |

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. Condensed consolidated information with respect to these reportable segments for the three and six months ended June 30, 2008 and 2007 are as follows:

For the three months ended June 30, 2008:            (In thousands)

|                           |   |          |   |                |   |           |   |                 |    |             |   |    |   |   |    |   |
|--------------------------------|--------|---------------|--------|---------------------|--------|----------------|--------|----------------------|---------|------------------|--------|---------|--------|--------|---------|--------|
|                           |   | **Magnesium** |   | **Basic Materials** |   | **Consulting** |   | **Clean Technology** |    | **Consolidated** |   |
|                           |   |          |   |                |   |           |   |                 |    |             |   |
|                           |   |          |   |                |   |           |   |                 |    |             |   |    |   |   |    |   |
| Revenues                       |   | $             | 54,320 |                | $      | 14,982         |   | $                    | 6,698   |             | $      | 216     |   | $      | 76,216  |   |
| Revenues – related party |   |          | 1,345  |                |   | —        |   |                 | — |             |   | — |   |   | 1,345   |   |
|                           |   |          |   |                |   |           |   |                 |    |             |   |    |   |   |    |   |
|                           |   |          | 55,665 |                |   | 14,982         |   |                 | 6,698   |             |   | 216     |   |   | 77,561  |   |
|                           |
| Interest income (expense)      |   |          | (44    | )                   |   | (29            | )      |                 | 216     |             |   | (13     | )      |   | 130     |   |
| Net income (loss)              |   |          | 3,000  |                |   | 51             |   |                 | 4,559   |             |   | (95     | )      |   | 7,515   |   |
|                           |   |          |   |                |   |           |   |                 |    |             |   |    |   |   |    |   |
| Segment Assets                 |   |          | 79,015 |                |   | 12,188         |   |                 | 27,997  |             | $      | 4,450   |   | $      | 123,650 |   |

For the three months ended June 30, 2007:            (Amounts in thousands)

|                           |   |          |    |                |   |           |   |                 |   |             |   |    |   |   |   |   |
|--------------------------------|--------|---------------|---------|---------------------|--------|----------------|--------|----------------------|--------|------------------|--------|---------|--------|--------|--------|--------|
|                           |   | **Magnesium** |    | **Basic Materials** |   | **Consulting** |   | **Clean Technology** |   | **Consolidated** |   |
|                           |   |          |    |                |   |           |   |                 |   |             |   |    |   |   |   |   |
|                           |   |          |    |                |   |           |   |                 |   |             |   |    |   |   |   |   |
| Revenues                       |   | $             | 23,445  |                | $      | 14,324         |   | $                    | 2,036  |             | $      | 209     |   | $      | 40,014 |   |
| Revenues – related party |   |          | — |                |   | —        |   |                 | 440    |             |   | — |   |   | 440    |   |
|                           |   |          |    |                |   |           |   |                 |   |             |   |    |   |   |   |   |
|                           |   |          | 23,445  |                |   | 14,324         |   |                 | 2,476  |             |   | 209     |   |   | 40,454 |   |
| Interest income (expense)      |   |          | 12      |                |   | 6              |   |                 | 23     |             |   | 1       |   |   | 42     |   |
| Net income (loss)              |   |          | 717     |                |   | 31             |   |                 | 1,564  |             |   | (44     | )      |   | 2,268  |   |
| Segment Assets                 |   | $             | 19,865  |                | $      | 5,668          |   | $                    | 10,028 |             | $      | 1,703   |   | $      | 37,264 |   |

For the six months ended June 30, 2008:            (In thousands)

|                           |   |          |    |                |   |           |   |                 |    |             |   |    |   |   |    |   |
|--------------------------------|--------|---------------|---------|---------------------|--------|----------------|--------|----------------------|---------|------------------|--------|---------|--------|--------|---------|--------|
|                           |   | **Magnesium** |    | **Basic Materials** |   | **Consulting** |   | **Clean Technology** |    | **Consolidated** |   |
|                           |   |          |    |                |   |           |   |                 |    |             |   |    |   |   |    |   |
|                           |   |          |    |                |   |           |   |                 |    |             |   |    |   |   |    |   |
| Revenues                       |   | $             | 98,264  |                | $      | 27,843         |   | $                    | 9,016   |             | $      | 333     |   | $      | 135,456 |   |
| Revenues – related party |   |          | 2,079   |                |   | —        |   |                 | — |             |   | — |   |   | 2,079   |   |
|                           |   |          |    |                |   |           |   |                 |    |             |   |    |   |   |    |   |
|                           |   |          | 100,343 |                |   | 27,843         |   |                 | 9,016   |             |   | 333     |   |   | 137,535 |   |
|                           |
| Interest income (expense)      |   |          | (64     | )                   |   | (29            | )      |                 | 326     |             |   | (13     | )      |   | 220     |   |
| Net income (loss)              |   |          | 6,757   |                |   | 299            |   |                 | 5,303   |             |   | (91     | )      |   | 12,268  |   |
| Segment Assets                 |   | $             | 79,015  |                | $      | 12,188         |   | $                    | 27,997  |             | $      | 4,450   |   | $      | 123,650 |   |

25

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

For the six months ended June 30, 2007:            (In thousands)

|                           |   |          |    |                |   |           |   |                 |   |             |   |    |   |   |   |   |
|--------------------------------|--------|---------------|---------|---------------------|--------|----------------|--------|----------------------|--------|------------------|--------|---------|--------|--------|--------|--------|
|                           |   | **Magnesium** |    | **Basic Materials** |   | **Consulting** |   | **Clean Technology** |   | **Consolidated** |   |
|                           |   |          |    |                |   |           |   |                 |   |             |   |    |   |   |   |   |
|                           |   |          |    |                |   |           |   |                 |   |             |   |    |   |   |   |   |
| Revenues                       |   | $             | 37,861  |                | $      | 26,719         |   | $                    | 3,705  |             | $      | 2,227   |   | $      | 70,512 |   |
| Revenues – related party |   |          | — |                |   | —        |   |                 | 880    |             |   | — |   |   | 880    |   |
|                           |   |          |    |                |   |           |   |                 |   |             |   |    |   |   |   |   |
|                           |   |          | 37,861  |                |   | 26,719         |   |                 | 4,585  |             |   | 2,227   |   |   | 71,392 |   |
| Interest income (expense)      |   |          | 25      |                |   | 3              |   |                 | 43     |             |   | — |   |   | 71     |   |
| Net income                     |   |          | 1,150   |                |   | 202            |   |                 | 2,761  |             |   | 26      |   |   | 4,139  |   |
| Segment Assets                 |   | $             | 19,865  |                | $      | 5,668          |   | $                    | 10,028 |             | $      | 1,703   |   | $      | 37,264 |   |

**NOTE 13 – FOREIGN OPERATIONS**

As of June 30, 2008 the majority of our revenues and assets are associated with subsidiaries located in the People’s Republic of China.

Assets at June 30, 2008 and June 30, 2007 as well as revenues for the three months ended June 30, 2008 and 2007 are as follows;

|                                 |   |                                |    |                                 |   |      |   |   |    |   |
|--------------------------------------|--------|-------------------------------------|---------|--------------------------------------|--------|-----------|--------|--------|---------|--------|
|                                 |   | **June 30, 2008****(In thousands)** |    |
|                                 |   |                                |    |
|                                 |   | **United States**                   |    | **People’s Republic of China** |   | **Total** |   |
|                                 |   |                                |    |                                 |   |      |   |
|                                 |   |                                |    |                                 |   |      |   |   |    |   |
| Revenues                             |   | $                                   | 6,632   |                                 | $      | 69,584    |   | $      | 76,216  |   |
|                                 |   |                                |    |                                 |   |      |   |   |    |   |
| Revenues – related party       |   |                                | — |                                 |   | 1,345     |   |   | 1,345   |   |
|                                 |   |                                |    |                                 |   |      |   |   |    |   |
| Total Revenues                       |   |                                | 6,632   |                                 |   | 70,929    |   |   | 77,561  |   |
|                                 |   |                                |    |                                 |   |      |   |   |    |   |
| Identifiable assets at June 30, 2008 |   | $                                   | 26,557  |                                 | $      | 97,093    |   | $      | 123,650 |   |
|                                 |   |                                |    |                                 |   |      |   |   |    |   |

|                                 |   |                                 |   |                                 |   |      |   |   |   |   |
|--------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|-----------|--------|--------|--------|--------|
|                                 |   | **June 30, 2007 (In thousands****)** |   |
|                                 |   |                                 |   |
|                                 |   | **United States**                    |   | **People’s Republic of China** |   | **Total** |   |
|                                 |   |                                 |   |                                 |   |      |   |
|                                 |   |                                 |   |                                 |   |      |   |   |   |   |
| Revenues                             |   | $                                    | 2,036  |                                 | $      | 37,978    |   | $      | 40,014 |   |
|                                 |   |                                 |   |                                 |   |      |   |   |   |   |
| Revenues – related party       |   |                                 | 440    |                                 |   | —   |   |   | 440    |   |
|                                 |   |                                 |   |                                 |   |      |   |   |   |   |
| Total Revenues                       |   |                                 | 2,476  |                                 |   | 37,978    |   |   | 40,454 |   |
|                                 |   |                                 |   |                                 |   |      |   |   |   |   |
| Identifiable assets at June 30, 2007 |   | $                                    | 9,805  |                                 | $      | 27,459    |   | $      | 37,264 |   |
|                                 |   |                                 |   |                                 |   |      |   |   |   |   |

Assets at June 30, 2008, and June 30, 2007 as well as revenues for the six months ended June 30, 2008 and 2007 are as follows;

|                                 |   |                             |    |                                 |   |      |   |   |    |         |
|--------------------------------------|--------|----------------------------------|---------|--------------------------------------|--------|-----------|--------|--------|---------|--------------|
|                                 |   | **June 30, 2008 (In thousands)** |    |
|                                 |   |                             |    |
|                                 |   | **United States**                |    | **People’s Republic of China** |   | **Total** |   |
|                                 |   |                             |    |                                 |   |      |   |   |    |         |
|                                 |   |                             |    |                                 |   |      |   |   |    |         |
| Revenues                             |   | $                                | 8,934   |                                 | $      | 126,522   |   | $      | 135,456 |         |
|                                 |   |                             |    |                                 |   |      |   |   |    |         |
| Revenues – related party       |   |                             | — |                                 |   | 2,079     |   |   | 2,079   |         |
|                                 |   |                             |    |                                 |   |      |   |   |    |         |
|                                 |
| Total Revenues                       |   |                             | 8,934   |                                 |   | 128,601   |   |   | 137,535 |         |
|                                 |   |                             |    |                                 |   |      |   |   |    |         |
| Identifiable assets at June 30, 2008 |   | $                                | 26,557  |                                 | $      | 97,093    |   | $      | 123,650 |         |
|                                 |   |                             |    |                                 |   |      |   |   |    |    |

26

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**CHINA DIRECT, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED STATEMENTSJUNE 30, 2008**

|                                 |   |                                 |   |                                 |   |      |   |   |   |   |
|--------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|-----------|--------|--------|--------|--------|
|                                 |   | **June 30, 2007 (In thousands****)** |   |
|                                 |   | **United States**                    |   | **People’s Republic of China** |   | **Total** |   |
|                                 |   |                                 |   |                                 |   |      |   |   |   |   |
| Revenues                             |   | $                                    | 3,705  |                                 | $      | 66,807    |   | $      | 70,512 |   |
|                                 |   |                                 |   |                                 |   |      |   |   |   |   |
| Revenues – related party       |   |                                 | 880    |                                 |   | —   |   |   | 880    |   |
| Total Revenues                       |   |                                 | 4,585  |                                 |   | 66,807    |   |   | 71,392 |   |
|                                 |   |                                 |   |                                 |   |      |   |   |   |   |
| Identifiable assets at June 30, 2007 |   | $                                    | 9,805  |                                 | $      | 27,459    |   | $      | 37,264 |   |

**NOTE 14 – SUBSEQUENT EVENTS**

A registration statement on Form S-3 covering the public sale of up to $70 million of shares of our common stock or other securities and the resale of shares of our common stock by certain selling shareholders pursuant to Rule 415 under the Securities Act of 1933 was declared effective by the Securities and Exchange Commission on August 1, 2008.

On August 1, 2008, CDI China and Xinjin Magnesium agreed to amend the April 26, 2008 Investment Framework Agreement entered into between CDI China and Xinjin Magnesium (the “Investment Framework Agreement”) to extend the date on which CDI China's initial investment is due until December 31, 2008.

On August 6, 2008, the Board of Directors approved an amendment to our Articles of Incorporation to effect a1-for-26 reverse split of our common stock followed by a 26-for-1 forward split of our common stock. The proposed transaction willbe carried out on a per shareholder basis. The proposed transaction is comprised of a 1 share for 26 shares reverse stock split (the“Reverse Split”), followed by a subsequent forward stock split (the “Forward Split”) pursuant to which eachwhole share of common stock outstanding following completion of the Reverse Split will be converted into 26 shares of common stock.Following the proposed transaction, there will be no change in our authorized common stock or the par value of our common stock.Shareholders who hold in the aggregate less than one share of common stock following the Reverse Split will not be included in theForward Split. Rather, such shares will receive a cash payment at a price equal to the closing price of our common stock as ofAugust 22, 2008.

27

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