form10ksb123105a.htm

CHDT CORPORATION

AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

-:-

INDEPENDENT ACCOUNTANT'S REPORT

DECEMBER 31, 2005 AND 2004

CONTENTS

	Page

Independent Auditor's Report	F - 1

Consolidated Balance Sheets
December 31, 2005 and 2004	F - 2

Consolidated Statements of Operations for the
Years Ended December 31, 2005 and 2004	F - 4

Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 2005 and 2004	F - 5

Consolidated Statements of Cash Flows for the
Years Ended December 31, 2005 and 2004	F - 8

Notes to Consolidated Financial Statements	F - 10

INDEPENDENT ACCOUNTANT'S REPORT

To the Board of Directors and Shareholders

CHDT Corporation (Formerly China Direct Trading Corporation) and Subsidiaries

We have audited the accompanying balance sheets of CHDT Corporation (formerly China Direct Trading Corporation) and Subsidiaries as of December 31, 2005 and 2004 and the related statements of operations, stockholder’s equity and cash flows for the years ended December 31, 2005 and 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CHDT Corporation (formerly China Direct Trading Corporation) and Subsidiaries as of December 31, 2005 and 2004 and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 12 to the financial statements, the Company’s December 31, 2005 operating expenses previously reported as $827,341 have been changed to $971,741, due to a correction of an error. This change was made subsequent to the issuance of the financial statements. The financial statements have been restated to reflect this change.

	Respectfully submitted,


	/s/ Robison, Hill & Co.
	Certified Public Accountants

Salt Lake City, Utah

April 9, 2006, except for Note 12, as to which the date is March 1, 2007

F - 1

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

CONSOLIDATED BALANCE SHEETS

	Restated
	December 31,			December 31,
	2005			2004
Assets:

Current assets:
Cash	$	9,090		$	77,503
Advances		-			3,062
Accounts receivable		4,000			-
Inventory		11,760			-
Prepaid expense		-			9,000

Total Current Assets		24,850			89,565

Fixed assets:
Computers		4,965			2,688
Less: Accumulated Depreciation		(2,132	)		(897	)

Total Fixed Assets		2,833			1,791

Other non-current assets:
Deposits		1,775			1,713

Total other non-current assets		1,775			1,713

Total assets	$	29,458		$	93,069

F - 2

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

CONSOLIDATED BALANCE SHEETS

(Continued)

	Restated
	December 31,			December 31,
	2005			2004
Liabilities and Stockholders’ Deficit:

Current liabilities:
Accounts payable, trade	$	35,666		$	20,595
Accrued expenses		341,183			170,516
Customer deposits		24,891			83,680
Accrued compensation		-			200,000
Related party payables		316,011			315,000

Total Liabilities		717,751			789,791

Stockholders' Deficit:
Preferred Stock, par value $.001 per share
Authorized 100,000,000 shares,
Issued 8,000 at December 31, 2005
and 8,100 shares at December 31, 2004		8			8
Common Stock, par value $.0001 per share
Authorized 600,000,000 shares,
Issued 543,122,028 shares at December 31, 2005
and 515,453,800 shares at December 31, 2004		54,313			51,546
Additional paid-in capital		832,665			93,432
Accumulated deficit		(1,575,279	)		(841,708	)

Total Stockholders' Deficit		(688,293	)		(696,722	)

Total Liabilities and
Stockholders' Deficit	$	29,458		$	93,069

The accompanying notes are an integral part of these financial statements.

F - 3

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

CONSOLIDATED STATEMENTS OF OPERATIONS

	Restated
	For the Year			For the Year
	Ended			Ended
	December 31,			December 31,
	2005			2004
Revenues	$	911,583		$	1,061,637
Cost of Sales		(658,084	)		(758,743	)

Gross Profit		253,499			302,894

Operating Expenses:
Sales and marketing		15,998			29,808
Compensation		404,580			222,380
Professional fees		92,930			55,994
Consulting		252,000			30,728
Legal settlements		28,000			-
Other General and administrative		178,233			230,970

Total Operating Expenses		971,741			569,880

Net Operating Income (Loss)		(718,242	)		(266,986	)

Other Income (Expense):
Interest expense		(15,347	)		(3,205	)
Dividend income		18			-

Net Income (Loss)	$	(733,571	)	$	(270,191	)

Weighted Average
Shares Outstanding		525,402,195			513,622,499

Income (Loss) per Common Share	$	-		$	-

The accompanying notes are an integral part of these financial statements.

F - 4

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2005 AND 2004

											Additional
	Preferred Stock				Common Stock						Paid-In		Retained
	Shares		Par Value		Shares			Par Value			Capital		Deficit
Balance at December 31, 2003		-	$	-		511,628,300		$	51,163		$	-	$	(571,517	)

February 2004 - Preferred Shares issued for cash		1,000		1		-			-			4,999		-

April 2004 - Shares returned to treasury and cancelled		-		-		(440,000	)		(44	)		44		-

May 2004 - Shares issued for services		-		-		1,500,000			150			26,850		-

June 2004 - Shares issued for services		-		-		2,000,000			200			35,800		-

June 2004 - Shares issued for services		-		-		200,000			20			3,580		-

June 2004 - Preferred shares issued for services		7,100		7		-			-			121		-

July 2004 - Shares issued for services		-		-		138,000			14			5,506		-

September 2004 - Shares issued for services		-		-		240,000			24			7,176		-

November 2004 - Shares issued for services		-		-		187,500			19			9,356		-

F - 5

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2005 AND 2004

(continued)

												Additional
	Preferred Stock					Common Stock						Paid-In		Retained
	Shares			Par Value		Shares			Par Value			Capital		Deficit
Net Loss		-		$	-		-		$	-		$	-	$	(270,191	)

Balance at December 31, 2004		8,100			8		515,453,800			51,546			93,432	$	(841,708	)

January 2005 - Shares issued for services		-			-		500,000			50			27,950		-

April 2005 - Shares issued for services		-			-		6,940,030			694			199,306		-

May 2005 - Shares issued for services		-			-		100,000			10			2,990		-

May 2005 - Preferred shares returned to treasury and cancelled		(100	)		-		-			-			-		-

June 2005 - Shares issued for accrued expenses		-			-		9,523,810			952			199,048		-

June 2005 - Shares returned to treasury and cancelled		-			-		(6,896,552	)		(690	)		690		-

October 2005 - Shares issued for accrued expenses		-			-		6,250,000			625			99,375		-

November 2005 - Shares issued for legal services		-			-		588,718			59			12,441		-

F - 6

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2005 AND 2004

(continued)

									Additional
	Preferred Stock				Common Stock				Paid-In		Retained
	Shares		Par Value		Shares		Par Value		Capital		Deficit
November 2005 - Shares issued for legal services		-	$	-		1,140,000	$	114	$	28,386	$	-

December 2005 - Shares issued for services		-		-		2,300,000		230		39,770		-

December 2005 - Shares issued for accrued expenses		-		-		5,555,555		556		99,444		-

December 2005 - Shares issued for cash		-		-		1,666,667		167		29,833		-

Net loss		-		-		-		-		-		(733,571	)

Balance at December 31, 2005 - Restated		8,000	$	8		543,122,028	$	54,313	$	832,665	$	(1,575,279	)

The accompanying notes are an integral part of these financial statements.

F - 7

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Restated
	For the Year			For the Year
	Ended			Ended
	December 31,			December 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Continuing operations:
Net Income (Loss)	$	(733,571	)	$	(270,191	)
Adjustments necessary to reconcile net loss
to net cash used in operating activities:
Write-off of Investment		-			-
Stock issued for accrued expenses		400,000			-
Stock issued for expenses		312,000			79,823
Depreciation		1,235			897
Deferred taxes		-			7,300
(Increase) decrease in advances		3,061			(3,061	)
(Increase) decrease in accounts receivable		(4,000	)		-
(Increase) decrease in inventory		(11,760	)		-
(Increase) decrease in prepaid expenses		9,000			-
(Increase) decrease in security deposits		(62	)		-
Increase (decrease) in accounts payable		15,072			8,591
Increase (decrease) in accrued compensation		(200,000	)		200,000
Increase (decrease) in accrued expenses		171,678			(10,794	)
Increase (decrease) in deposits from customers		(58,789	)		22,785
Net Cash Used in continuing operations		(96,136	)		35,350

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(2,277	)		(2,688	)
Net cash provided by (used) investing activities		(2,277	)		(2,688	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock		30,000			5,000
Shareholder receivables		-			-
Proceeds from shareholder payables		-			15,000
Net Cash Provided by Financing Activities		30,000			20,000

Net (Decrease) Increase in cash and cash equivalents		(68,413	)		52,662
Cash and Cash Equivalents at beginning of period		77,503			24,841
Cash and Cash Equivalents at end of period	$	9,090		$	77,503

F - 8

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)


	Restated
	For the Year		For the Year
	Ended		Ended
	December 31,		December 31,
	2005		2004
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	740	$	3,205
Franchise and income taxes	$	-	$	-

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCINGACTIVITIES:

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

On December 1, 2003, the Company issued 97,000,000 shares of common stock to acquire Souvenir Direct, Inc. in a reverse acquisition.

On December 1, 2003, 414,628,300 shares of common stock were issued to the previous owners of CBQ, Inc. in connection with the reverse acquisition of Souvenir Direct, Inc.

The accompanying notes are an integral part of these financial statements.

F - 9

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Organization and Basis of Presentation

CHDT Corporation (formerly China Direct Trading Corporation), a Florida corporation, was initially incorporated September 18, 1986 under the laws of the State of Delaware under the name “Yorkshire Leveraged Group, Incorporated”, and then changed its situs to Colorado in 1989 by merging into a Colorado corporation, named “Freedom Funding, Inc.”. Freedom Funding, Inc. then changed its name to “CBQ, Inc.” by amendment of its Articles of Incorporation on November 25, 1998. In May 2004, the Company changed its name to China Direct Trading Corporation and reincorporated from the State of Colorado to the State of Florida.

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

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

Nature of Business

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

Cash and Cash Equivalents

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

Inventory

During the fourth quarter of 2005, the Company acquired twenty generators at a total cost of $15,420. As of December 31, 2005, the Company had sold four generators that had cost $3,660, leaving total inventory of $11,760.

F - 10

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Fixed Assets

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

Computer equipment 3 years

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

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

Depreciation expense was $1,235 and $897 for the years ended December 31, 2005 and 2004, respectively.

Pervasiveness of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements for the years ended December 31, 2005 and 2004 include the accounts of the parent entity and its subsidiaries Souvenir Direct, Inc. and Overseas Building Supplies, LLC (formerly China Pathfinder Fund, LLC).

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

All significant intercompany balances and transactions have been eliminated.

F - 11

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Net Income (Loss) Per Common Share

Basic earnings per common share were computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Diluted loss per common share for the years ended December 31, 2005 and 2004 are not presented as it would be anti-dilutive.

Concentration of Credit Risk

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

Reclassifications

Certain reclassifications have been made in the 2004 financial statements to conform with the 2005 presentation.

Major Suppliers

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

Major Customers

At December 31, 2005, the Company receives approximately 40% of its gross revenues from its top three accounts. The loss of these customers would adversely impact the business of the Company.

Revenue Recognition

Sales are recorded when goods are shipped, and profit is recognized at that time. Allowances for sales returns, rebates and discounts are recorded as a component on net sales in the period the allowances are recognized.

Advertising

Advertising costs are expensed as incurred. Advertising expense was $15,998 and $29,808 for the years ended December 31, 2005 and 2004, respectively.

F - 12

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Income Taxes

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

NOTE 2 - LEASES

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

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

Rental expense under these leases was approximately $30,000 and $21,000 for the years ended December 31, 2005 and 2004, respectively.

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

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

NOTE 3 - COMMITMENTS

On December 1, 2003, the Company entered into an employment agreement with Howard Ullman, the Company’s President and CEO that provides for annual compensation of $200,000.

F - 13

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - STOCK TRANSACTIONS

Common Stock

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

On December 1, 2003, the Company issued 97,000,000 shares of common stock to acquire Souvenir Direct, Inc. in a reverse acquisition. The 100 shares that were previously issued were retroactively adjusted to reflect the equivalent number of shares that were issued in connection with the reverse acquisition. The acquisition was recorded by a credit to common stock of $9,600 and a debit to paid-in capital of $2,674 and a debit to retained earnings of $6,926. Also on December 1, 2003, an additional 414,628,300 shares of common stock were issued to the previous owners of CBQ, Inc. All references to stock reflect the retroactive adjustment to the shares.

In April 2004, 440,000 shares of common stock were returned to the treasury and cancelled.

In May 2004, the Company issued 1,500,000 shares of common stock for services valued at $27,000.

In June 2004, the Company issued 2,000,000 shares of common stock for services valued at $36,000. As of December 31, 2004, expense of $27,000 and prepaid expense of $9,000 was recorded.

In June 2004, the Company issued 200,000 shares of common stock for services valued at $3,600.

In July 2004, the Company issued 138,000 shares of common stock for services valued at $5,520.

In September 2004, the Company issued 240,000 shares of common stock for services valued at $7,200.

In November 2004, the Company issued 187,500 shares of common stock for services valued at $9,375.

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

F - 14

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - STOCK TRANSACTIONS (continued)

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

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

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

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

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

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

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

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

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

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

Preferred Stock

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

F - 15

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - STOCK TRANSACTIONS (continued)

Warrants

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

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

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

NOTE 5 - RELATED PARTY PAYABLES

On September 1, 2004, China Pathfinder Fund, LLC., a wholly-owned subsidiary of the Company received loans of $15,000 from shareholders of the Company. The loans carry an interest rate of 5% per annum and are payable in twelve equal monthly installments with the first installment due and payable on January 31, 2006. At December 31, 2005, the total amount due on these loans was $16,011.

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

F - 16

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - INCOME TAXES

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

NOTE 7 - LEGAL SETTLEMENTS

In June 2001, ITC/INFO Tech (“Claimant”) obtained a default award of $79,000 against the Company. The award was based on non-payment for computer goods shipped by ITC to two subsidiaries of the Company. The Company has offered to settle the award for shares of restricted stock, but the Claimant has refused to accept such an offer to date. The Claimant has made no effort to enforce its award since June 2001. As of December 31, 2005 and 2004, the award amount has been included in the accrued expenses of the Company.

NOTE 8 - CONTINGENCIES

Celeste Trust Reg., Esquire Trade, et al. v. CBQ, Inc. (Case# 03 Civ. 9650 RMB; US District Court, SDNY, 12/4/2003). A lawsuit filed against company by three plaintiffs on or about December 4, 2003, but which the company did not receive notice of until the week of February 18, 2004 or thereabouts. The Plaintiffs purchased debentures issued by Socrates Technologies Corporation (STC), a public Delaware corporation in 2000. When the Company purchased the assets of two STC subsidiaries in March 2001, the plaintiffs allege that the Company promised to issue to the Plaintiffs and others the consideration that was to be paid to STC for the acquired assets and to so do in order to compensate the plaintiffs for their investment in the STC debentures, which were apparently in default at that time. The total consideration paid for the STC

subsidiaries' assets were 7.65 million shares of company Common Stock and a Promissory Note made by the Company for $700,000 principal amount. The Company has defended against the Plaintiffs' claims to date. If the Plaintiffs win a judgment on their claims, the judgment, if collected, would prove potentially ruinous the Company, unless a settlement involving no cash was arranged between the parties to the lawsuit. The Plaintiff's claims include a claim for receipt of the money due under the Promissory Note with a principal amount of $700,000. The Company lacks the cash flow or cash reserves or funding resources to pay such a claim, either in a lump sum or over time. If the Plaintiffs are awarded the claimed damages against the Company in this lawsuit, the Company would be unable to pay such damages, either in a lump-sum or under a schedule, and would be insolvent.

F - 17

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - CONTINGENCIES (continued)

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

Sun Trust Bank Dispute. Sun Trust Bank line of credit and term note: Prior to being acquired by the company, Quantum Technology Group had a $4 million line of credit with Crestar Bank, which was subsequently acquired by Sun Trust. This line of credit was guaranteed by Quantum and five individual guarantors, including Ray Kostkowski, Anne Sigman, Skip Lewis, and Anthony Saunders. This line of credit was opened during April, 2000. On August 8, 2000, the Company acquired all of the shares of Quantum. Sun Trust asserted that $1.3 million of the line of credit had been used, and was owing to Sun Trust, as well as line of credit, a $200,000 term loan from Sun Trust to Quantum, approximately $200,000 in accrued interest and $100,000 in attorney fees -- all of which Suntrust had sought to collect from the individual guarantors. Sun Trust had not sued the Company and has not raised its prior threat to sue in 2005.

RAS Investment, Inc., a company affiliated with Anne Sigman, a former employee of the Company, has advised the Company that RAS has acquired the Sun Trust note and has demanded payment in cash or stock. As of the date of this Report, the Company's position remains as before, that is, that the Company is not obligated to pay the Sun Trust debts and any claims made to collect that debt could be defeated by several potential defenses and counterclaims.

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

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

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CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - CONTINGENCIES (continued)

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

NOTE 9 - SUBSIDIARY

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

NOTE 10 - ACQUISITION

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

NOTE 11 - SUBSEQUENT EVENTS

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

F - 19

CHDT CORPORATION AND SUBSIDIARIES

(Formerly China Direct Trading Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

We have restated our balance sheet at December 31, 2005, and statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2005. The restatement impacts the year ended December 31, 2005, but has no effect on the financial statements issued in prior fiscal years. The restatement is the result of a correction of an error. In 2005, the Company did not accrue $175,000 of directors’ fees that had been authorized, but not paid at December 31, 2005. The $175,000 was paid in 2006 with the issuance of common stock. Also, the Company had accrued $30,600 in payroll tax expense on accrued compensation of $200,000 that had been paid in stock at December 31, 2005, that was subsequently treated as contract services and not employee services. The impact of the restatement on the balance sheet was to increase accounts payable and accrued expenses from $232,449 to $376,849 and increase accumulated deficit from $1,430,879 to $1,575,279. The impact of the restatement on the statements of operations was to increase compensation expense from $229,580 to $404,580 and reduce other general and administrative expenses from $208,833 to $178,233. The impact of the restatement on net loss is an increase of $144,400, from $589,171 to $733,571 net of tax for the year ended December 31, 2005. There was no change in the loss per share.

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