U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB/A

                                 AMENDMENT NO. 2
(Mark One)
[X]      Annual Report Pursuant To Section 13 Or 15(d) Of The Securities
         Exchange Act Of 1934

         For the fiscal year ended DECEMBER 31, 2006

[    ]   Transition Report Under Section 13 Or 15(d) Of The Securities
         Exchange Act Of 1934

         For the transition period from _____ to _____

COMMISSION FILE NUMBER:     000-21391

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                          TURBODYNE TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

               NEVADA                                95-4699061
---------------------------------          -------------------------------------
(State or other jurisdiction of                      (I.R.S. Employer
 incorporation or organization)                      Identification No.)

36 EAST BARNETT STREET
VENTURA, CALIFORNIA                                        93001
--------------------------------           -------------------------------------
(Address of principal executive offices)                (Zip Code)


(805) 201-3133
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Issuer's telephone number


Securities registered under Section 12(b) of the Exchange Act:  NONE.
                                                                -----

Securities registered under Section 12(g) of the Exchange Act:
                                                  COMMON STOCK, PAR VALUE $0.001
                                                  ------------------------------

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] NO [X]

                                      -1-
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year:  $22,224
                                                          -------

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in RULE
12B-2 of the Exchange Act.) $12,592,982.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 353,459,444 SHARES OF COMMON STOCK AS
OF MARCH 26, 2007

Transitional Small Business Disclosure Format (check one): Yes  [   ]   NO  [X]



                                      -2-
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                          TURBODYNE TECHNOLOGIES, INC.
                                   FORM 10-KSB

                                      INDEX

                                                                            PAGE
PART I

Item 1.    Description Of Business............................................ 5

Item 2.    Description Of Property. ..........................................17

Item 3.    Legal Proceedings. ................................................17

Item 4.    Submission Of Matters To A Vote Of Security Holders. ..............18

PART II

Item 5.    Market For Common Equity And Related Stockholder Matters. .........19

Item 6.    Management's Discussion And Analysis Or Plan Of Operation. ........21

Item 7.    Financial Statements. .............................................31

Item 8.    Changes In And Disagreements With Accountants On Accounting And
           Financial Disclosure. .............................................32

Item 8A.  Controls and Procedures. ...........................................32

PART III

Item 9.    Directors, Executive Officers, Promoters And Control
           Persons; Compliance With Section 16(a) Of The Exchange Act.........33

Item 10.  Executive Compensation..............................................35

Item 11. Security Ownership Of Certain Beneficial Owners and
           Management and Related Stockholder Matters.........................38

Item 12.  Certain Relationships And Related Transactions......................39

Item 13.  Exhibits And Reports On Form 8-K....................................40

Item 14.  Principal Accountant Fees and Services..............................41


Signatures ...................................................................42



                                      -3-
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                                EXPLANATORY NOTE

Turbodyne Technologies, Inc. (the "Company") is filing this Amendment No. 2 to
its Annual Report on Form 10-KSB for the year ended December 31 2006 (the "
December 31 2006 10-K"), which was originally filed on April 2, 2007. This
Amendment No. 2 is being filed to restate the Company's financial statements for
the year ended December 31 2006, which understated other expenses and net loss,
overstated liabilities and understated additional paid-in capital.

The Company is restating its previously issued 2006 consolidated financial
statements for the following reasons: unrecorded beneficial conversion feature
of convertible debt and related amortization, unrecorded value of detachable
warrants issued with the convertible debt, unrecorded debt conversion expense as
a result of Company's modification of conversion terms and terms for the
exercise of warrants to induce conversion and warrants exercise.

The Company issued $660,000 convertible notes with detachable warrants. The
notes bear interest at 5% and mature within one year from date of issuance. The
Notes are convertible, at the option of the holder, to shares of the Company's
common stock at a conversion price per share equal to the lower of (i) 70% of
the market price of common stock at date of issuance; or (ii) $0.025. The
warrants are to purchase the Company's common stock at $0.025 per share expiring
in five years. In September 2006 the board of directors offered to decrease the
note conversion price to $0.005 per share if the note holders exercised their
warrants at $0.01 by September 30, 2006. In consideration for the reduction, the
maturity of the notes was extended for another year. As a result of the
inducement, the Company recognized $345,357 of debt conversion expense for the
year ended December 31, 2006 relating to note holders who converted during the
year.

At the dates of issuance, the Company also issued to the holders of convertible
notes warrants to purchase 13,200,000 shares of the Company's common stock at
$0.025 per share. In accordance with generally accepted accounting principles,
the Company allocates the proceeds received from debt or convertible debt with
detachable warrants using the relative fair value of the individual elements at
the time of issuance. Using the Black-Scholes valuations model, the aggregate
value of the 13,200,000 warrants is $164,944. The amount allocated to the
warrants amounts to $102,185 and has been recognized as additional paid in
capital. As of December 31, 2006, 11,900,000 of the warrants have been
exercised.

In accordance with generally accepted accounting principles, in the event the
conversion price on notes is less than the Company's stock price on the date of
issuance, the difference is considered to be a beneficial conversion feature and
is amortized as interest expense over the period from the date of issuance to
the earlier of the conversion date or the stated maturity date. The aggregate
beneficial conversion feature of these convertible notes is $358,477. In
relation to the inducement to convert, an additional beneficial conversion
feature of $128,042 has been recognized.

For the year ended December 31, 2006, the Company recognized $328,041 in
interest expense related to the amortization of the beneficial conversion
feature recorded on these convertible notes. As of December 31, 2006, the
remaining balance of the beneficial conversion feature was $158,478.

This Amendment No. 2 does not reflect events occurring after the original filing
of the Company's December 31, 2006 10-KSB, and does not update or modify the
disclosures therein in any way other than as required to reflect the amendment
described above.



                                      -4-
<PAGE>


                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS.


FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-KSB contains statements that constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words
"expect," "estimate," "anticipate," "project," "predict," "believe" and similar
expressions and variations thereof are intended to identify forward-looking
statements. Such statements appear in a number of places in this report and
include statements regarding our intent, belief or current expectations and that
of our officers or directors with respect to, among other things, trends
affecting our financial condition and results of operations and our business and
growth strategies. You are cautioned not to put undue reliance on these
forward-looking statements. These forward-looking statements are not guarantees
of future performance and involve risks and uncertainties. Actual results may
differ materially from those projected in this Annual Report on Form 10-KSB. We
undertake no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date of this filing. You
should carefully review the cautionary statements and risk factors contained in
this and other documents that we file from time to time with the Securities and
Exchange Commission.


CORPORATE ORGANIZATION

We were incorporated under the laws of British Columbia, Canada in 1983. We
reincorporated under the laws of the State of Delaware in 1998. We
reincorporated under the laws of the State of Nevada in August 2002. See "Risk
Factors - Possible Voidable Reincorporation".

In 2006 we had two wholly owned significant subsidiaries: Turbodyne Systems,
Inc., a Nevada corporation, and Electronic Boosting Systems, Inc. We carried out
our business operations in 2004 and part of 2005 through Electronic Boosting
Systems, Inc. Since September 2005 we have carried out our business through the
parent.

As used in this annual report, the terms "we", "us", "our", "Turbodyne" and "our
Company" mean Turbodyne Technologies, Inc. and its subsidiaries, unless
otherwise indicated.


RECENT CORPORATE DEVELOPMENTS

On September 9, 2005 a majority owned subsidiary of Aspatuck Holdings Ltd.
("Aspatuck") was merged into our newly formed wholly owned subsidiary pursuant
to an AGREEMENT AND PLAN OF MERGER (the "Agreement"). Prior to the merger, this
subsidiary of Aspatuck entered into a consulting agreement ("CONSULTING
AGREEMENT") with Stamford Research LLC, which is obligated to provide the
services of Albert Case to the Company. Upon completion of the merger,
139,192,222 shares of the Company's Common Stock were issuable to holders of the


                                      -5-
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subsidiary of Aspatuck and 1,300,000 such shares became issuable to Stamford
Research LLC, under the Consulting Agreement. At this time Mr. Albert Case
became President and Chief Executive Officer and Mr. Jason Meyers, principal
shareholder of Aspatuck, became Chairman of the Board of Directors. Additional
shares are issuable to the former shareholders of the Aspatuck subsidiary when
the Company issues any securities related directly or indirectly to pre-merger
events.

The new management obtained some additional financing and resumed limited
business activity including in late 2005 and 2006:

     o    Updating our financial statements and required SEC filings
     o    Assessment of our technology including patents and other rights
     o    Limited development of our Turbopac(TM) product line
     o    Review and negotiate to settle outstanding litigation and liabilities
     o    Formulating business and marketing plans

There is no assurance we will be able to obtain sufficient financing to
implement full scale operations.


PRIOR TO THE MERGER IN 2005:

     1.   We became unable to sustain our business operations due to a lack of
          financing and our working capital deficit. In April 2005, we laid off
          our employees, vacated our premises and relinquished the majority of
          the fixed assets to the landlord to sell and offset against rent
          payable.

     2.   On June 7, 2005 the Company's remaining cash was claimed in connection
          with a litigation settlement and prior attachment.

     3.   In April 2005 we suspended work on the development of our products and
          technologies as part of the suspension of our business operations.


GENERAL


We are an engineering Company and have been engaged, for over ten years, in the
design and development of forced-air induction (air-charging) technologies that
improve the performance of gas and diesel internal combustion engines. Optimum
performance of an internal combustion engine requires a proper ratio of fuel to
air. Power available from the engine is reduced when a portion of the fuel is
not used. In a wide range of gas and diesel engines additional air is needed to
achieve an optimal result. Traditional engineered solutions for this problem use
belts or exhaust gas (superchargers or turbochargers) to supply additional air
to an engine. Turbodyne, instead, uses electric motors to supply additional air.
Because an electric motor can be engaged more quickly, compared to the
mechanical delays inherent in a belt or exhaust gas device, Turbodyne's products
reduce this `turbolag' and otherwise adds to the effectiveness of gas and diesel
engines used in automotive, heavy vehicle, marine, and other internal combustion
installations.

                                      -6-
<PAGE>


The focus of our business plan is to restructure the company's balance sheet and
re-engineer our financial plan. We are reviewing our plans for re-launching our
products. Our ability to complete commercialization of our products remains
subject to our ability to obtain additional financing. See "Plan of Operations",
below.

INDUSTRY BACKGROUND


MARKET DEMAND FOR CHARGING TECHNOLOGY FOR INTERNAL COMBUSTION ENGINES
Turbodyne's management believes that the market demands for improved internal
combustion engine performance will continue. This is especially true in light of
ecological demands for increased fuel efficiency and reducing the overall
consumption of fossil fuels. While many factors contribute to demands for
improved engine performance, we believe the key factors are:

     o    Worldwide, turbocharged diesel engines will continue to represent a
          large share of the power plants in passenger cars, trucks, boats, and
          other vehicles;

     o    Turbocharged gasoline engines are an advantageous alternative to
          larger displacement gasoline engines; they currently represent only
          approximately 1% of the power plants in passenger cars because of
          turbo-lag;

     o    All passenger cars equipped with diesel engines in the displacement
          range of 1.5 to 3.5 litres, about 4 million of which were built
          worldwide in 2003, share the common problem of trading steady-state
          power output with inadequate take-off performance when accelerating
          from low engine rpm and power, due to turbo-lag;

     o    The automobile industry is pursuing downsizing of gasoline and diesel
          engines to improve engine efficiency and fuel economy, as well as to
          reduce cost, weight, size, and pollution. Although the drop in engine
          torque and power associated with smaller engines can be prevented by
          charging the downsized engine, it must be accomplished without turbo
          lag to be successful;

     o    The passenger car industry appears committed to resolving the turbo
          lag problem and to the best of our knowledge the charging technology
          as used in our product is currently the most practical and effective
          solution to the problem; and

     o    New more stringent emissions standards requiring reduced levels of
          emissions during periods of engine acceleration are being introduced
          throughout the world. Our technology helps engine manufacturers comply
          with the new requirements without having to make their engines less
          responsive.


                                      -7-
<PAGE>




MARKET OPPORTUNITY

Our market opportunity is to take advantage of these market conditions and
become a design and engineering company that undertakes the development of the
core technology for the automotive industry that will eliminate turbolag in
turbocharged engines, increase power and performance, reduce the pollution of
non-turbocharged engines, and facilitate the successful downsizing of internal
combustion engines and the use of hybrid engines.


TURBODYNE PROPRIETARY TECHNOLOGY

The history of using exhaust gas or belt driven air blowers to enhance internal
combustion engine performance has been used for approximately 100 years. In both
the exhaust gas ("turbocharger") and belt or chain driven ("supercharger") air
blowers the performance of the blower is directly related to the operating speed
of the engine (such as `revolutions per minute'). The technologies were
developed in airplane applications where the engine is usually run at a higher
constant operating speed, and then moved on to other vehicle applications (most
using turbochargers). In supercharger installations the energy losses at low
engine operating speeds hinders performance. `Turbolag' occurs when the operator
demand for a higher operating speed requires more air than the un-pressurized
air stream of the air intake produces until the turbocharger increases the air
intake pressure by blowing a higher volume of air into the engine. Until the
operating speed of the engine increases turbochargers don't have power to blow
substantially more air. For turbocharged engines, `turbolag', normally measured
in seconds, limits both the vehicle driver's physical perception of the power
and performance as well as the actual low RPM acceleration of the vehicle.

The driver's perception of low-end acceleration is a key marketing hindrance in
the deployment of smaller-displacement, turbocharged engines to replace
larger-displacement, normally aspirated engines. While the turbocharged engine
may perform equally well with the normally aspirated, larger engine in a
quarter-mile acceleration, the larger engine's perceptible low-RPM acceleration
tends to have drivers prefer larger displacement, but less efficient engines.

In very small displacement engines (sub-1 liter), turbolag inherent in
traditional exhaust-gas driven turbochargers may be so significant that vehicle
performance in critical maneuvers (e.g., highway on-ramp merging) prohibits the
practical use of these engines.

The Turbopac(TM) uses a powerful electric motor, running off the vehicle
electrical system, to blow useful amounts of air into an engine during the
period when the turbocharger does not have enough exhaust gas to blow all the
air required for optimal engine acceleration performance. There is an
improvement in `take-off' (initial acceleration from low RPM) performance as
well as observable low-end acceleration to the vehicle driver, thus improving
the driver's perception of vehicle power and performance, making smaller
displacement, more efficient engines more palatable to the driver.

                                      -8-
<PAGE>


The Turbopac(TM) can either be applied in a multi-stage combination with an
existing turbocharger or by itself ("standalone"). The Turbopac(TM) can be
turned on and off by the external engine control system or other means. When
combined with a turbocharger the Turbopac(TM) supplies air to the engine until
the turbocharger's performance meets engine air needs. When standalone the
Turbopac(TM) supplies air for brief periods during acceleration and has
applications, among others, for vehicles with frequent stops (refuse trucks) and
small motors.

Subsequent to December 31, 2006 the Company filed a provisional application in
the United States Patent and Trademark Office for a TurboPac related technology.
Referred to as the 'TurboFlow', the patent disclosure includes application of
the technology to vehicle types commonly referred to as 'hybrids' or 'low
emission vehicles'. The disclosed technology applies advanced controls, energy
management, and a TurboPac related technology to avoid problems encountered when
using traditional turbo- or super- charging air injection units with a small
engine in those types of vehicles.



BUSINESS STRATEGY

Our general business strategy is to develop products incorporating our
technology. We contemplate that our first targets will be the aftermarket
industry such as speed shops, diesel truck fleets and the marine market where
our products can be used to enhance or upgrade already manufactured motors. We
also intend to offer licenses for our technology to the automotive industry. We
believe that the strategy of offering our products directly into low-volume
aftermarket applications will enable the most rapid commercialization of our
products. We believe that the strategy of licensing our products to OEM's will
also enable rapid commercialization of products incorporating our technology on
a large scale. We believe this process will take longer to implement than the
aftermarket, OEM's and major existing tier-one suppliers have the necessary
manufacturing economies of scale, including the ability to obtain volume
purchasing and mass production manufacturing, necessary to manufacture products
incorporating our technology at competitive costs.

We have decided to subcontract our manufacturing and not to attempt to pursue
the large scale manufacturing of our products in view of the high costs and
business risks associated with manufacturing. Our operational strategy is to
outsource wherever possible, employing a minimal core of mechanical, electrical,
manufacturing and quality control engineers with significant project management
experience who manage outsourced engineering, testing and manufacturing. By
outsourcing wherever possible, we can substantially reduce the requirements for
capital equipment, and convert formerly fixed costs into variable costs.



INTELLECTUAL PROPERTY

We now have a portfolio of patents and patent applications at various states of
prosecution. The most significant patents and applications are for the use of a
large scale motor for air-charging systems for internal combustion engines and
several patents relating to high speed motors [in a heat sensitive environment].

                                      -9-
<PAGE>

We are continuing to pursue new proprietary technologies and these have resulted
in one or more additional pending applications. We also received a license from
Honeywell for certain Dynacharger patents involving technology overlapping both
the Dynacharger and the Turbopac(TM). We also own the trademark for Turbopac.
The Company has agreed to pay a royalty equal to 2% of the gross sales of
products manufactured and sold that incorporate certain licensed technology
which is not being used.

Subsequent to December 31, 2006 the Company filed a provisional application in
the United States Patent and Trademark Office for a TurboPac related technology.
Referred to as the 'TurboFlow', the patent disclosure includes application of
the technology to vehicle types commonly referred to as 'hybrids' or 'low
emission vehicles'. The disclosed technology applies advanced controls, energy
management, and a TurboPac related technology to avoid problems encountered when
using traditional turbo- or super- charging air injection units with a small
engine in those types of vehicles.

The Company has issued licenses covering some of its intellectual property that
may generate royalties if our licenses generate revenues.


PROPRIETARY INFORMATION AGREEMENTS

It is our policy to require all of our employees, consultants and persons or
companies involved in testing our products to execute confidentiality agreements
with respect to all proprietary information regarding our products.


RESEARCH AND DEVELOPMENT
We incurred research and development costs in the amount of $252,478 during our
fiscal year end December 31, 2006, compared to research and development costs in
the amount of $371,485 during our fiscal year ended December 31, 2005. These
expenditures included amounts for research and development in an engineering
program with the objective of bringing our TurboPac(TM) product line into
full-scale commercial production.

GOVERNMENT REGULATION

In the United States, emissions standards for diesel and gasoline engines are
imposed by the Environmental Protection Agency ("EPA") and other regulatory
agencies, including the California Air Resources Board. In Europe, the Euro 4
emissions standards came into effect in 2005, and Euro emissions standards are
proposed for 2009. The presence of these government regulations has the
potential to create demand for our products as our products are designed to
increase engine performance with resulting reductions in emissions.

We must continue to design and develop products that help mitigate failures to
meet worldwide vehicle emissions standards that are imposed by regulatory
agencies. Testing to ensure our products help meet these government regulations
will be an integral component of our research and development expense on new
products.


                                      -10-
<PAGE>



EMPLOYEES

As of December 31, 2006 we had no full-time employees but we have retained
several consultants, devoting significant time to the Company's affairs.

RISK FACTORS

We face the following material risks in executing our business plan and
achieving revenues. We also face the risks identified elsewhere in this Annual
Report on Form 10-KSB, including those risks identified under "Item 3 - Legal
Proceedings" and "Item 6 - Management Discussion and Analysis or Plan of
Operations". If any of these risks occur, our business and our operating results
and financial condition could be seriously harmed and we may not be able to
commence business operations as a going concern.

THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN

We reported net loss of $1,479,559 for the fiscal year ended December 2006. We
have derived negligible revenue from operations and have substantial unpaid
liabilities. We have an accumulated deficit of $128,825,314 at December 31,
2006. Since our inception we have disposed of our most significant subsidiary
through bankruptcy, have been subject to lawsuits, used most of our available
cash to conduct our operating activities and are required to seek additional
equity or debt financing in order to continue operations. These matters raise
substantial doubt about our ability to continue as a going concern.
Our auditors have made reference to the substantial doubt about our ability to
continue as a going concern in their audit report on our audited financial
statements for the year ended December 31, 2006.

FINANCIAL HISTORY PROBLEMS

We anticipate difficulties arising from our adverse financial history. These
include substantial payables that must be paid or settled, damaged relationships
and adverse publicity, and interrupted contracts. There is no assurance that we
can overcome these difficulties.


VOIDABLE REINCORPORATION

It is possible that our reincorporation from Delaware to Nevada may be voidable
under Delaware law. Because of the similarity of the laws of the two states we
do not believe we will suffer substantial adverse consequences. However we may
suffer adverse consequences in such event. Moreover, in the process of
correcting any failure to have properly approved the merger we may incur
expenditures unrelated to operations.

                                      -11-
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COMPANY REQUIRES ADDITIONAL FUNDING

If we do not obtain sufficient funds from a private financing presently being
conducted we may not be able to continue in business. We may not be able to
obtain any such additional financing on favorable acceptable terms, if at all.

THE ACCOUNTING TREATMENT OF FUTURE VESTING OF WARRANTS MAY RESULT IN SIGNIFICANT
LOSSES

We have over 70,000,000 warrants which may vest over the next two or more years
upon the continuation of service of the holders and/or the happening of a
specific event. Effective January 1, 2005 the Company adopted SFAS 123(R)
therefore the warrants will be valued at date of grant and expensed as vested.


THE COMPANY WILL BE DEPENDENT ON THIRD PARTIES FOR THE PRODUCTION OF ANY PRODUCT
WHICH MAY BE COMMERCIALIZED

The Company will utilize unaffiliated third parties to assemble its products and
manufacture its components. The Company believes there are numerous
manufacturers available to satisfy anticipated requirements. The inability to
enter into arrangements with manufacturers would prevent or limit the Company's
future sales. Moreover, subsequent failures or termination of a manufacturer
could result in our inability to deliver adequate quantities of product on a
timely and competitive basis. Further, the inability to obtain favorable pricing
terms from third parties could effect our competitive situation and our profit
margins.


POTENTIAL PRODUCT LIABILITY

The Company faces substantial potential product liability in connection with the
sale and use of its products. It intends to take significant protective steps,
including a vigorous quality assurance program and the purchase of product
liability insurance. There can be no assurance that any insurance obtained will
be sufficient to cover potential claims or that coverage will be available at a
reasonable cost. A partially or completely uninsured successful claim against
the Company could have a material adverse effect on the Company.


DEPENDENCE ON KEY EXECUTIVES

The Company will be dependent on the services of Albert Case and Jason Meyers.
The Company has entered into consulting agreements with two firms that are
obligated to provide the services of Mr. Case and Mr. Meyers. If, however, their
services were not available, the Company would be severely adversely affected.

                                      -12-
<PAGE>



SUBSTANTIAL DILUTION- FUTURE ISSUANCE OF SHARES

The Company most likely will issue a significant number of additional shares in
the future in connection with additional financing and for other purposes. A
holder of the Company's common stock may face substantial dilution resulting
from future issuances of its securities.



CONTROL

Aspatuck Holdings, Ltd beneficially owns a significant number of the outstanding
shares, with rights to additional shares, and will retain effective control of
the Company


WE HAVE NO CURRENT SALES AND MARKETING

We do not have dedicated sales and marketing professionals who are experienced
in dealing with the relevant OEM markets. Company personnel and agents on a
part-time basis perform sales and marketing functions along with other duties.
If existing resources are insufficient for the OEM markets, then no revenues
will be gained in a timely fashion.


INCREASED COMPLIANCE COSTS MAY BE A BURDEN

Pending actions by the PCAOB and the SEC may substantially increase compliance
costs (commonly referred to as "Sarbanes-Oxley" costs) in the short term. If the
Company fails to act because of a lack of funds then the ability of the Company
to operate as a public traded firm could be materially impaired.


WE HAVE NO HISTORY OF PRODUCT SALES

None of our products have been commercially produced. Except for the limited
sales of shop (or produced prototypes) products, we have had no recent sales.
The sales of prototypes have been treated as a reduction of research and
development cost. We cannot assure you that products will be commercially
developed in a timely manner or that sales will be commercially successful. The
failure of sales will have a material adverse effect on our business, operating
results and financial condition.


OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO HIRE AND RETAIN
MANAGEMENT

There is no assurance that we will be able to obtain and retain a management
team that is capable of implementing our business strategy successfully. If we
do not obtain and retain qualified personnel, our ability to manage our
business, achieve financing and to further develop our technology will be
impaired with the result that our business will be adversely affected. In
addition, our historical problems and financial position may make it more
difficult to attract personnel.

                                      -13-
<PAGE>



OUR BUSINESS POTENTIAL WILL BE LIMITED IF ULTIMATE USERS DO NOT ACCEPT OUR
PRODUCT LINE

We have a relatively new product and our success is dependent upon acceptance by
ultimate users in our target markets. If we are unable to convince our target
market of the advantages and viability of our technology, our market potential
may be severely limited.


WE MAY EXPEND A SIGNIFICANT AMOUNT OF TIME AND RESOURCES TESTING PROGRAMS THAT
MAY NOT RESULT IN ANY SALES

Although not now a priority in the Company's present plans, in the future a key
component of our business strategy may involve entering into joint development
agreements with automotive OEM's with the objective of having the OEM's
incorporate our technology into the OEM's products. Developing relationships
with OEM's involves lengthy periods of product development and performance
evaluation. During this period, we may provide certain products or services free
of charge or at a reduced rate. We also devote a significant amount of time and
attention to pursuing these programs in an effort to obtain commercialization
for products incorporating our technology. OEM's that we conduct joint
development work with are under no obligation to purchase our products and after
evaluation may determine not to incorporate any of our technology into their
products. Accordingly, we may devote substantial time and resources to
developing relationships and programs with OEM's that do not result in
commercialization of products incorporating our technology.


OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED IF WE ENCOUNTER PROBLEMS AND
DELAYS IN COMPLETING THE DEVELOPMENT OF OUR PRODUCTS

With the exception of limited commercial production of certain Turbopac(TM)
models several years ago, products incorporating our technology are in the
development stage. Historically, we have encountered delays in development due
to design defects or changes in specifications and we may continue to experience
delays. These delays could increase the cost of development of products
incorporating our technology and affect the timing of commercialization. Our
future revenues depend largely on sales of products incorporating our technology
and delays in commercialization will impact on our financial condition and
operating results. In addition, new products incorporating our technology may
not receive market acceptance and may not be sold at a profit.


FUTURE REVENUES DEPEND ON OUR ABILITY TO OBTAIN AND ENFORCE PATENT PROTECTION
FOR OUR TECHNOLOGY

Protection of trade secrets and proprietary know how is critical to our success.
If our competitors independently develop similar or superior technologies or
gain access to our trade secrets, our business will be materially and adversely
affected. Accordingly, we depend on continued patent protection for these
products. If we are unable to maintain patent protection for our technology, we
may not be able to gain a competitive advantage or protect our technology and
our business will be adversely affected.

                                      -14-
<PAGE>


We may incur substantial costs seeking to enforce our patent rights against
infringement or unauthorized use. We are already aware of one or more
infringements. Our trade secrets and proprietary know how are critical for us to
achieve and maintain a competitive position. We cannot assure you that others
may not independently develop similar or superior technologies or gain access to
our trade secrets or know how.


WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO ACHIEVE SUCCESS

The industries in which we compete are characterized by rapid and significant
technological change. Our success depends on our ability to continually develop
new technology and to refine products incorporating our original technology. We
have been pursuing commercialization of our product lines. Due to delay and the
rapid pace of technological innovation in the industry, there is a risk that
these products may be superseded by new technology and become obsolete.

Our products may not be commercially accepted or we may not be able to enhance
existing products or develop new products. Future technological change may
render one or more of our products obsolete or uneconomical. Our ability to
continue to develop and market new and improved products that can achieve
significant market acceptance will determine our future sales and profitability.


INTENSE COMPETITION

The business environment in which we operate is highly competitive. Most of our
competitors and potential competitors may have greater financial, marketing,
technological and other resources. We believe that no products technologically
similar to TurbopacTM have been sold. Nevertheless we will face intense
competition if we introduce our products commercially. We believe the
effectiveness of our product may give us an advantage but there is no assurance
competitors will not develop equal or superior product.

 In addition, a relatively small number of OEM's hold a significant share of the
automotive market and the determination of an OEM not to incorporate our
products into its product line may force us to expend additional amounts to gain
market share and/or significantly reduce our potential.



                                      -15-
<PAGE>


RISKS RELATING TO OUR MARKET

OUR STOCK IS A PENNY STOCK, THEREFORE SHAREHOLDERS WILL BE MORE LIMITED IN THEIR
ABILITY TO SELL THEIR STOCK

Our common stock is traded on the OTC Bulletin Board and constitutes a penny
stock under the Securities and Exchange Act. Our common stock will remain
classified as a penny stock for the foreseeable future. The classification as a
penny stock makes it more difficult for a broker-dealer to sell the stock into a
secondary market, which makes it more difficult for a purchaser to liquidate his
or her investment. Any broker-dealer engaged by the purchaser for the purpose of
selling his or her shares will be subject to rules 15g-1 through 15g-10 of the
Securities and Exchange Act. Rather than having to comply with these rules, some
broker-dealers will refuse to attempt to sell a penny stock. These rules may
affect the ability of broker-dealers to sell our common stock and also may
affect the ability of holders of our common stock.


OUR STOCK PRICE IS EXTREMELY VOLATILE

The price of our common stock has been and may continue to be subject to wide
fluctuations in response to a number of events and factors, such as our ability
to finance our operations, the status of legal proceedings against us, our
inability to achieve commercialization of our products or enter into joint
venture and licensing agreements, the operating and stock price performance of
other companies that investors may deem comparable to us, and news relating to
trends in our markets. In addition, the stock market in general, and the market
for high technology stocks in particular, has experienced extreme volatility
that often has been unrelated to the operating performance of these companies.
These broad market and industry fluctuations may adversely affect the price of
our common stock, regardless of our operating performance.


ABSENCE OF DIVIDENDS

We have never paid cash dividends on the common stock and because of substantial
deficit may not legally do so. Cash dividends are not expected to be paid on our
common stock in the foreseeable future. Assuming we could eliminate the deficit,
any future determination to declare or pay dividends will be at the discretion
of the board of directors and will be dependent on our results of operations,
financial condition, contractual and legal restrictions and other factors deemed
relevant by the board of directors.


                                      -16-
<PAGE>



ITEM 2.  DESCRIPTION OF PROPERTY.

In March 2005 we vacated our corporate headquarters. While we had mailing
addresses from such time until March 2007, we had no offices during such period.
In March 2007 the Company rented a small corporate office in Ventura, California


ITEM 3.  LEGAL PROCEEDINGS.

We are a party to the legal proceedings described below. We are not party to any
other material legal proceedings and to our knowledge, no such proceedings are
threatened or contemplated.

PACIFIC BAJA LIQUIDATING TRUST


In September 1999, Pacific Baja Light Metals Corporation, our former, wholly
owned subsidiary, filed a Chapter 11 petition in bankruptcy in the United States
Bankruptcy Court, Central District of California (Case No. RS99-26477MG) in
Riverside, California. ("Bankruptcy Proceeding") In September 2001, the Pacific
Baja Liquidating Trust (the "Trust") commenced action against us in the
aforesaid Bankruptcy Court. The Trust was established under the Pacific Baja
bankruptcy proceedings for the benefit of the unsecured creditors of Pacific
Baja. The Company settled the bankruptcy proceedings for $500,000 to be issued
in common stock or cash or a combination of both. Additionally the Company
assigned to the Bankruptcy Trust the rights to $9,500,000 claims under any
applicable directors and officers' liability insurance policies. The Bankruptcy
Trust also agreed to a covenant not to execute against the Company regardless of
the outcome of the insurance claims. The Company has completed the assignment of
its insurance claims, but has not completed the cash/stock payment that was to
be paid to the Trust by December 9, 2005. We are negotiating with the Trustee
regarding this default



TST, INC.

In March 2000, TST, Inc. ("TST"), a vendor to a subsidiary of Pacific Baja,
filed an action against us in the California Superior Court, County of San
Bernardino alleging that we were liable under a guarantee that we granted to TST
in order to induce TST to extend credit to our subsidiary, Pacific Baja. TST
alleged that Pacific Baja had defaulted on the credit facility and that we are
liable as guarantor. TST originally sought damages of approximately $1.8
million.

We agreed on the terms of settlement with TST on October 4, 2001. Under the
terms of the settlement agreement, we agreed to issue 1,000,000 shares of our
common stock to Mr. Andrew Stein, the president of TST and 2,000,000 shares of
our common stock to TST.

The settlement provided for the immediate entry of judgment against us in the
amount of $2,068,078 plus interest from the date of entry at the rate of 10% per
annum. The amount of this judgment would immediately increase by any amount that
TST is compelled by judgment or court order or settlement to return as a
preferential transfer in connection with the bankruptcy proceedings of Pacific
Baja. Any proceeds received by TST or Mr. Stein from the sale of the issued
shares to be automatically applied as a credit against that amount of the
judgment against us in favor of TST.

                                      -17-
<PAGE>


TST and Pacific Baja settled the preference payment issue resulting in TST
paying $20,000 to Pacific Baja and TST relinquished the right to receive
$63,000, therefore the $2,130,000, that the Company had included in provision
for lawsuit settlements, has been reduced to $83,000. For the year ended
December 31, 2005 the $2,047,000 difference has been recorded as a lawsuit
settlement in other income. At December 31, 2006, the Company has included
$3,190,352 ($2,900,320 - 2005) in regard to the remaining matter in provision
for lawsuit settlements.


KRAMER ACTION

A former director of Turbodyne, Erwin Kramer (the "Plaintiff"), represented by
his attorney Claus Schmidt, a former attorney of Turbodyne at the time of the
alleged claim, filed a legal action in Germany against Turbodyne, our
non-operating subsidiary Turbodyne Europe GmbH ("Turbodyne GmbH"), and
ex-employees of Turbodyne GmbH, Peter Kitzinski and Marcus Kumbrick
(collectively the "Defendants"), with the Regional Frankfurt court (the "German
Court") in September, 2004. The Plaintiff claims damages of Euro 245,620 plus 5%
interest per annum against the Defendants in respect of actions taken by the
Defendants while employed with Turbodyne GmbH.

On September 9, 2004, the German Court, on a motion by the Defendants to the
suit, dismissed the Plaintiff's claims against Peter Kitzinski and Marcus
Kumbrick, and ordered that Turbodyne's patents in Munich be attached pending the
resolution of the Plaintiff's claim against Turbodyne and Turbodyne GmbH. On
June 13, 2005 the Court in Frankfurt dismissed the claim. The Plaintiff filed an
appeal against this judgment with the Higher Regional Court in Frankfurt.

The Plaintiff's attorney, Claus Schmidt, also filed similar suits on behalf of
Frank Walter and Herbert Taeuber. The German courts are indicating that all
three suits need to be filed in the United States not Germany. Presently the
suits have not been filed in the United States. We vigorously dispute this claim
and have retained German counsel to defend it and seek its dismissal. At
December 31, 2006, the Company has included $405,785 in regard to this matter in
the provision for lawsuit settlements.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Due to the limited activity of the Company in 2006 an annual meeting was not
held, therefore, no matters were presented to the security holders.


                                      -18-
<PAGE>


PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, PRICE RANGE OF
        COMMON STOCK

The Company's common shares are now listed under the symbol "TRBD.OB" and on the
Frankfurt Stock Exchange under the symbol "TUD.F".

Set forth below are the high and low closing bid quotations for our common stock
for each quarter of the last two full fiscal years as reflected on the
electronic bulletin board. The quotations listed below represent prices between
dealers and do not include retail mark-up, markdown or commission, and there can
be no assurance that they represent actual transactions:

                               2005                               2006
                      ----------------------------------------------------------
                         HIGH            LOW                HIGH          LOW
                      ----------------------------------------------------------
First Quarter         $   0.031      $   0.002         $   0.018       $   0.01
Second Quarter        $   0.027      $   0.007         $   0.015       $   0.006
Third Quarter         $   0.021      $   0.014         $   0.07        $   0.014
Fourth Quarter        $   0.018      $   0.01          $   0.043       $   0.016

The source of the high and low price is eSignal Charts and BigCharts.com.

REGISTERED HOLDERS OF OUR COMMON STOCK

As of March 29, 2007, there were approximately 458 registered holders of record
of our common stock.


DIVIDENDS

We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying cash dividends on our common stock in the foreseeable
future. We currently intend to retain any future earnings to finance our
operations and fund research and development. Any payment of future dividends
will be at the discretion of our board of directors and will depend upon, among
other things, our earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions in respect to the payment of dividends
and other factors that our board of directors deems relevant.


RECENT SALES OF UNREGISTERED SECURITIES
The following issuances of securities occurred during 2006 and were not
otherwise reported in our current or quarterly reports.

                                      -19-
<PAGE>


In the last quarter of 2006 we sold 0.45 units of our securities in a private
placement. Each unit consisted of $100,000, a 5% convertible note and warrants
to purchase 2,000,000 of our shares at $0.025. The note is convertible at any
time prior to payment. The conversion price was one-half penny ($.005). The
securities were issued pursuant to Section 4(2) of the Securities Act of 1933
and are exempt from the registration requirements under that act. In addition
during such quarter $40,000 of principal of the aforesaid notes were converted
into 8,000,000 shares of our common stock. These latter shares were issued
pursuant to Section 3a(9) of the Securities Act of 1933 and are exempt from the
registration requirements under that act.




EQUITY COMPENSATION PLAN INFORMATION


The following summary information is presented for our Plans. For a more
detailed discussion, please refer to Note 7 of our financial statements included
in this annual report.

<TABLE>
<CAPTION>

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

                                 Number of
                              Securities to be   Weighted-Average
                                Issued Upon         Exercise             Number of Securities Remaining
                                Exercise of         Price of           Available for Future Issuance Under
                                Outstanding       Outstanding         Equity Compensation Plans (Excluding
                                  Options           Options             Securities Reflected in column (a))
-----------------------------------------------------------------------------------------------------------

Plan Category                    (a)                  (b)                          (c)

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

<S>                          <C>                   <C>                       <C>
Equity Compensation Plans    3,564,666 Shares      $0.09 per Share           2,122,200 Shares
Approved By Security         of Common Stock       of Common Stock
Holders

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

Equity Compensation Plans    88,184,000 Shares    $0.02 per Share          27,197,759 Shares
Not Approved By Security     of Common Stock *    of Common Stock
Holders

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

<FN>

* Represents shares subject to (i) 10,984,000 options under plans prior to 2006
and (ii) includes 77,200,000 warrants that are included in consultant contracts,
only 6,494,444 of these warrants vested in 2006.
</FN>
</TABLE>


                                      -20-
<PAGE>


ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

OVERVIEW

The following discussion and analysis of our financial condition as of December
31, 2006 and results of operations for the two years ended December 31, 2006 and
2005 should be read in conjunction with the consolidated financial statements
and related notes included in this annual report.

This section adds additional analysis of our operations and current financial
condition and also contains forward-looking statements and should be read in
conjunction with the factors set forth above under the heading "Forward-Looking
Statements" under Item I - Business.

Lack of funds caused the Company to again gradually curtail its operations until
it ceased almost all activities in 2005. During that period it had no business
operations, place of business and no employees. In September 2005, new
management took control with the purpose of attempting to resurrect the
Company's business and has obtained financing for such purpose but must seek
additional financing.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005

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

                                           Year Ended December 31
                             ---------------------------------------------------
                                                                    Percentage
                                    2006              2005          (Decrease)
                                    ----              ----          ----------
Total Revenue                     $22,224           $22,224            Nil
Operating Expenses              ($1,337,597)      ($1,833,112)      (27.0 %)
Net Loss From Operations        ($1,315,373)      ($1,810,888)      (27.4 %)
Settlement of Litigation             $0            $2,047,000        (100 %)
Other Income and Expenses        ($164,186)        ($14,784)         (101%)
Net Income/(loss)               ($1,479,559)        $221,328        (768.5%)


                                      -21-
<PAGE>




NET REVENUE

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

                                         Year Ended December 31
                     -----------------------------------------------------------
                                                                     Percentage
                        2006                     2005                 Increase
                        ----                     ----                 --------
License Fee            $22,224                  $22,224                 Nil

We had no revenue in 2006 other than recognition of amortized license fees.
During the year ended December 31, 2003, $400,000 in license fees were deferred
and amortized over 18 years. As a result, for each of the years ended December
31, 2006 and 2005, $22,224 of licensing fees was recognized as income. Our
limited receipts (not reflected as revenue) are derived for the most part from
selling "shop" versions of our product and reflect the fact that our
Turbopac(TM) products are in the development stage. During 2005, we sold one
prototype for $27,319, which reduced our research and development expenses. Our
continued net losses from operations reflect our continued operating expenses
and our inability to generate revenues. We believe that we will not be able to
generate any significant revenues from TurboPac(TM) until we complete our
production models and enter into manufacturing and sales arrangements.


COSTS OF SALES

We had no sales in 2005 and 2006; therefore we did not have any costs of sales
during any portion of these years.


OPERATING EXPENSES

The primary components of our operating expenses are outlined in the table
below:
                                     -------------------------------------------

                                                Year Ended December 31
                                     -------------------------------------------
                                                                 Percentage
                                       2006         2005     Increase (Decrease)
                                       ----         ----     -------------------
Selling, General and
Administrative Expenses              $828,166     $671,389         23.4%
Research and Development Expenses    $252,478     $371,485        (32.04%)
Litigation Expenses                  $255,181     $778,842        (67.24%)

                                      -22-
<PAGE>



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

The decrease in our selling, general and administrative expenses was
attributable to: limited operations due to limited funds which in turn resulted
in limited development operations.

RESEARCH AND DEVELOPMENT
The decrease in research and development costs in 2006 is due to limited funds
which in turn resulted in limited development operations. Our research and
development costs related to present and future products are charged to
operations in the period incurred. Our research and development activities
during 2006 are associated with the development of our TurboPac product.

LITIGATION EXPENSE
The decrease in litigation expense is primarily attributable to our settlement
of litigations.


COMPENSATION EXPENSE
For 2006, our stock based compensation for consultants and employees decreased
to $172,363 from $205,006 for 2005, representing a decrease of $32,643 or
approximately 15.92%. During 2006, warrants to purchase 77,200,000 shares of our
common stock were included as additional compensation in the contracts of
various consultants that we deemed essential to our operations. Of these
warrants, 6,494,444 were vested and reflected as an expense in 2006 compared to
options to purchase 1,300,000 shares granted in 2005. As a result, we recognized
$172,363 of non-employee compensation expense during the year ended December 31,
2006 compared to $63,254 during the year ended December 31, 2005. From time to
time we may grant a significant number of options or warrants to purchase common
stock to non-employees.
Prior to January 1, 2005 we recognized compensation expense in accordance with
Accounting Principles Board Opinion No. 25. Generally, under APB No. 25
compensation expense is recognized for the difference between the market price
of the underlying stock and the exercise price of the stock options. This method
of accounting is different from the fair value method of accounting that is
prescribed by SFAS No. 123.

                                      -23-
<PAGE>

OTHER INCOME (EXPENSE)

<TABLE>
<CAPTION>

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

                                                            Year Ended December 31
                                                 ----------------------------------------------
                                                                                   Percentage
                                                    2006          2005              Increase
                                                                                   (Decrease)
                                                 ----------------------------------------------
<S>                                             <C>           <C>                 <C>
Settlement of litigation                               --      $ 2,047,000           (100%)
Interest Expense                                ($   26,122)   ($    3,093)           745%
Amortization of Discount on Convertible Notes   ($  328,041)          --              100%
Debt Conversion Expense                         ($  345,357)          --              100%
Provision for income tax                             (2,400)          --              100%
Gain (loss) on sale of assets                          --      ($   13,527)          (100%)
Interest income                                        --      $     1,836           (100%)
Gain on Extinguishment of debt                  $   537,734           --              100%
</TABLE>

The Company continues to negotiate with our creditors and trade debt holders on
settlement of accounts payable from periods prior to the current management
assuming operation of the Company. When achieved this is represented as a gain
on extinguishment of accounts payable.

The Company issued $660,000 convertible notes with detachable warrants. The
notes bear interest at 5% and mature within one year from date of issuance. The
Notes are convertible, at the option of the holder, to shares of the Company's
common stock at a conversion price per share equal to the lower of (i) 70% of
the market price of common stock at date of issuance; or (ii) $0.025. The
warrants are to purchase the Company's common stock at $0.025 per share expiring
in five years. In September 2006 the board of directors offered to decrease the
note conversion price to $0.005 per share if the note holders exercised their
warrants at $0.01 by September 30, 2006. In consideration for the reduction, the
maturity of the notes was extended for another year. As a result of the
inducement, the Company recognized $345,357 of debt conversion expense and an
increase in additional paid in capital for the year ended December 31, 2006
relating to note holders who converted during the year.

In accordance with generally accepted accounting principles, in the event the
conversion price on notes is less than the Company's stock price on the date of
issuance, the difference is considered to be a beneficial conversion feature and
is amortized as interest expense over the period from the date of issuance to
the earlier of the conversion date or the stated maturity date. The aggregate
beneficial conversion feature of these convertible notes is $358,477. In
relation to the inducement to convert, an additional beneficial conversion
feature of $128,042 has been recognized. These were recorded as decreases in
loans payable and increases in additional paid in capital.

                                      -24-
<PAGE>


For the year ended December 31, 2006, the Company recognized $328,041 in
interest expense related to the amortization of the beneficial conversion
feature recorded on these convertible notes. As of December 31, 2006, the
remaining balance of the beneficial conversion feature was $158,478.


NET INCOME / LOSS

Our net income for the year ended December 31, 2006 decreased to a net loss of
($1,479,559) from net income of $221,328 for the year ended December 31, 2005,
representing a decrease of $1,700,887 or 768.5%. The net income in 2005 resulted
from the settlement of litigation of $2,047,000. Since we had no other
significant revenue and we had the financing expenses as explained in "Other
Income (Expense)" above in 2006 we incurred a loss.

We anticipate that we will continue to incur losses until such time as the
revenues we are able to generate from sales or licensing of our products exceed
our increased operating expenses. We base this expectation in part on the
expectation that we will incur increased operating expenses in completing our
stated plan of operations and there is no assurance that we will generate
revenues that exceed these expenses.



FINANCIAL CONDITION

At the end of 2004 we had no cash reserves and by early 2005 we were compelled
to suspend operations. Subsequent to September 2005 we received additional funds
from private offerings. We will require additional financing if we are to
continue as a going concern and to finance our business operations.



CASH AND WORKING CAPITAL

                                ------------------------------------------------
                                                                   Percentage
                                At December 31,   At December 31,   Increase /
                                     2006             2005          (Decrease)
                                ------------------------------------------------
  rrent Assets                     $    15,417     $   101,210        (85%)
Current Liabilities                ($7,972,868)    ($7,818,074)         2%
                                   -----------     -----------     -----------
Working Capital Deficit            ($7,957,451)    ($7,716,864)         3%
                                   ===========     ===========     ===========

The increase to our working capital deficit was primarily attributable to
decrease in cash and an increase in our current liabilities.


                                      -25-
<PAGE>


LIABILITIES
<TABLE>
<CAPTION>

                                      ----------------------------------------------------------
                                      At December 31,      At December 31,      Percentage
                                          2006                  2005        Increase/ (Decrease)
                                     -----------------------------------------------------------
<S>                                     <C>                <C>                        <C>
Provisions for Lawsuit Settlements      $4,675,137         $4,385,105                 7%
Accounts Payable                        $2,302,417         $2,491,259                (8%)
Accrued Liabilities                       $444,193           $476,048                (7%)
Short-Term Loans                          $511,121           $465,662                10%
</TABLE>

The increase in provision for lawsuits is due to accrued interest on outstanding
judgments. Accounts payable decreased due to a settlement of debt. Without this
settlement accounts payable would have increased due to a lack of funds to pay
creditors. Short-term loans increased in connection with our note financing to
generate cash. Short-term loans are net of discounts of $158,478 and warrant
allocation of $102,185.

The Company issued $660,000 convertible notes with detachable warrants. The
notes bear interest at 5% and mature within one year from date of issuance. The
Notes are convertible, at the option of the holder, to shares of the Company's
common stock.

In addition, the Company issued to the holders of convertible notes warrants to
purchase 13,200,000 shares of the Company's common stock. In accordance with
generally accepted accounting principles, the Company allocates the proceeds
received from debt or convertible debt with detachable warrants using the
relative fair value of the individual elements at the time of issuance.

We continue to negotiate with our creditors for the payment of our accounts
payable and accrued liabilities. Payment of these liabilities is contingent on
new funding being received that would enable us to make payments to the
creditors. Our ability to continue our operations is also conditional upon the
forbearance of our creditors.

Included in short-term loans at December 31, 2006 are unsecured, non-interest
bearing advances of $148,600 that we anticipate will be converted into shares of
our common stock.

                                      -26-
<PAGE>



CASH FLOWS

                                                      -------------------------
                                                            At December 31,
                                                      -------------------------
                                                             2006         2005
                                                             ----         ----
Net Cash provided by (used in) Operating Activities    ($564,793)   ($419,773)
Net Cash provided by Investing Activities                       -      $17,770
Net Cash provided by (used in) Financing Activities      $479,000     $500,926
                                                      ------------ ------------
Net Increase (Decrease) in Cash During Period           ($85,793)      $98,923
                                                      ============ ============


CASH USED IN OPERATING ACTIVITIES

The increase in cash used in operating activities was due to the fact that
additional funds were obtained in private financing in late 2005 and during
2006. This enabled us to utilize more funds for development in 2006 than in
2005.

FINANCING REQUIREMENTS

We will require additional financing if we are to continue as a going concern
and to finance our business operations. While we have obtained some financing in
2006 we need substantially more capital. We may not be able to obtain additional
working capital on acceptable terms, or at all. Accordingly, there is
substantial doubt about our ability to continue as a going concern.
We are presently in the process of negotiating to raise working capital to
finance our operations which is no assurance that we will be able to raise the
additional capital that we require to continue operations. In the event that we
are unable to raise additional financing on acceptable terms, then we may have
to cease operating and seek relief under appropriate statutes.



CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. As
such, some accounting policies have a significant impact on the amount reported
in these financial statements. A summary of those significant accounting
policies can be found in the Summary of Significant Accounting Policies in our
consolidated financial statements included in Item 7 of this Form 10-KSB. Note
that our preparation of this Annual Report on Form 10-KSB requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates. We have identified certain accounting policies,
described below, that are the most important to the portrayal of our current
financial condition and results of operations.

                                      -27-
<PAGE>


SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN

Our audited consolidated financial statements included with this Annual Report
on Form 10-KSB have been prepared assuming that we will continue as a going
concern. We have suffered net losses in recent periods resulting in an
accumulated deficit of $128,825,314 at December 31, 2006, have used cash in our
operating activities in recent periods, have disposed of our most significant
subsidiary through bankruptcy, are subject to lawsuits brought against us by
shareholders and other parties, and based on our projected cash flows for the
ensuing year, we may be required to seek additional equity or debt financing in
order to continue our present operations. These matters raise substantial doubt
about our ability to continue as a going concern.



STOCK BASED COMPENSATION

Prior to January 1, 2005, the Company accounted for employee stock-based
compensation using the intrinsic value method supplemented by pro forma
disclosures in accordance with APB 25 and SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No.148 "Accounting for
Stock-Based Compensation--Transition and Disclosures." Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. Under the intrinsic value method, the
Company has recognized stock-based compensation common stock on the date of
grant.

Effective January 1, 2005 the Company adopted SFAS 123(R) using the modified
prospective approach and accordingly prior periods have not been restated to
reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards granted
prior to its adoption will be expensed over the remaining portion of their
vesting period. These awards will be expensed under the straight-line method
using the same fair value measurements which were used in calculating pro forma
stock-based compensation expense under SFAS 123. For stock-based awards granted
on or after January 1, 2005, the Company will amortize stock-based compensation
expense on a straight-line basis over the requisite service period, which is
generally a five-year vesting period.

SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
initial estimates. Stock-based compensation expense was recorded net of
estimated forfeitures for the year ended December 31, 2005 such that expense was
recorded only for those stock-based awards that are expected to vest. Previously
under APB 25 to the extent awards were forfeited prior to vesting, the
corresponding previously recognized expense was reversed in the period of
forfeiture.

                                      -28-
<PAGE>



REVENUE RECOGNITION

Prior to the suspension of our operations in 2003, we recognized revenue upon
shipment of product. Since the re-commencement of operations in 2004, we
recognize license and royalty fees over the term of the license or royalty
agreement. Previously, research prototypes were sold and proceeds reflected by
reductions in our research and development costs. As new technology
pre-production manufacturing units are produced and related non-recurring
engineer services are delivered we will recognize the sales proceeds as revenue.

LICENSES

Licenses are recorded at cost and were being amortized at $208,000 per year over
their estimated useful life, which is estimated to be five years. At December
31, 2003, management determined that the licenses had been impaired and a
$624,000 impairment provision was recorded in our financial statements.


RESEARCH AND DEVELOPMENT

Research and development costs related to present and future products are
charged to operations in the period incurred. Previously, research prototypes
were sold and proceeds reflected by reductions in our research and development
costs. As new technology pre-production manufacturing units are produced and
related non-recurring engineer services are delivered we will recognize the
sales proceeds as revenue. During the year ended December 31, 2005 sales of
prototypes totaling $27,319 offset research and development costs.


                                      -29-
<PAGE>


NEW ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS 159
will be effective for the Company on January 1, 2008. The Company is currently
evaluating the impact SFAS 159 may have on its financial condition or results of
operations.

In September 2006, the United States Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). This SAB provides guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. SAB 108 establishes an approach
that requires quantification of financial statement errors based on the effects
on each of the company's balance sheets, statements of operations and related
financial statement disclosures. The SAB permits existing public companies to
record the cumulative effect of initially applying this approach in the first
year ending after November 15, 2006 by recording the necessary correcting
adjustments to the carrying values of assets and liabilities as of the beginning
of that year with the offsetting adjustment recorded to the opening balance of
retained earnings. Additionally, the use of the cumulative effect transition
method requires detailed disclosure of the nature and amount of each individual
error being corrected through the cumulative adjustment and how and when it
arose. The Company is currently evaluating the impact SAB 108 may have on its
financial condition or results of operations.

In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Issues No. 157, "Fair Value Measurements"
("SFAS 157"), which defines the fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Early adoption is encouraged, provided that the Company has not yet
issued financial statements for that fiscal year, including any financial
statements for an interim period within that fiscal year. The Company is
currently evaluating the impact SFAS 157 may have on its financial condition or
results of operations.

In July 2006, the FASB released FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting and reporting for uncertainties in income
tax law. This interpretation prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. This statement is
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact FIN 48 may have on its financial condition or
results of operations.

                                      -30-
<PAGE>



ITEM 7.  FINANCIAL STATEMENTS.



Included at the end of this Annual Report on Form 10-KSB, starting at page F-1,
are our audited financial statements for the years ended December 31, 2006 and
2005, which consists of the following:

1.   Report of Independent Registered Public Accounting Firm

2.   Consolidated Balance Sheets as at December 31, 2006 and December 31, 2005.

3.   Consolidated Statements of Operations for the years ended December 31, 2006
     and December 31, 2005.

4.   Consolidated Statements of Capital Deficit for the years ended December 31,
     2006 and December 31, 2005.

5.   Consolidated Statements of Cash Flows for the years ended December 31, 2006
     and December 31, 2005.

6.   Notes to the Consolidated Financial Statements.




                                      -31-
<PAGE>


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.


There were no changes in 2006.


ITEM 8A. CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company's Chief Executive Officer and its Chief
Financial Officer reviewed and evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)).These controls are designed to ensure that material information the
Company must disclose in its reports filed or submitted under the Exchange Act
is recorded, processed, summarized and reported on a timely basis. These
officers have concluded, based on that evaluation, that as of such date, the
Company's disclosure controls and procedures were effective at a reasonable
assurance level for a Company with substantially no activities and no personnel.
The Company believes it must devise new procedures as it increases its activity
and its personnel.
..
As required by Rule 13a-15 under the Exchange Act the Company's Chief Executive
Officer and its Chief Financial Officer reviewed and evaluated the effectiveness
of the Company's internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)), The term "internal control over financial
reporting" is a process designed by, or under the supervision of, the
registrant's principal executive and principal financial officers, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.

The Company's Chief Executive Officer and Chief Financial Officer believed that
for the limited operations of the Company internal controls over financial
reporting were adequate to provide reasonable assurance at yearend. Nevertheless
these controls indicated substantial weakness that must be rectified if the
Company increased operations, including a lack of segregation of duties.

                                      -32-
<PAGE>



PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT.


DIRECTORS AND EXECUTIVE OFFICERS

Our executive officers and directors and their respective ages as of March 15,
2007 are as follows:
----------------------------- --------------------------------------------------
 NAME                          AGE
----------------------------- --------------------------------------------------
 Jason Meyers                  39         Director and Chairman
----------------------------- ---------- ---------------------------------------
 Albert F. Case, Jr.           52         President and Chief Executive Officer
----------------------------- ---------- ---------------------------------------

----------------------------- ----------- --------------------------------------
Debi Kokinos                  54          Chief Financial Officer and Secretary
----------------------------- ----------- --------------------------------------

Set forth below is a brief description of the background and business experience
of our executive officer and directors in 2006:

ALBERT F. (AL) CASE, JR., Director, Chief Executive Officer since October 6,
2005. Mr. Case is a seasoned business executive with over 30 years of
experience. He has served an officer or board member of private and publicly
traded companies since the late 1970s when he was first elected as the youngest
senior systems officer in the history of Marine Midland Banks (now HSBC). He has
extensive experience in mergers and acquisitions, day-to-day business
operations, and international operations in the Americas, Europe and
Asia/Pacific. Mr. Case also has extensive experience in turning around flagging
business operations, building marketing and sales teams, and streamlining
operations.

JASON MEYERS, Director, Chairman since September 1, 2005. Mr. Meyers is an
investment banker, based in New York City. Mr. Meyers has extensive experience
in re-capitalizing, funding and revitalizing distressed businesses and
recruiting management teams. Mr. Meyers has over 17 years of investment and
merchant banking experience and has led or participated in the origination and
syndication of dozens of private placements and initial public offerings in a
broad range of industries including entertainment, technology, healthcare, and
financial services.

DEBI KOKINOS, Chief Financial Officer and Corporate Secretary since October 6,
2005. Ms. Kokinos has been with the company since May 2003. Ms. Kokinos has
extensive experience in accounting, management, taxation and computer
consulting.


AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that none of the audit committee members
can be classified as an "audit committee financial expert" as defined in Item
401(e) of Regulation S-B. We presently do not have any other committees of the
Board of Directors.

                                      -33-
<PAGE>



CODE OF ETHICS

We adopted a Code of Ethics applicable to our Chief Executive Officer, Chief
Financial Officer, Corporate Controller and certain other finance executives,
which is a "code of ethics" as defined by applicable rules of the SEC. Our Code
of Ethics is attached to this Annual Report on Form 10-KSB. If we make any
amendments to our Code of Ethics other than technical, administrative, or other
non-substantive amendments, or grant any waivers, including implicit waivers,
from a provision of our Code of Ethics to our chief executive officer, chief
financial officer, or certain other finance executives, we will disclose the
nature of the amendment or waiver, its effective date and to whom it applies in
a Current Report on Form 8-K filed with the SEC.




COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT

Section 16(a) of the Exchange Act requires our executive officers and directors,
and persons who beneficially own more than ten percent of our equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than ten percent
shareholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file. Based on our review of the copies of such forms
received by us, we believe that during the fiscal year ended December 31, 2006
new management did not file reports but these reports are being prepared and
will be filed shortly.


                                      -34-
<PAGE>


ITEM 10.          EXECUTIVE COMPENSATION.


The following table sets forth certain compensation information for each of our
executive officers for the year ended December 31, 2006 and 2005:
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------
                                                                 Option/
Name and principal                                  Stock        Warrant      All Other
position                    Year       Salary       Awards       Awards     Compensation     Total
-----------------------------------------------------------------------------------------------------
<S>                         <C>       <C>              <C>      <C>              <C>        <C>
Albert F. Case, Jr.,        2006      $96,000         -0-       $42,772         -0-         $138,772
President (Principal                                              (3)
Executive Officer)          2005      $96,000       $65,000       -0-                       $161,000
                                        (1)           (2)
-----------------------------------------------------------------------------------------------------
Jason Meyers                2006      $120,000        -0-       $71,284         -0-         $ 191,284
                                                                  (4)
                            2005      $ 96,000     $5,014,990                   -0-        $5,110,990
                                                      (5)         -0-

-----------------------------------------------------------------------------------------------------
Debi Kokinos,               2006      $77,520         -0-       $21,385         -0-          $98,905
Chief Financial Officer
                            2005      $77,520         -0-       $11,813         -0-          $89,333

-----------------------------------------------------------------------------------------------------
<FN>


     (1)  Represents amounts paid to a corporation affiliated with Mr. Case for
          providing the services of Mr. Case who became President and chief
          executive officer in September 2005.

     (2)  Represents amounts accrued for financial reporting purposes in 2005
          for the issuance of 1,300,000 shares.

     (3)  Represents amounts accrued for financial reporting purposes in 2006
          for the issuance of warrants to purchase 1,600,002 shares

     (4)  Represents amounts accrued for financial reporting purposes in 2006
          for the issuance of options to purchase 2,666,664 shares

     (5)  Represents $5,014,990 for 100,299,791 shares owned of record by
          Aspatuck Holdings Ltd. of which Jason Meyers is the controlling party
          and beneficial ownership.

     (6)  Represents amounts accrued for financial reporting purposes in 2006
          for the issuance of warrants to purchase 800,001 shares

     (7)  Represents amounts accrued for financial reporting purposes in 2005
          for the issuance of options to purchase 500,000 shares
</FN>
</TABLE>

                                      -35-
<PAGE>






COMPENSATION ARRANGEMENTS


On April 1, 2006 we entered into a consulting agreement ("Consulting Agreement")
with Stamford Research, LLC, which is obligated to provide the services of
Albert Case to the Company. Albert F. Case, Jr. is our chief executive officer.
The Agreement is for a three year term. The Company may terminate the Agreement
and convert the Agreement to an employment agreement with Mr. Case. As
compensation for Consultant's services, the Company is obligated to pay
Consultant a cash fee of not less than $96,000 per annum. As additional
consideration Consultant received seven year Warrants (the "Warrants") to
purchase 19,200,000 of shares of the common stock of the Company (the "Shares")
at an exercise price of $0.0117 per share. Such warrants shall "vest" and may be
exercised as follows:

     o    Warrants to purchase 6,400,000 Shares are "service based" and 1/36th
          of such Shares shall vest at the end of each month that Mr. Case has
          provided services pursuant to the consulting agreement or any
          converted employment agreement.

     o    Warrants to purchase 6,400,000 Shares are "revenue based" and shall
          vest in their entirety upon filing of a report with the Securities &
          Exchange Commission containing reviewed or audited statements
          reflecting the recognition of revenue for the first sale of a
          production model of a Company product after provided payment is made
          therefore and the product is not returned and provided further such
          sale occurs during the period that Case has provided services pursuant
          to the consulting agreement or any converted employment agreement.

     o    Warrants to purchase 6,400,000 Shares are "earnings based" and vest in
          their entirety upon filing of a report with the Securities & Exchange
          Commission containing reviewed or audited statements reflecting EBITA
          or earnings before taxes, interest or amortization , of $1,000,000 and
          provided further such sale occurs during the period that Case has
          provided services pursuant to the consulting agreement or any
          converted employment agreement .

Jason Meyers and Debi Kokinos, or entities controlled by them, entered into
substantially identical agreements, providing for their services as Chairman of
the Board and Chief Financial Officer respectively. The agreement for Mr. Meyers
calls for annual compensation of $120,000 and the grant of 32,000,000 warrants.
Ms. Kokinos is to receive annual compensation of approximately $77,500 and the
grant of 9,600,000. Their warrants are divided equally into the same three
categories and vesting schedule as the warrants for Stamford Research.



                                      -36-
<PAGE>

OPTION
INFORMATION

Set forth below is information concerning unexercised options; stock that has
not vested; and equity incentive plan awards for each named executive:
<TABLE>
<CAPTION>

                                                                                               Equity
                                                                                               Incentive
                                                                                Equity         Plan
                                                                                Incentive      Awards:
                                                                                Plan           Market or
                                                                                Awards:        Payout
                                                                                Number of      Value of
                                      Equity                                    Unearned       Unearned
                                      Incentive                                 Shares,        Shares,
                                      Plan Awards:                              Units          Units
                       Number of      Number of                                 or Other       or Other
                       Securities     Securities                                Rights         Rights
                       Underlying     Underlying     Options                    That           That
                       Unexercised    Unexercised    Exercise    Options        Have Not       Have Not
                       Options (#)    Unearned       Price       Expiration     Vested         Vested
Name                   Exercisable    Options (#)    ($)         Date           (#)            (#)
(a)                    (b)            (d)            (e)         (f)            (i)            (j)
---------------------------------------------------------------------------------------------------------
<S>                     <C>            <C>           <C>             <C> <C>    <C>              <C>
Albert F. Case, Jr      1,600,002      17,599,998    $0.0117     Mar 31, 2013   17,599,998       $880,000
Jason Meyers            2,666,664      29,333,336    $0.0117     Mar 31, 2013   29,333,336     $1,466,667
Debi Kokinos            1,700,001       8,799,999    $0.0117     Mar 31, 2013    8,799,999      $440,000
</TABLE>


COMPENSATION OF DIRECTORS

As of December 31, 2006, our directors were reimbursed for reasonable
out-of-pocket expenses in connection with attendance at board of director and
committee meetings.

                                      -37-
<PAGE>





ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information concerning the number of
shares of our common stock owned beneficially as of March 31 2007 by: (i) each
of our then directors; (ii) each of our named executive officers, and (iii)
officers and directors as a group. Unless otherwise indicated, the shareholders
listed possess sole voting and investment power with respect to the shares
shown.

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

                              Amount and Nature
Name and Address                of Beneficial             Percentage of
of Beneficial Owner               Ownership               Common Stock
----------------------------- -------------------- -----------------------------

Jason Meyers  (1) (2)             104,447, 935                 29.2%
----------------------------- -------------------- -----------------------------

Aspatuck Holdings Ltd.(1)         100,299,791                 28.37%
----------------------------- -------------------- -----------------------------

Albert F. Case, Jr. (3)            3,788,892                   1.06%
----------------------------- -------------------- -----------------------------

Debi Kokinos  (4)                  2,144,446                   0.60%
----------------------------- -------------------- -----------------------------

All Officers and Directors
as a Group (3 persons)           110,381,273                   30.47%

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

     (1)  Represents 100,299,791 shares owned of record by Aspatuck Holdings
          Ltd. of which Jason Meyers is the controlling party and beneficial
          ownership. The above does not include substantial additional shares
          Aspatuck Holdings Ltd. may acquire under the Agreement and Plan of
          Merger described under Item 12 - Certain Relationships and Related
          Transactions.

     (2)  Of the above number of shares 4,148,144 shares are subject to warrants
          owned by Mr. Meyers and presently exercisable within sixty days after
          March 31, 2007. An additional 27,851,856 shares are subject to
          warrants not presently exercisable or exercisable within sixty days of
          March 31, 2007.

     (3)  Represents securities owned by Stamford Research LLC of which Albert
          F. Case, Jr is the controlling party and beneficial owner. Of the
          above number of shares 2,488,892 shares are subject to warrants
          presently exercisable or within sixty days of March 31, 2007. An
          additional 16,711,108 shares are subject to warrants not presently
          exercisable or exercisable within sixty days after March 31, 2007.

     (4)  The above ownership consists of shares that are subject to options or
          stock warrants presently exercisable within after March 31, 2007. An
          additional 7,455,554 shares are subject to warrants not presently
          exercisable or exercisable within sixty days of March 31, 2007.

                                      -38-
<PAGE>



ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Company entered into an AGREEMENT AND PLAN OF MERGER (the "Agreement") dated
as of SEPTEMBER 2005, among it, its wholly owned subsidiary Turbodyne
Acquisition Corp. ("Merger Subsidiary" or the "Survivor") and Aspatuck Holdings
Nevada, Inc., (the "Nevada"). Nevada was a majority owned subsidiary of Aspatuck
Holdings Ltd. ("AHL"). Jason Meyers is the President of AHL. The agreement
contemplated the merger of Nevada and Merger Subsidiary with the Survivor as the
surviving entity. Prior to the merger, Nevada entered into a consulting
agreement ("CONSULTING AGREEMENT") with an entity which is obligated to provide
the services of Albert Case to the Company.

The merger was completed as of September 9, 2005. Upon completion of the merger,
the shareholders of Survivor were entitled under the Agreement to receive
("Merger Consideration") 40% of the Company's outstanding shares including the
number of shares of Common Stock issuable on the exercise, conversion or
exchange of securities, options, rights or other agreements ("Derivatives")
providing for the issuance of Common Stock. Upon the merger the shareholders of
Nevada were entitled to 139,192,222 of a total actual outstanding of 315,560,144
shares of the Company's Common Stock. There was no cash exchanged. These shares
then accounted for 44% of the presently outstanding shares. AHL is the
beneficial owner of 107,178,550 shares or approximately 34% of the outstanding
shares of the Company's Common Stock. As a controlling owner of AHL, Meyers is
the indirect beneficial owner of these shares. The number of Fully Diluted
Shares Outstanding and, consequently the Merger Consideration include shares of
Common Stock issued, or subject to Derivatives issued, after the merger,
relating, in any manner, to events or transactions prior to the merger including
securities of the Company issued to obtain funds to satisfy any Pre-merger
obligations. Based on this formula substantial additional shares will be issued
as Merger Consideration.

The Company is the beneficiary of the Consulting Agreement dated as of September
1, 2005, between Nevada and Stamford Research LLC, to provide the services of
Albert Case who is now the Company's chief executive officer. As compensation
for Consultant's services hereunder, the Company is to pay Consultant a total of
$33,000 payable; $20,000 cash and $13,000 which was paid by the issuance of
1,300,000 shares of the Company's Common Stock based upon market at the time of
the merger. The agreement is for a term of 90 days after the merger.

In February 2007 we entered into a patent assignment agreement with four of our
consultants relating to the assignment of patent rights. The four consultants,
including our President Albert Case, are joint inventors of certain inventions
and/or improvements for which they have filed a provisional application in the
United States Patent and Trademark Office. Under the terms of the agreement, the
co-inventors assigned the rights to the patent application to the Company .The
Company is required to pay all accrued and unpaid compensation owed under
existing agreements to each inventor and keep payments to them current under
such agreements. .Failure to make these payments may result in the return of the
Patent to the inventors.



Aspatuck Holdings Ltd. And another entity affiliated with Jason Meyers has
advanced an aggregate of $ 46,000 to the Company. The advances are repayable on
demand and bear interest at 5 % per annum.


                                      -39-
<PAGE>


ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K.

EXHIBITS

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


EXHIBIT NUMBER   DESCRIPTION OF EXHIBIT
3.1     Restated Articles of Incorporation of Registrant.(1)
3.2     Amended Bylaws of the Registrant.(1)
3.3     Certificate of Amendment to Articles of Incorporation, as filed by the
        Registrant with the Nevada Secretary of State.(7)
4.1     Certificate of Merger, as filed by the Registrant with the Delaware
        Secretary of State.(1)
4.2     Certificate of Merger, as filed by the Registrant with the Nevada
        Secretary of State.(2)
4.3     Certificate of Designation creating Series X Preferred Stock, as filed
        by the Registrant with the Nevada Secretary of State.(4)
4.4     Certificate of Designation creating Series X Preferred Stock, as filed
        by the Registrant with the Nevada Secretary of State. (4)
4.5     Agreement and Plan of Merger (9)
10.1    Sub-Lease between Turbodyne Systems, Inc. and John E. King and Carole D.
        King dated July 1, 2001.(3)
10.2    Exclusive License Agreement between the Registrant, Turbodyne Systems,
        Inc. and David St. James dated October 15, 2001.(3)
10.3    Licensing and Joint Development Agreement Between the Registrant and
        Ishikawajima-Harima Heavy Industries Co., Ltd.(1)
10.4    Settlement Agreement dated January 29, 2003 between the Registrant,
        Turbodyne Systems Inc., Leon E. Nowek and L.N. Family Holdings Inc.(4)
10.5    Settlement Agreement dated January 29, 2003 between the Registrant,
        Turbodyne Systems Inc., Edward M. Halimi and March Technologies Inc.(4)
10.6    Settlement Agreement dated effective January 24, 2004 among the
        Registrant, Turbodyne Systems, Inc. and Honeywell International Inc. (5)
10.7    Employment Agreement dated effective February 1, 2004 between the
        Registrant and Marsha Chandler. (6)
10.8    Employment Agreement dated effective February 1, 2004 between the
        Registrant and Andrew Martyn-Smith. (6)
10.9    Employment Agreement dated effective February 1, 2004 between the
        Registrant and David T. Willett. (6)
10.10   2004 Stock Incentive Plan. (6)
10.11   Consulting Agreement dated October 4, 2004 between the Registrant and
        Marsha Chandler. (8)
10.12   Stipulation and Settlement Order dated October 27, 2004 between the
        Registrant and Peter Hofbauer. (8)
10.13   Settlement and Release Agreement dated September 14, 2004 between the
        Registrant and John King. (8)
10.14   2005 Stock Incentive Plan
10.15   Consulting Agreement dated April 1, 2006 between the Registrant and
        Albert F. Case, Jr. (10)
14.1    Code of Ethics. (5)
21.1    List of Subsidiaries. (5)
23.2    Consent of Vasquez & Company, LLP
31.1    Certification of Chief Executive Officer and Chief Financial Officer
        pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer and Chief Financial Officer
        pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
        of the Sarbanes-Oxley Act of 2002.
--------------------------------------------------------------------------------
     (1)  Filed as an exhibit to our Current Report on Form 8-K filed with the
          SEC on September 18, 2002.
     (2)  Filed with as an exhibit to our Form 10-K for the fiscal year ended
          December 31, 1999.
     (3)  Filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal
          year ended December 31, 2001.
     (4)  Filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal
          year ended December 31, 2002.
     (5)  Filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal
          year ended December 31, 2003
     (6)  Filed as an exhibit to our Quarterly Report on Form 10-QSB for the
          fiscal quarter ended March 31, 2004.
     (7)  Filed as an exhibit to our Current Report on Form 8-K filed with the
          SEC on July 9, 2004.
     (8)  Filed as an exhibit to our Quarterly Report on Form 10-QSB for the
          fiscal quarter ended September 30,2004
     (9)  Filed as an exhibit to our Current Report on Form 8-K filed with the
          SEC October 2005
     (10) Filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal
          year ended December 31, 2006

                                      -40-
<PAGE>



(A)      CURRENT REPORTS ON FORM 8-K.


During the quarterly period ended December 31, 2006 we did not file any Form
8-K:







ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES.


AUDIT FEES

The aggregate fees billed for the two most recently completed fiscal years ended
December 31, 2006 and 2005 for professional services rendered by the principal
accountant for the audit of our annual financial statements and review of the
financial statements included our Quarterly Reports on Form 10-QSB and services
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for these fiscal periods.

Our audit committee pre-approves all non-audit services to be performed by our
principal accountant in accordance with our audit committee charter.

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

                                    YEAR ENDED                   YEAR ENDED
                                 DECEMBER 31, 2006           DECEMBER 31, 2005

------------------------- ------------------------------ -----------------------
    Audit Related Fees               $108,000                     $89,000
------------------------- ------------------------------ -----------------------
    Tax Fees                         $ 21,000                     $ 7,000
------------------------- ------------------------------ -----------------------
    All Other Fees                       -                           -
------------------------- ------------------------------ -----------------------
    Total                            $129,000                     $96,000
------------------------- ------------------------------ -----------------------


                                      -41-
<PAGE>


                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this amendment no.2 to this annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                             Turbodyne Technologies, Inc.

Dated:   June 4, 2007                        BY: /S/ ALBERT F. CASE, JR.
                                             ---------------------------
                                             Albert F. Case, Jr,
                                             Chief Executive Officer



In accordance with the Exchange Act, this report has been signed below by the
following person on behalf of the registrant and in the capacities and on the
dates indicated.

Signature                       TITLE                               DATE
                                -----                               ----

/s/ Albert F. Case, Jr          Chief Executive Officer,            June 4, 2007
________________________        Director
Albert F. Case, Jr


/s/ Debi Kokinos                Chief Financial Officer             June 4, 2007
_________________________       and Chief Accounting Officer
Debi Kokinos







                                      -42-

<PAGE>

                                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  CONSOLIDATED FINANCIAL STATEMENTS
                                  FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005







                                      F-1
<PAGE>



                                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  CONSOLIDATED FINANCIAL STATEMENTS
                                  FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005




                                                                       Contents
--------------------------------------------------------------------------------

  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                F-3

  CONSOLIDATED FINANCIAL STATEMENTS

         Balance Sheets                                                  F-4

         Statements of Operations                                        F-5

         Statements of Capital Deficit                                   F-6

         Statements of Cash Flows                                        F-7

         Notes to the Financial Statements                               F-8





                                      F-2
<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Turbodyne Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Turbodyne
Technologies, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, capital deficit, and cash flows
for the each of the years in the two-year period ended December 31, 2006. 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 Turbodyne Technologies, Inc.
and subsidiaries as of December 31, 2006 and 2005, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2006 in conformity with accounting principles generally accepted in
the United States of America.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As more fully discussed in Note 1
to the consolidated financial statements, the Company has incurred significant
losses in recent years, has an accumulated deficit of $128,825,314 and a total
capital deficit of $8,276,192 at December 31, 2006. It has used all of its
available cash in its operating activities in recent years, has a significant
working capital deficiency and is subject to lawsuits brought against it by
other parties. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in these regards are also
discussed in Note 1 to the consolidated financial statements. The aforementioned
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.

/s/ VASQUEZ & COMPANY
---------------------
Los Angeles, California
March 30, 2007
(except for Note 2, as to which the date is May 25, 2007)


                                      F-3
<PAGE>

<TABLE>
<CAPTION>

=========================================================================================================

                                                            TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                              CONSOLIDATED BALANCE SHEETS
DECEMBER 31                                                                  2006                 2005
---------------------------------------------------------------------------------------------------------

  ASSETS                                                                 (AS RESTATED)

  CURRENT
<S>                                                                    <C>                <C>
       Cash                                                            $        14,745    $       100,538
       Prepaid expenses and other current assets                                   672                672
                                                                       ---------------    ---------------
              TOTAL CURRENT ASSETS                                              15,417            101,210

PROPERTY AND EQUIPMENT, NET (NOTE 3)                                               537              2,309
                                                                       ---------------    ---------------

TOTAL ASSETS                                                           $        15,954    $       103,519
=========================================================================================================

LIABILITIES AND CAPITAL DEFICIT

LIABILITIES

CURRENT
       Accounts payable (Notes 4 and 7(a))                             $     2,302,417    $     2,491,259
       Accrued liabilities                                                     444,193            476,048
       Provision for lawsuit settlements (Notes 7, 11, 12 and 13)            4,675,137          4,385,105
       Loans payable (Notes 5, 9(g))                                           551,121            465,662
                                                                       ---------------    ---------------

              TOTAL CURRENT LIABILITIES                                      7,972,868          7,818,074

DEFERRED LICENSING FEE                                                         319,278            341,502
                                                                       ---------------    ---------------

              TOTAL LIABILITIES                                              8,292,146          8,159,576
                                                                       ---------------    ---------------

CAPITAL DEFICIT
       Share Capital (Note 9)
           Authorized
                    1,000,000 preferred shares, par value $0.001
                    1,000,000,000 (150,000 - 2003) common
                    shares, par value $0.001
           Issued
                  12,675 preferred shares in 2006 (2005 - 12,675)                   12                 12
                  345,316,577 common shares in 2006 (2005-320,416,577)         345,317            320,417
       Treasury stock, at cost (1,778,580 shares)                           (1,963,612)        (1,907,612)

       Additional paid-in capital                                          122,132,286        120,841,762
       Other comprehensive income -
           Foreign exchange translation gain                                    35,119             35,119
       Accumulated deficit                                                (128,825,314)      (127,345,755)
                                                                       ---------------    ---------------

              TOTAL CAPITAL DEFICIT                                         (8,276,192)        (8,056,057)
                                                                       ---------------    ---------------

TOTAL LIABILITIES AND CAPITAL DEFICIT                                  $        15,954    $       103,519
=========================================================================================================





      The accompanying summary of significant accounting policies and notes
        are an integral part of these consolidated financial statements.
</TABLE>

                                      F-4
<PAGE>
<TABLE>
<CAPTION>


======================================================================================================

                                                         TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                 CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31                                            2006              2005
------------------------------------------------------------------------------------------------------


                                                                         AS RESTATED)
                                                                        ------------------------------

<S>                                                                     <C>              <C>
LICENSING FEES                                                          $      22,224    $      22,224
                                                                        ------------------------------

EXPENSES
       Selling, general and administrative (Notes 7, 8 and 9)                 828,166          671,389
       Research and developments costs (Notes 7 and 8)                        252,478          371,485
       Litigation expense (Notes 7, 11, 12, 13 and 14)                        255,181          778,842
       Depreciation and amortization                                            1,772           11,396
                                                                        ------------------------------

           TOTAL EXPENSES                                                   1,337,597        1,833,112
                                                                        ------------------------------

LOSS FROM OPERATIONS                                                       (1,315,373)      (1,810,888)

OTHER INCOME (EXPENSE)
       Settlement of litigation (Notes 7,12)                                     --          2,047,000
       Interest expense                                                       (26,122)          (3,093)
       Amortization of convertible note discount                             (328,041)            --
       Debt conversion expense                                               (345,357)            --
       Provision for income tax                                                (2,400)            --
       Interest Income                                                           --              1,836
       Gain (loss) on sale of assets                                             --            (13,527)
       Debt relief                                                            537,734             --
                                                                        ------------------------------

NET INCOME (LOSS) FOR THE PERIOD                                        $  (1,479,559)   $     221,328
======================================================================================================

INCOME (LOSS) PER COMMON SHARE - BASIC                                  $        0.00    $        0.00
======================================================================================================

INCOME (LOSS) PER COMMON SHARE - DILUTED                                $        0.00    $        0.00
======================================================================================================

WEIGHTED AVERAGE SHARES USED FOR BASIC INCOME (LOSS) PER SHARE            325,726,440      214,891,125
======================================================================================================

WEIGHTED AVERAGE SHARES USED FOR DILUTED INCOME (LOSS) PER SHARE          325,726,440      248,917,733
======================================================================================================





      The accompanying summary of significant accounting policies and notes
        are an integral part of these consolidated financial statements
</TABLE>


                                      F-5
<PAGE>

<TABLE>
<CAPTION>

==============================================================================================================================

                                                                                 TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                    CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT


                                        Preferred Stock                 Common Stock                     Treasury Stock
                                   -------------------------    ----------------------------        --------------------------
                                    Shares        Amount           Shares          Amount            Shares         Amount
                                   -------------------------------------------------------------------------------------------
<S>                              <C>          <C>               <C>           <C>                <C>            <C>
Balance,
January 1, 2005                     52,175    $          52      160,157,955   $     160,158         378,580   $  (1,907,612)

Exercise of stock
options (Note 9(e))                   --               --         10,816,400          10,816            --              --

Issuance of stock
for services
(Note 9(c))                           --               --          5,000,000           5,000            --              --


Issuance of stock options
to non-employees for
services (Note 7)                     --               --               --              --              --              --

Issuance of stock options
to employees (Note 8)                 --               --               --              --              --              --

Conversion of preferred
Series X shares
(Note 9(e),(f))                    (39,500)             (40)       3,950,000           3,950            --              --

Merger Share accrual
(Note 9(b),(e))                       --               --        140,492,222         140,493            --              --

Net income for
the period                            --               --               --              --              --              --
                             -------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 2005                   12,675    $          12      320,416,577   $     320,417         378,580   $  (1,907,612)

Exercise of warrants                  --               --         11,900,000          11,900            --              --

Issuance of stock
for services                          --               --          5,000,000           5,000            --              --

Conversion of
note payable                          --               --          8,000,000           8,000            --              --

Shares returned from
lawsuit settlement                    --               --               --              --         1,400,000         (56,000)

Issuance of warrants to
consultants                           --               --               --              --              --              --

Issuance of warrants with
convertible notes (Note 2)            --               --               --              --              --              --

Beneficial conversion
features of notes
(Note 2)                              --               --               --              --              --              --

Inducement to convert
notes payable (Note 2)                --               --               --              --              --              --

Inducement to
exercise warrants
(Note 2)                              --               --               --              --              --              --

Net loss for
the period                            --               --               --              --              --              --
                             -------------------------------------------------------------------------------------------------
Balance,
December 31, 2006
(as restated)                       12,675    $          12      345,316,577   $     345,317       1,778,580   $  (1,963,612)
                             =================================================================================================


                             Additional            Other
                                Paid-in    Comprehensive      Accumulated         Capital
                                Capital           Income          Deficit         Deficit
                             ---------------------------------------------------------------
Balance,
January 1, 2005              $ 120,544,963    $      35,119   $(127,567,083)   $  (8,734,403)

Exercise of stock
options (Note 9(e))                178,196             --              --            189,012

Issuance of stock
for services
(Note 9(c))                         45,000             --              --             50,000

Issuance of stock options
to non-employees for
services (Note 7)                   63,254             --              --             63,254

Issuance of stock options
to employees (Note 8)              141,752             --              --            141,752

Conversion of preferred
Series X shares
(Note 9(e),(f))                     (3,910)            --              --               --

Merger Share accrual
(Note 9(b),(e))                   (127,493)            --              --             13,000

Net income for
the period                            --               --           221,328          221,328
                             ---------------------------------------------------------------
BALANCE,
DECEMBER 31, 2005            $ 120,841,762    $      35,119   $(127,345,755)   $  (8,056,057)

Exercise of warrants               107,100             --              --            119,000

Issuance of stock
for services                        45,000             --              --             50,000

Conversion of
note payable                        32,000             --              --             40,000

Shares returned from
lawsuit settlement                    --               --              --            (56,000)

Issuance of warrants to
consultants                        172,363             --              --            172,363

Issuance of warrants with
convertible notes (Note 2)         102,185             --              --            102,185

Beneficial conversion
features of notes
(Note 2)                           486,519             --              --            486,519

Inducement to convert
notes payable (Note 2)             166,857             --              --            166,857

Inducement to
exercise warrants
(Note 2)                           178,500             --              --            178,500

Net loss for
the period                            --               --        (1,479,559)      (1,479,559)
                             ---------------------------------------------------------------
Balance,
December 31, 2006
(as restated)                $ 122,132,286    $      35,119   $(128,825,314)   $  (8,276,192)
                             ===============================================================







      The accompanying summary of significant accounting policies and notes
        are an integral part of these consolidated financial statements.

</TABLE>


                                      F-6
<PAGE>

<TABLE>
<CAPTION>

====================================================================================================
                                                       TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                               CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31                                               2006           2005
----------------------------------------------------------------------------------------------------
                                                                          (AS RESTATED)

OPERATING ACTIVITIES
<S>                                                                       <C>            <C>
       Net income                                                         $(1,479,559)   $   221,328
       Adjustments to reconcile net income to net
      cash provided by (used in) operating activities:
           Amortization of deferred licensing fees                            (22,224)       (22,224)
           Depreciation and amortization                                        1,772         11,396
           Amortization of convertible note discount (Note 2)                 328,041           --
           Debt conversion expense (Note 2)                                   345,357           --
           Gain on settlement of debt                                        (537,734)          --
           Loss (gain) on sale of asset                                          --           13,527
           Stock option compensation (Note 8)                                    --          205,006
           Stock issued for services (Note 9 (c))                              50,000         50,000
           Warrant compensation                                               172,363           --
           Stock received against litigation expense                          (56,000)          --
       Increase (decrease) in operating assets
           Prepaid expenses and other current assets                             --          289,383
       Increase (decrease) in operating liabilities
           Accounts payable                                                   348,892        247,729
           Accrued liabilities and provision for lawsuit settlements          284,299     (1,435,918)
                                                                          --------------------------
                Net cash provided by (used in) operating activities          (564,793)      (419,773)
                                                                          --------------------------
INVESTING ACTIVITIES
       Purchase of property and equipment                                        --             --
       Sale of capital assets                                                    --           17,770
                                                                          --------------------------
                    Net cash provided by (used in) investing activities          --           17,770
                                                                          --------------------------
FINANCING ACTIVITIES
       Proceeds from loans payable                                            360,000        298,914
       Accrual for merger                                                        --           13,000
       Proceeds from exercise of stock options and warrants                   119,000        189,012
                                                                          --------------------------
                Net cash provided by (used in) financing activities           479,000        500,926
                                                                          --------------------------

NET INCREASE (DECREASE) IN CASH                                               (85,793)        98,923

CASH, beginning of year                                                       100,538          1,615
                                                                          --------------------------

CASH, end of year                                                         $    14,745    $   100,538
====================================================================================================


SUPPLEMENTARY DISCLOSURE OF NON-CASH FLOW INFORMATION

       Issuance of stock for merger consideration                         $      --      $    13,000

       Beneficial conversion feature of convertible debt                      486,519           --
====================================================================================================







      The accompanying summary of significant accounting policies and notes
        are an integral part of these consolidated financial statements.
</TABLE>


                                      F-7
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------

1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF BUSINESS

     Turbodyne Technologies, Inc., a Nevada corporation, and its subsidiaries
     (the "Company") engineer, develop and market products designed to enhance
     performance and reduce emissions of internal combustion engines. The
     Company had a period of activity during 2004 and early 2005. Lack of funds
     caused the Company to gradually curtail its operations until it ceased
     almost all activities. In March 2005 the Company moved out of the business
     premises and relinquished the majority of the fixed assets to the landlord
     to sell and offset against rent payable.

     The Company had no current business operations, place of business and no
     employees when in September 2005, new management took control with the
     purpose of attempting to resurrect the Company's business and seek
     financing for such purpose. The Company entered into a merger agreement in
     September 2005 that resulted in new management, which is examining
     alternatives for financing, and fulfilling its working capital needs based
     on its working capital projections.

     New management took control pursuant to a merger completed as of September
     9, 2005 pursuant to which a majority owned subsidiary of Aspatuck Holdings
     Ltd. ("Aspatuck") was merged into our newly formed wholly owned subsidiary.
     Prior to the merger, this subsidiary of Aspatuck entered into a consulting
     agreement ("Consulting Agreement") with Stamford Research, LLC that is
     obligated to provide the services of Mr. Albert Case to the Company. Upon
     completion of the merger, 139,192,222 shares of the Company's Common Stock
     were issuable to holders of the subsidiary of Aspatuck and 1,300,000 such
     shares became issuable to Stamford Research LLC, under the Consulting
     Agreement. At this time Mr. Albert Case became president and chief
     executive officer and Mr. Jason Meyers, principal shareholder of Aspatuck,
     became Chairman of the Board of Directors. Additional shares are issuable
     to the former shareholders of the Aspatuck subsidiary in the event the
     Company issues any securities related directly or indirectly to pre-merger
     events.

     The Company's operations have been financed principally through a
     combination of private and public sales of equity and debt securities. If
     the Company is unable to raise equity capital or generate revenue to meet
     its working capital needs, it may have to cease operating and seek relief
     under appropriate statutes. These consolidated financial statements have
     been prepared on the basis that the Company will be able to continue as a
     going concern and realize its assets and satisfy its liabilities and
     commitments in the normal course of business and do not reflect any
     adjustment which would be necessary if the Company is unable to continue as
     a going concern.

     GOING CONCERN

     The accompanying consolidated financial statements have been prepared
     assuming that the Company will continue as a going concern. The Company has
     suffered net operating losses in recent periods, has an accumulated deficit
     of $128,825,314 at December 31, 2006 and a total capital deficit of
     $8,276,192 at December 31, 2006. It has used most of its available cash in
     its operating activities in recent years, has a significant working capital
     deficiency and is subject to lawsuits brought against it by other parties.
     These matters raise substantial doubt about the Company's ability to
     continue as a going concern.


                                      F-8
<PAGE>

================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
     CONTINUED

     PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements, stated in United States
     dollars, include the accounts of Turbodyne Technologies, Inc. and its
     wholly owned subsidiaries, Turbodyne Systems, Inc., Turbodyne Germany Ltd.,
     Electronic Boosting Systems Inc. and Pacific Baja Light Metals Corp.
     ("Pacific Baja"). All intercompany accounts and transactions have been
     eliminated on consolidation.

     DEPRECIATION AND AMORTIZATION

     Depreciation and amortization of property and equipment is computed using
     the straight-line method over estimated useful lives as follows:

                        Machinery and equipment      - 7 to 15 years
                        Furniture and fixtures       - 5 to 10 years

     LICENSES

     Licenses were recorded at cost and were being amortized at $208,000 per
     year over their estimated useful life, which was estimated to be five
     years. At December 31, 2003, management determined that the licenses had
     been impaired and a $624,000 impairment provision was recorded.

     VALUATION OF LONG-LIVED ASSETS

     The Company periodically reviews the carrying value of long-lived assets
     for indications of impairment in value and recognizes impairment of
     long-lived assets in the event the net book value of such assets exceeds
     the estimated undiscounted future cash flows attributable to such assets.
     Long-lived assets to be disposed of by sale are to be measured at the lower
     of carrying amount or fair value less cost of sale whether reported in
     continuing operations or in discontinued operations. No impairment was
     required to be recognized during 2006 and 2005.

     RECOGNITION OF REVENUE

     License fee revenue is recognized over the term of the license agreement.
     During the year ended December 31, 2003, $400,000 in license fees were
     deferred and are being amortized over 18 years. As a result, for the year
     ended December 31, 2006 $22,224 ($22,224 - 2005) of licensing fees was
     recognized as income.

     Prior to the suspension of our operations in 2003, we recognized revenue
     upon shipment of product. Previously, research prototypes were sold and
     proceeds reflected by reductions in our research and development costs. As
     new technology pre-production manufacturing units are produced and related
     non-recurring engineer services are delivered we will recognize the sales
     proceeds as revenue.

     EARNINGS (LOSS) PER SHARE

     Earnings (loss) per share is computed in accordance with SFAS No. 128,
     "Earnings Per Share". Basic earnings (loss) per share is calculated by
     dividing the net income (loss) available to common stockholders by the
     weighted average number of shares outstanding during the year. Diluted
     earnings per share reflects the potential dilution of securities that could
     share in earnings of an entity. In a loss year, dilutive common equivalent
     shares are excluded from the loss per share calculation as the effect would
     be anti-dilutive.

                                      F-9
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
     CONTINUED

     EARNINGS (LOSS) PER SHARE - CONTINUED

     For the year ended December 31, 2006, 12,675 preferred shares convertible
     into 1,267,500 shares of common stock, options and warrants to purchase
     18,022,000 and 9,894,444 shares of common stock, convertible notes to
     purchase 126,296,339 shares of common stock were outstanding during the
     year. The weighted average cumulative equivalent shares of 325,726,440 were
     included in the denominator for 2006 computation of diluted earnings (loss)
     per share. No other adjustments were made for purposes of per share
     calculations.

     For the year ended December 31, 2005, 12,675 preferred shares convertible
     into 1,267,500 shares of common stock, options and warrants to purchase
     18,538,300 and 11,573,510 shares of common stock, convertible notes to
     purchase 32,353,316 shares of common stock were outstanding during the
     year. The weighted average dilutive cumulative equivalent shares of
     34,026,608 were included in the denominator for 2006 computation of diluted
     earnings (loss) per share. No other adjustments were made for purposes of
     per share calculations.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair values of the Company's cash, term debts, accounts payable,
     accrued liabilities and loans payable approximate their carrying values
     because of the short-term maturities of these instruments.

     STOCK-BASED COMPENSATION

     Prior to January 1, 2005, the Company accounted for employee stock-based
     compensation using the intrinsic value method supplemented by pro forma
     disclosures in accordance with APB 25 and SFAS 123 "Accounting for
     Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No.148
     "Accounting for Stock-Based Compensation--Transition and Disclosures."
     Under the intrinsic value based method, compensation cost is the excess, if
     any, of the quoted market price of the stock at grant date or other
     measurement date over the amount an employee must pay to acquire the stock.
     Under the intrinsic value method, the Company has recognized stock-based
     compensation common stock on the date of grant.

     Effective January 1, 2005 the Company adopted SFAS 123R using the modified
     prospective approach and accordingly prior periods have not been restated
     to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards
     granted prior to its adoption will be expensed over the remaining portion
     of their vesting period. These awards will be expensed under the
     straight-line method using the same fair value measurements which were used
     in calculating pro forma stock-based compensation expense under SFAS 123.
     For stock-based awards granted on or after January 1, 2005, the Company
     will amortize stock-based compensation expense on a straight-line basis
     over the requisite service period, which is generally a five-year vesting
     period.

                                      F-10
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------

1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
     CONTINUED

     STOCK-BASED COMPENSATION - CONTINUED

     SFAS No. 123 requires the Company to provide pro-forma information
     regarding net loss as if compensation cost for the stock options granted to
     the Company's employees had been determined in accordance with the fair
     value based method prescribed in SFAS No. 123. Options granted to
     non-employees are recognized in these financial statements as compensation
     expense under SFAS No. 123 (See Note 7) using the Black-Scholes
     option-pricing model.

     RESEARCH AND DEVELOPMENT

     Research and development costs related to present and future products are
     charged to operations in the year incurred. Previously, research prototypes
     were sold and proceeds reflected by reductions in our research and
     development costs. As new technology pre-production manufacturing units are
     produced and related non-recurring engineer services are delivered we ill
     recognize the sales proceeds as revenue.


     USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     the 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 could differ from those
     estimates.

     INCOME TAXES

     The Company accounts for income taxes under the asset and liability method
     of accounting for income taxes, which recognizes deferred tax assets and
     liabilities for the estimated future tax consequences attributable to
     differences between the financial statement carrying amounts of existing
     assets and liabilities and their respective tax bases. Deferred tax assets
     and liabilities are measured using enacted tax rates in effect for the
     years in which those temporary differences are expected to be recovered or
     settled. The effect on deferred tax assets and liabilities of a change in
     tax rates is recognized in income in the period that includes the enactment
     date.

     COMPREHENSIVE INCOME

     The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
     SFAS No. 130 establishes standards to measure all changes in equity that
     result from transactions and other economic events other than transactions
     with owners. Comprehensive income is the total of net earnings (loss) and
     all other non-owner changes in equity. Except for net earnings (loss) and
     foreign currency translation adjustments, the Company does not have any
     transactions and other economic events that qualify as comprehensive income
     as defined under SFAS No. 130. As foreign currency translation adjustments
     were immaterial to the Company's consolidated financial statements, net
     earnings (loss) approximated comprehensive income for the quarter ended
     December 31, 2006 and 2005.


                                      F-11
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
     CONTINUED

     LEGAL FEES

     The Company expenses legal fees in connection with litigation as curred.

     NEW ACCOUNTING PRONOUNCEMENTS

     In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
     Financial Assets and Financial Liabilities" ("SFAS 159") which permits
     entities to choose to measure many financial instruments and certain other
     items at fair value that are not currently required to be measured at fair
     value. SFAS 159 will be effective for the Company on January 1, 2008. The
     Company is currently evaluating the impact SFAS 159 may have on its
     financial condition or results of operations.


     In September 2006, the United States Securities and Exchange Commission
     (SEC) issued Staff Accounting Bulletin No. 108, "Considering the Effects of
     Prior Year Misstatements when Quantifying Misstatements in Current Year
     Financial Statements" ("SAB 108"). This SAB provides guidance on the
     consideration of the effects of prior year misstatements in quantifying
     current year misstatements for the purpose of a materiality assessment. SAB
     108 establishes an approach that requires quantification of financial
     statement errors based on the effects on each of the company's balance
     sheets, statements of operations and related financial statement
     disclosures. The SAB permits existing public companies to record the
     cumulative effect of initially applying this approach in the first year
     ending after November 15, 2006 by recording the necessary correcting
     adjustments to the carrying values of assets and liabilities as of the
     beginning of that year with the offsetting adjustment recorded to the
     opening balance of retained earnings. Additionally, the use of the
     cumulative effect transition method requires detailed disclosure of the
     nature and amount of each individual error being corrected through the
     cumulative adjustment and how and when it arose. The Company is currently
     evaluating the impact SAB 108 may have on its financial condition or
     results of operations.


     In September 2006, the Financial Accounting Standards Board (FASB) issued
     Statement of Financial Accounting Issues No. 157, "Fair Value Measurements"
     ("SFAS 157"), which defines the fair value, establishes a framework for
     measuring fair value and expands disclosures about fair value measurements.
     This statement is effective for financial statements issued for fiscal
     years beginning after November 15, 2007, and interim periods within those
     fiscal years. Early adoption is encouraged, provided that the Company has
     not yet issued financial statements for that fiscal year, including any
     financial statements for an interim period within that fiscal year. The
     Company is currently evaluating the impact SFAS 157 may have on its
     financial condition or results of operations.

                                      F-12
<PAGE>

================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
     CONTINUED

     NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED

     In July 2006, the FASB released FASB Interpretation No. 48, Accounting for
     Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
     (FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties
     in income tax law. This interpretation prescribes a comprehensive model for
     the financial statement recognition, measurement, presentation and
     disclosure of uncertain tax positions taken or expected to be taken in
     income tax returns. This statement is effective for fiscal years beginning
     after December 15, 2006. The Company is currently evaluating the impact FIN
     48 may have on its financial condition or results of operations.







                                      F-13
<PAGE>

================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


2    RESTATEMENT OF FINANCIAL STATEMENTS

     The Company is restating its previously issued 2006 consolidated financial
     statements for the following reasons: unrecorded beneficial conversion
     feature of convertible debt and related amortization, unrecorded value of
     detachable warrants issued with the convertible debt, unrecorded debt
     conversion expense as a result of Company's modification of conversion
     terms and terms for the exercise of warrants to induce conversion and
     warrants exercise.

     The following is a summary of the restatements for the year ended December
     31, 2006:

     Unrecorded debt conversion expense                   $   (166,857)
     Unrecorded inducement expense for the
       exercise of warrants                                   (178,500)
     Unrecorded amortization of beneficial
       conversion feature of convertible debt                 (293,733)
     Unrecorded amortization of additional beneficial
       conversion feature arising from modification
       of conversion terms
                                                               (34,308)
                                                          ------------
                                                          $   (673,398)
                                                          ============

     The effect on the Company's previously issued 2006 financial statements is
     summarized as follows:
<TABLE>
<CAPTION>

                                                       AS
                                                   PREVIOUSLY          INCREASE
     BALANCE SHEET DATA                             REPORTED          (DECREASE)       RESTATED
                                                  -------------    --------------   -------------

<S>                                               <C>              <C>              <C>
     TOTAL ASSETS                                 $      15,954    $        --      $      15,954

     Loans payable                                      811,784         (260,663)         551,121
     Total Current Liabilities                        8,233,531         (260,663)       7,972,868
     TOTAL LIABILITIES                                8,552,809         (260,663)       8,292,146

     Additional paid in capital                     121,198,225          934,061      122,132,286
     TOTAL STOCKHOLDER'S DEFICIT                     (8,536,855)        (260,663)      (8,276,192)


     STATEMENT OF OPERATIONS DATA
     Amortization of convertible notes discount            --            328,041         328,041
     Debt conversion expense                               --            345,357          345,357

     NET LOSS                                     $    (806,161)   $    (673,398)   $  (1,479,559)
</TABLE>



                                      F-14
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


3    PROPERTY AND EQUIPMENT

     Property and equipment, at cost, is summarized as follows:

                                                  2006            2005
                                               -------------------------
     Machinery and equipment                   $   46,193      $  46,193
     Less: accumulated depreciation                45,656         43,884
                                               -------------------------
     Net property and equipment                $      537      $   2,309
                                               =========================


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

4.   LONG-TERM DEBT

     During the quarter ended September 30, 2004, the Company entered into a
     loan agreement collateralized by an automobile for an aggregate of $36,035.
     The loan bears interest at 6.64%, paid monthly; the last payment of $707 is
     due August 4, 2009.


     Subsequent to March 31, 2005 the Company was unable to make the payments so
     the bank repossessed the automobile and sold it at auction. The Company
     currently owes $17,428 which is included in accounts payable.

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





                                      F-15
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


5.   LOANS PAYABLE
                                                      2006              2005
                                                   --------------------------
     Unsecured, non-interest bearing
     loan payable, due on demand from
     stockholders and other parties                $ 148,600       $  148,600

     Note payable, 5% per annum, due
     June 15, 2007                                    15,000            --

     Convertible notes payable net of
     unamortized discount of $158,478
     and warrant valuation of $102,185 **            387,521          317,062
                                                   --------------------------
     Total Loans Payable                           $ 551,121       $  465,662
                                                   ==========================

     ** The Company issued $660,000 convertible notes with detachable warrants.
     The notes bear interest at 5% and mature within one year from date of
     issuance. The Notes are convertible, at the option of the holder, to shares
     of the Company's common stock at a conversion price per share equal to the
     lower of (i) 70% of the market price of common stock at date of issuance;
     or (ii) $0.025. The warrants are to purchase the Company's common stock at
     $0.025 per share expiring in five years. In September 2006 the board of
     directors offered to decrease the note conversion price to $0.005 per share
     if the note holders exercised their warrants at $0.01 by September 30,
     2006. In consideration for the reduction, the maturity of the notes was
     extended for another year. As a result of the inducement, the Company
     recognized $345,357 of debt conversion expense and an increase in
     additional paid in capital for the year ended December 31, 2006 relating to
     note holders who converted during the year.

     At the dates of issuance, the Company issued to the holders of convertible
     notes five-year warrants to purchase 13,200,000 shares of the Company's
     common stock at $0.025 per share. In accordance with generally accepted
     accounting principles, the proceeds, received from debt or convertible debt
     with detachable warrants, are allocated using the relative fair value of
     the individual elements at the time of issuance. Using the Black-Scholes
     valuations model, the aggregate value of the 13,200,000 warrants is
     $164,944. Assumptions used to value the warrants ranged between: 1.46% and
     1.55% for expected volatility; 4.36% and 5.02% for risk-free interest rate
     and an expected life of 5 years. The amount allocated to the warrants
     amounts to $102,185 and has been recognized as a decrease in loans payable
     and an increase in additional paid in capital. As of December 31, 2006,
     11,900,000 of the warrants have been exercised.

     In accordance with generally accepted accounting principles, in the event
     the conversion price on notes is less than the Company's stock price on the
     date of issuance, the difference is considered to be a beneficial
     conversion feature and is amortized as interest expense over the period
     from the date of issuance to the earlier of the conversion date or the
     stated maturity date. The aggregate beneficial conversion feature of these
     convertible notes is $358,477. In relation to the inducement to convert, an
     additional beneficial conversion feature of $128,042 has been recognized.
     These were recorded as decreases in loans payable and increases in
     additional paid in capital.

     For the year ended December 31, 2006, the Company recognized $328,041 in
     interest expense related to the amortization of the beneficial conversion
     feature recorded on these convertible notes. As of December 31, 2006, the
     remaining balance of the beneficial conversion feature was $158,478.

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


                                      F-16
<PAGE>

================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


6.   INCOME TAXES

     Income tax expense is comprised of the following for the years ended
     December 31, 2006 and 2005:

                                                      2006         2005
                                                   ------------------------

     Current
          State                                    $   7,200      $   --
                                                   ========================

     Total income tax expense for the years ended December 31, 2006 and 2005
     differed from the amounts computed by applying the statutory Federal income
     tax rate to earnings before income taxes as a result of the following:

                                                      2006          2005
                                                   ------------------------

     Computed "expected" income tax benefit        $    --        $   --
     Non-deductible stock option compensation        172,363       205,006
     Non-deductible expenses                        (719,758)     1,459,369
     Non-deductible stock for services                50,000         50,000
     Change in valuation allowance                   497,395     (1,714,375)
                                                   ------------------------

                                                   $    --        $   --
                                                   ========================

     The tax effects of temporary differences that give rise to the deferred tax
     assets and liabilities at December 31, 2006 and 2005 are as follows:

                                                      2006          2005
                                                   ------------------------

     Accrued liabilities                           $ 177,677     $  190,419
     Reserve for lawsuit settlements               1,870,055      1,754,042
     Alternative minimum tax credit                   55,000         55,000
     Net operating loss carryover                 26,984,770     26,590,646
                                                 --------------------------

     Gross deferred tax assets                    29,087,502     28,590,107
        Less valuation allowance                 (29,087,502)   (28,590,107)
                                                 --------------------------
        Deferred tax assets, net of
        valuation allowance                        $    --        $    --
                                                 ==========================

     In assessing the realizability of deferred tax assets, management considers
     whether it is more likely than not that some portion or all of the deferred
     tax assets will not be realized. The ultimate realization of deferred tax
     assets is dependent upon the generation of future taxable income during the
     periods in which those temporary differences become deductible. Management
     considers the scheduled reversal of deferred tax assets, projected future
     taxable income and tax planning strategies in making this assessment.
     Management believes it is not likely that the Company will realize the
     benefits of these deductible differences at December 31, 2006 or 2005.
     Accordingly, a valuation allowance has been provided for the total net
     deferred tax assets.

     At December 31, 2006, the Company had net operating loss carryforwards of
     approximately $79,000,000 for US income tax purposes, which if not used,
     will expire between the years 2009 and 2026. Due to change of ownership as
     defined in the Internal Revenue Code, restriction applies to the amount of
     net operating loss carryforward, which the Company can utilize to offset
     income for tax purposes in a year in the future.

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

                                      F-17
<PAGE>

================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


7.   COMMITMENTS AND CONTINGENCIES

     a) Leases

        The Company leased certain factory and office premises in California
        under a non-cancelable operating lease expiring January 2005. Rental
        expense for 2006 and 2005 was approximately $10,200 and $17,800,
        respectively. In March 2005 the Company moved out of the premises and
        relinquished the majority of the fixed assets to the landlord to sell
        and offset against rent payable less amount paid to the County of Santa
        Barbara for past due personal property taxes.

        The Company signed a five-year copier lease on March 19, 2004 with
        payments of $375 per month. The Company returned the copier in April
        2005 defaulting on the lease. The $17,316 balance due on the lease is
        included in accounts payable.

     b) Litigation

        In March 2000, TST, Inc. ("TST"), a vendor to a subsidiary of Pacific
        Baja (Note 10) filed an action against the Company alleging that in
        order to induce TST to extend credit to a subsidiary of Pacific Baja,
        the Company executed guarantees in favor of TST. TST alleged that the
        subsidiary defaulted on the credit facility and that the Company is
        liable as guarantor.

        The Company and TST entered into a settlement agreement and release.
        Under the terms of the agreement, the Company:

        i)  issued 1,000,000 shares of common stock to the president of TST and
            agreed to register the resale of these shares by filing a
            registration statement with the Securities and Exchange Commission;
            valued at $350,000 based on the common share trading price at the
            date the agreement was entered into;

        ii) issued 2,000,000 shares of common stock to TST; valued at $700,000
            based on the common share trading price at the date the agreement
            was entered into;

        iii) agreed to the immediate entry of judgment against the Company in
            the amount of $2,068,078 plus interest from the date of entry at the
            rate of 10% per annum. The amount of this judgment will immediately
            increase by any amount that TST is compelled by judgment or court
            order or settlement to return as a preferential transfer in
            connection with the bankruptcy proceedings of Pacific Baja; and

        iv) any proceeds received by TST or its president from the sale of the
            issued shares will be automatically applied as a credit against the
            amount of the judgment against the Company in favor of TST. Prior to
            March 31, 2004, 147,000 shares issued in connection with the TST
            settlement had been sold which has reduced the provision for lawsuit
            settlement by $23,345.

                                      F-18
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


7.   COMMITMENTS AND CONTINGENCIES - CONTINUED

     b) Litigation - Continued

        At December 31, 2006, the Company has included $3,190,352 ($2,900,320 -
        2005) in regard to this matter in provision for lawsuit settlements. If
        it was determined that TST received payment in preference to other
        creditors before Pacific Baja filed its Chapter 11 petition in
        bankruptcy, TST would likely increase its claim by $2,130,000. TST and
        Pacific Baja settled the preference payment issue with TST paying
        $20,000 to Pacific Baja and TST relinquishing the right to receive
        $63,000, therefore the $2,130,000, that the Company had included in
        provision for lawsuit settlements, has been reduced to $83,000. For the
        year ended December 31, 2005 the $2,047,000 difference has been recorded
        as a lawsuit settlement in other income.

     c) Other

        The Company is currently involved in various collection claims and other
        legal actions (Notes 10 and 13). It is not possible at this time to
        predict the outcome of some of the legal actions.

     d) Royalties

        The Company has agreed to pay a royalty equal to 2% of gross sales of
        products manufactured and sold that incorporate certain licensed
        technology which is not being used.


8.   STOCK OPTIONS

     2003 STOCK INCENTIVE PLAN

     On August 12, 2003, the Company established the 2003 Stock Incentive Plan
     (the "2003 Plan"). Under the 2003 Plan, the Company may grant common stock
     or incentive stock options to its directors, officers, employees and
     consultants for up to 15,000,000 shares. The maximum term of the 2003 Plan
     is ten years. The Board of Directors will determine the terms and matters
     relating to any awards under the 2003 Plan including the type of awards,
     the exercise price of the options and the number of common shares granted.
     The value of the shares of common stock used in determining the awards
     shall not be less than 85% of the fair market value of the common shares of
     the Company on the date of grant. As of December 31, 2006 and 2005, the
     number of unoptioned shares available for granting of options under the
     plan was 7,197,759.


                                      F-19
<PAGE>

================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


8.   STOCK OPTIONS - CONTINUED

     2004 NEVADA STOCK INCENTIVE PLAN

     On March 31, 2004, the Company established the 2004 Nevada Stock Incentive
     Plan (the "2004 Plan"). Under the 2004 Plan, the Company may grant common
     stock or incentive stock options to its directors, officers, employees and
     consultants for up to 15,000,000 shares. The maximum term of the 2004 Plan
     is ten years. The Board of Directors will determine the terms and matters
     relating to any awards under the 2004 Plan including the type of awards,
     the exercise price of the options and the number of common shares granted.
     The value of the shares of common stock used in determining the awards
     shall not be less than 85% of the fair market value of the common shares of
     the Company on the date of grant. As of December 31, 2006 and 2005, the
     number of unoptioned shares available for granting of options under the
     plan was 1,703,500.

     2005 STOCK INCENTIVE PLAN

     On January 11, 2005 the Company established the 2005 Nevada Stock Incentive
     Plan (the "2005" Plan). Under the 2005 Plan, the Company may grant common
     stock on incentive stock options to its directors, officers, employees and
     consultants for up to 20,000,000 shares. The maximum term of the 2005 Plan
     is ten years. The Board of Directors will determine the terms and matters
     relating to any awards under the 2005 Plan including the type of awards,
     the exercise price of the options and the number of common shares granted.
     The value of the shares of common stock used in determining the awards
     shall not be less than 70% of the fair market value of the common shares of
     the Company on the date of grant. As of December 31, 2006 the number of
     unoptioned shares available for granting of options under the plan was Nil.

     All options granted under the above plans are fully vested and exercisable
     immediately.

     The following summarizes information relating to stock options during 2006
     and 2005:
<TABLE>
<CAPTION>

                                                          2006

                            NON-EMPLOYEES          EMPLOYEES & DIRECTORS            TOTAL
                        ----------------------------------------------------------------------------

                                     WEIGHTED                  WEIGHTED      WEIGHTED
                                      AVERAGE                   AVERAGE       AVERAGE
                                     EXERCISE                  EXERCISE      EXERCISE
                         OPTIONS      PRICE       OPTIONS       PRICE        OPTIONS      PRICE
                        ----------------------------------------------------------------------------
<S>                   <C>              <C>        <C>          <C>          <C>            <C>
Outstanding at
  beginning of year     2,505,000    $   0.08    16,033,300    $   0.06    18,538,300    $   0.06
Expired                  (380,000)   $   0.07      (136,300)   $   0.04      (516,300)   $   0.06
                        ---------                ----------                ----------
Options outstanding
  and exercisable
  at end of year        2,125,000    $   0.08    15,897,000    $   0.06    18,022,000    $   0.06
                        =========                ==========                ==========
</TABLE>



                                      F-20
<PAGE>
================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


8.   STOCK OPTIONS - CONTINUED
<TABLE>
<CAPTION>

                                                                                    2005

                                            NON-EMPLOYEES              EMPLOYEES                     TOTAL
                                       ---------------------------------------------------------------------------
                                                     WEIGHTED                  WEIGHTED                   WEIGHTED
                                                     AVERAGE                    AVERAGE                   AVERAGE
                                                     EXERCISE                  EXERCISE                   EXERCISE
                                        OPTIONS        PRICE      OPTIONS       PRICE       OPTIONS        PRICE
                                       ---------------------------------------------------------------------------
<S>                                     <C>          <C>         <C>           <C>         <C>           <C>
   Outstanding at beginning of year     4,651,666    $   0.11    10,277,000    $   0.11    14,928,666    $   0.11
   Granted                              1,300,000    $   0.02    18,700,000    $   0.02    20,000,000    $   0.02
   Exercised                           (1,300,000)   $   0.02    (9,516,400)   $   0.02   (10,816,400)   $   0.02
   Expired                             (2,146,666)       0.17    (3,427,300)   $   0.09    (5,573,966)   $   0.12
                                       ----------                ----------               -----------
   Options outstanding and
   exercisable at end of  year          2,505,000    $   0.08    16,033,300    $   0.06    18,538,300    $   0.06
                                       ==========                ==========                ==========
   Weighted average fair value of
    options granted during the year                  $   0.02                  $   0.02                  $   0.01
</TABLE>



     At December 31, 2006, the following is a summary of stock options
     outstanding:

                                              Weighted Average     Weighted
                                                     Remaining      Average
                                                   Contractual     Exercise
     Exercise Price              Number           Life (Years)        Price
     ----------------------------------------------------------------------
              $0.02           7,000,000                   3.08        $0.01
      $0.04 - $0.07           1,450,000                   5.09         0.04
      $0.09 - $0.10           9,572,000                   6.86         0.10
                            -----------------------------------------------

                             18,022,000                   5.25        $0.06
                            ===============================================




     During 2005 the Company waived the termination clause for 7,000,000
     Director and employee options issued in 2005.


     ISSUANCE OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES


     The Company issued warrants to non-employees for services in 2006. The
     Company has recorded in general and administrative expenses, $172,363
     ($63,254 - 2005) of compensation expense, relating to stock warrants issued
     to non-employees for services rendered.

                                      F-21
<PAGE>

================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


8.   STOCK OPTIONS - CONTINUED

     ISSUANCE OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES - CONTINUED

     The per share weighted average fair value of stock options expensed for the
     year ended December 31, 2005 was $0.01, $0.02 and $0.04 on the date of
     grant using the Black-Scholes option-pricing model with the following
     weighted average assumptions in 2005: expected dividend yield Nil%;
     expected volatility of 141%, 159% and 163%; risk-free interest rate of
     2.89% and 3.75% and expected life of 1 year and 5 years.

     ISSUANCE OF STOCK OPTIONS TO EMPLOYEES FOR SERVICES

     Prior to January 1, 2005, the Company accounted for employee stock-based
     compensation using the intrinsic value method supplemented by pro forma
     disclosures in accordance with APB 25 and SFAS 123 "Accounting for
     Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No.148
     "Accounting for Stock-Based Compensation--Transition and Disclosures."
     Under the intrinsic value method, compensation cost is measured as the
     excess of, if any, of the market price of the Company's common stock at the
     date of grant, or at any subsequent measurement date, over the amount an
     employee must pay to acquire the stock. Such amounts are amortized as
     compensation expense over the vesting period of the related stock options.
     Under the intrinsic value method, the Company was not required to recognize
     stock-based compensation.

     Effective January 1, 2005 the Company adopted SFAS 123R using the modified
     prospective approach and accordingly prior periods have not been restated
     to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards
     granted prior to its adoption will be expensed over the remaining portion
     of their vesting period. These awards will be expensed under the
     straight-line method using the same fair value measurements which were used
     in calculating pro forma stock-based compensation expense under SFAS 123.
     For stock-based awards granted on or after January 1, 2005, the Company
     will amortize stock-based compensation expense on a straight-line basis
     over the requisite service period, which is generally a five-year vesting
     period.

     Upon our adoption of SFAS123R in 2005, we recorded $141,752 of compensation
     costs relating to stock options granted to employees. The amounts recorded
     represent equity-based compensation expense related to options that were
     issued in January 2005 as well as those issued prior to 2005. The
     compensation costs are based on the fair value at the grant date. There was
     no such expense recorded during our fiscal year 2006.

     The per share weighted average fair value of stock options granted to
     employees during 2005 was $0.02 and $0.04, calculated on the date of grant
     using the Black-Scholes option pricing model with the following weighted
     average assumptions in 2005: expected dividend yield Nil%; expected
     volatility of 159% and 163%; risk-free interest rate of 3.75%; and an
     expected life of 5 years.


                                      F-22
<PAGE>

================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


9.   SHARE CAPITAL

     a) Authorized Capital

        In 2003, 150,000 of the 1 million preferred shares were designated as
        Series X preferred shares. These shares have a par value of $0.001 per
        share with each share being convertible into 100 common shares at the
        discretion of the holder.

        At the Annual General Meeting held on June 30, 2004, the shareholders
        approved an increase of authorized capital to 1,000,000,000 common
        shares. Prior to this increase in authorized capital, the Company's
        potentially diluted common shares exceeded the authorized shares.
        Immediately prior to the increase in authorized capital, the Company had
        recorded $2,134,322 in accrued liabilities to account for the potential
        cash settlement of these financial instruments. As at June 30, 2004, the
        Company has reversed the $2,134,322 accrued liabilities since the
        potentially diluted common shares no longer exceeded authorized capital.

     b) Merger

        New management took control pursuant to a merger completed as of
        September 9, 2005 pursuant to which a majority owned subsidiary of
        Aspatuck Holdings Ltd. ("Aspatuck") was merged into our newly formed
        wholly owned subsidiary. Prior to the merger, this subsidiary of
        Aspatuck entered into a consulting agreement ("Consulting Agreement")
        with Stamford Research, LLC that is obligated to provide the services of
        Mr. Albert Case to the Company. Upon completion of the merger,
        139,192,222 shares of the Company's Common Stock were issuable to
        holders of the subsidiary of Aspatuck and 1,300,000 such shares became
        issuable to Stamford Research LLC, under the Consulting Agreement. At
        this time Mr. Albert Case became president and chief executive officer
        and Mr. Jason Meyers, principal shareholder of Aspatuck, became Chairman
        of the Board of Directors. Additional shares are issuable to the former
        shareholders of the Aspatuck subsidiary in the event the Company issues
        any securities related directly or indirectly to pre-merger events.

     c) During 2006, the Company issued 5,000,000 (5,000,000 - 2005) shares to
        consultants in consideration for services, at ascribed value of $0.01
        ($0.01 - 2005) per share (based on the trading price of the Company's
        common stock on the agreement date).

     d) During 2002, in addition to 378,580 shares acquired under the 1998 Share
        Buy-Back Plan, the Company entered into an agreement to acquire, from a
        director for cancellation, 3,500,000 shares for $152,078. The Company
        has paid $152,078 in connection with the acquisition of the 3,500,000
        shares, has recorded amounts paid as a charge to Treasury shares. The
        related shares have not yet been received or cancelled.


                                      F-23
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


9.   SHARE CAPITAL - CONTINUED

     e) During 2006, the Company issued 24,900,000 shares of common stock. The
        24,900,000 included, 8,000,000 were issued for conversion of notes
        payable, 11,900,000 shares were issued upon exercise of warrants with a
        weighted average exercise price of $0.01 and 5,000,000 shares were
        issued for services with an ascribed value of $50,000 (based on the
        trading price of the Company's common stock on the dates service
        agreements were entered into).


        During 2005, the Company issued 160,258,622 shares of common stock. The
        160,258,622 included, 3,950,000 were issued for conversion of preferred
        shares, 140,492,222 were issued for payment of merger consideration,
        10,816,400 shares were issued upon exercise of options with a weighted
        average exercise price of $0.02 and 5,000,000 shares were issued for
        services with an ascribed value of $50,000 (based on the trading price
        of the Company's common stock on the dates service agreements were
        entered into).


     f) In 2003, the Company issued 122,175 Series X preferred shares, During
        2005, 39,500 Series X preferred shares were converted into 3,950,000
        common shares.

     g) During 2003, the Company entered into three private placement agreements
        for the issuance of 2,433,810 shares for gross proceeds of $148,600,
        which was recorded as loans payable. As of December 31, 2006 the shares
        have not been issued.

     h) Stock Purchase Warrants

        At December 31, 2006 and 2005, the Company had 9,894,444 and 11,573,510
        stock purchase warrants outstanding and exercisable, respectively. These
        warrants were issued in connection with private placements, non-employee
        compensation and other means of financing. The holders of these warrants
        are entitled to receive one share of common stock of the Company for one
        warrant exercised. The warrants have exercise prices ranging from
        $0.0117 to $0.12 per share with a weighted average exercise price of
        $0.035 per share and expiration dates between 2007 and 2013.

        In 2006 consulting contracts were signed with a total of 77,200,000
        warrants of which only 6,494,444 warrants were vested in 2006. The
        remaining warrants may vest over the next two or more years upon the
        continuation of service of the holders and/or the happening of specific
        events.


                                      F-24
<PAGE>

================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


9.   SHARE CAPITAL - CONTINUED

     h) Stock Purchase Warrants - continued


        Details of share purchase warrants issued and expired are as follows:
<TABLE>
<CAPTION>

                                                                          2005

                                           INVESTORS         EMPLOYEES & CONSULTANTS           TOTAL
                                  ------------------------------------------------------------------------------
                                                 WEIGHTED                   WEIGHTED                  WEIGHTED
                                                  AVERAGE                    AVERAGE                   AVERAGE
                                                 EXERCISE                   EXERCISE                  EXERCISE
                                      WARRANTS      PRICE      WARRANTS        PRICE       WARRANTS      PRICE
                                  ------------------------------------------------------------------------------
<S>                                 <C>           <C>          <C>           <C>         <C>           <C>
Outstanding at beginning of year    11,573,510    $   0.09          --        $--         11,573,510    $   0.09
Granted                              6,900,000    $   0.01     6,494,444      $   0.01    13,394,444    $   0.01
Exercised                          (11,900,000)   $   0.01          --        $   0.00   (11,900,000)   $   0.01
Expired                             (3,173,510)   $   0.21          --        $   0.00    (3,173,510)   $   0.21
                                   -----------                 ----------                -----------
Warrants outstanding and
exercisable at end of  year          3,400,000    $   0.07     6,494,444      $   0.01     9,894,444    $   0.03
                                   ===========                 =========                 ===========
Weighted average fair value of
warrants granted during the year                  $   0.02                    $   0.02                  $   0.01
                                   ===============================================================================
</TABLE>



        At December 31, 2006, the following is a summary of share purchase
        warrants outstanding and exercisable:

                                                      Weighted-
                                                        Average        Weighted
                                                      Remaining         Average
                                                    Contractual        Exercise
     Exercise Price                Number          Life (Years)           Price
     ---------------------------------------------------------------------------
         $0.01                  6,216,668                  6.67           $0.01
          0.025                 1,577,776                  0.21            0.03
      0.10 - 0.12               2,100,000                  0.01            0.11
                               -------------------------------------------------
                                9,894,444                  5.29           $0.03
                               ==========

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

                                      F-25
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------

10.  RELATED PARTY TRANSACTIONS

     The Company previously leased its premises from related parties (Note
     7(a)).

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


11.  PACIFIC BAJA BANKRUPTCY

     In July 1999, a major creditor of the Company's wholly-owned major
     subsidiary, Pacific Baja, began collection activities against Pacific Baja
     which threatened Pacific Baja's banking relationship with, and source of
     financing from, Wells Fargo Bank. As a result, Pacific Baja and its
     subsidiaries commenced Chapter 11 bankruptcy proceedings on September 30,
     1999.

     In September 2001, the Pacific Baja Liquidating Trust ("the Trust")
     commenced action against a former subsidiary in the United States
     Bankruptcy Court, Central District of California - Riverside Division. The
     Trust was established under the Pacific Baja bankruptcy proceedings for the
     benefit of the unsecured creditors of Pacific Baja.

     The Trust is seeking, among other matters:

     i) the re-characterization of Company advances to Pacific Baja as equity
        and the subordination of unsecured claims against Pacific Baja;

     ii) the re-conveyance of an aggregate of up to approximately $7,190,000
        transferred by Pacific Baja to the Company on the basis of an allegation
        of fraudulent transfer;

     iii) an order that the Company is liable for all of the previous debts of
        Pacific Baja totaling approximately $7,000,000; and

     iv) Damages and punitive damages against the Company and certain former
        officers and directors and the former officers and directors of Pacific
        Baja in the amount of up to approximately $12,000,000 based on various
        allegations of fraud, misrepresentation, breach of contract, alter ego
        and negligence.


                                      F-26
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------


11.  PACIFIC BAJA BANKRUPTCY - CONTINUED

     The Company vigorously contested the Complaint until April 22, 2005 when
     the Company entered into a stipulation for entry of judgment and assignment
     in the Pacific Baja bankruptcy proceedings for $500,000 to be issued in
     common stock or cash or a combination. Additionally the Company assigned to
     the bankruptcy Trust the rights to $9,500,000 claims under any applicable
     directors and officers liability insurance policies. The bankruptcy Trust
     also agreed to a covenant not to execute against the Company regardless of
     the outcome of the insurance claims.

     The Company has completed the assignment of its insurance claims, but has
     not completed the cash/stock payment that was to be paid to the Trust by
     December 9, 2005. We are negotiating with the Trustee regarding this
     default.

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

12.  FORMER OFFICER


     On May 20, 2004, one of the Company's former officers, Mr. Peter Hofbauer,
     filed a motion against the Company alleging that the Company failed to pay
     him the sum of $369,266 pursuant to the terms of a purported settlement
     agreement, allegedly made for the purposes of settling amounts owed to the
     former officer for services to the Company. On August 3, 2004 a writ of
     attachment was applied to the Company's Certificate of Deposit for
     $315,000. On October 25, 2004 the former officer and the Company signed and
     filed with the court a Stipulation re: Settlement and Order. The
     stipulation ordered the Company to deliver 4,000,000 shares of common stock
     without restrictions to be used by the former officer to raise funds to
     settle amounts owed to him by the Company. As funds are raised to settle
     amounts owed, writs will be reversed from the Certificate of Deposit. If
     the funds raised are not adequate to settle amounts owed, the Company will
     be obligated to issue further shares to the former officer in order to
     settle amounts owed.



     During 2004 the Company issued the 4,000,000 shares. Mr. Hofbauer has sold
     2,600,000 shares and released $125,000 of the Certificate of Deposit. On
     June 7, 2005 Mr. Hofbauer claimed the remaining $210,496 in the Certificate
     of Deposit. The remaining 1,400,000 shares were returned to the Company in
     October 2006.

                                      F-27
<PAGE>


================================================================================
                                   TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------

13.  FORMER DIRECTORS

     A former director of Turbodyne, Erwin Kramer (the "Plaintiff"), represented
     by his attorney Claus Schmidt, a former attorney of Turbodyne at the time
     of the alleged claim, filed a legal action in Germany against Turbodyne,
     our non-operating subsidiary Turbodyne Europe GmbH ("Turbodyne GmbH"), and
     ex-employees of Turbodyne GmbH, Peter Kitzinski and Marcus Kumbrick
     (collectively the "Defendants"), with the Regional Frankfurt court (the
     "German Court") in September, 2004. The Plaintiff claims damages of Euro
     245,620 plus 5% interest per annum against the Defendants in respect of
     actions taken by the Defendants while employed with Turbodyne GmbH.

     On September 9, 2004, the German Court, on a motion by the Defendants to
     the suit, dismissed the Plaintiff's claims against Peter Kitzinski and
     Marcus Kumbrick, and ordered that Turbodyne's patents in Munich be attached
     pending the resolution of the Plaintiff's claim against Turbodyne and
     Turbodyne GmbH. On June 13, 2005 the Court in Frankfurt dismissed the
     claim. The Plaintiff filed an appeal against this judgment with the Higher
     Regional Court in Frankfurt.


     The Plaintiff's attorney, Claus Schmidt, also filed similar suits on behalf
     of Frank Walter and Herbert Taeuber. The German courts are indicating that
     all three suits need to be filed in the United States not Germany.
     Presently the suits have not been filed in the United States. We vigorously
     dispute this claim and have retained German counsel to defend it and seek
     its dismissal. At December 31, 2006 and 2005, the Company has included
     $405,785 in regard to this matter in the provision for lawsuit settlements.


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


                                      F-28