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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION** Washington, D.C. 20549

FORM 10-KSB

(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, 2003

** ̈**  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

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

|NEVADA                                                         | 95-4699061                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                               |                                     
|6155 Carpinteria Avenue                                        |                                     
|Carpinteria, California                                        | 93013                               
|(Address of principal executive offices)                       | (Zip Code)                          
|                                                               |                                     
|(805) 684-4551                                                 |                                     
|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
  **x**   No** ̈**

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: $14,050

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.) $13,280,743
  as of May 5, 2004

State the number of shares outstanding of each of the issuer's
  classes of common equity, as of the latest practicable date. 148,914,616
  shares of common stock as of May 5, 2004

Transitional Small Business Disclosure Format (check one):
  Yes ** ̈**No
  **x**

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TURBODYNE TECHNOLOGIES, INC.

FORM 10-KSB

INDEX

|           |                                                                                                                       | PAGE
|---------- | --------------------------------------------------------------------------------------------------------------------- | ----
|PART I     |                                                                                                                       |     
|           |                                                                                                                       |     
|Item 1.    | Description Of Business                                                                                               | 3   
|           |                                                                                                                       |     
|Item 2.    | Description Of Property.                                                                                              | 16  
|           |                                                                                                                       |     
|Item 3.    | Legal Proceedings.                                                                                                    | 16  
|           |                                                                                                                       |     
|Item 4.    | Submission Of Matters To A Vote Of Security Holders.                                                                  | 20  
|           |                                                                                                                       |     
|PART II    |                                                                                                                       |     
|           |                                                                                                                       |     
|Item 5.    | Market For Common Equity And Related Stockholder Matters.                                                             | 21  
|           |                                                                                                                       |     
|Item 6.    | Management's Discussion And Analysis Or Plan Of Operation.                                                            | 22  
|           |                                                                                                                       |     
|Item 7.    | Financial Statements.                                                                                                 | 28  
|           |                                                                                                                       |     
|Item 8.    | Changes In And Disagreements With Accountants On Accounting
      And Financial Disclosure.                           | 29  
|           |                                                                                                                       |     
|Item 8A.   | Controls and Procedures.                                                                                              | 29  
|           |                                                                                                                       |     
|PART III   |                                                                                                                       |     
|           |                                                                                                                       |     
|Item 9.    | Directors, Executive Officers, Promoters And Control
      Persons; Compliance With Section 16(a) Of The Exchange Act | 30  
|           |                                                                                                                       |     
|Item 10.   | Executive Compensation.                                                                                               | 33  
|           |                                                                                                                       |     
|Item 11.   | Security Ownership Of Certain Beneficial Owners and
      Management and Related Stockholder Matters.                 | 36  
|           |                                                                                                                       |     
|Item 12.   | Certain Relationships And Related Transactions.                                                                       | 39  
|           |                                                                                                                       |     
|Item 13.   | Exhibits And Reports On Form 8-K                                                                                      | 41  
|           |                                                                                                                       |     
|Item 14.   | Principal Accountant Fees and Services.                                                                               | 42  
|           |                                                                                                                       |     
|Signatures | 43                                                                                                                   

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PART I

ITEM 1.           DESCRIPTION
  OF BUSINESS.

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.

As used in this annual report, the terms "we", "us", "our",
  Turbodyne and our company mean Turbodyne Technologies,
  Inc., unless otherwise indicated. All dollar amounts in this annual report are
  in U.S. dollars unless otherwise stated.

GENERAL

We are an engineering company engaged in the design and development
  of air charging technology that enhances the performance of internal combustion
  engines. Our technology is based on DC/AC, high-speed, high-powered, electronically
  commutated electric motors and high performance power electronics. Our business
  strategy involves entering into license agreements with original equipment manufacturers
  (OEMs) in the automotive industry who would incorporate our
  technology into their product lines in exchange for the payment of royalties
  or other similar license fees, as well as developing products suitable for direct
  sale to the retrofit and performance enhancement market segments.

We initially incorporated our technology into two primary
  products, which are: (i) the Dynacharger and (ii) the Turbopac.
  We transferred the intellectual property associated with our Dynacharger and
  Turbopac products to Honeywell International Inc. (Honeywell) in
  1999. Our rights to these products were the subject of a license agreement and
  a joint development agreement with Honeywell which have since been terminated
  pursuant to our settlement agreement with Honeywell. See Item 3. 
  Legal Proceedings and Recent Corporate Developments below.

We suspended our business operations during our third fiscal
  quarter in 2003 pending resolution of certain of our outstanding legal proceedings
  and due to a lack of financing. Following our entry into the settlement agreement
  with Honeywell, we resumed our business operations on February 1, 2004. We plan
  to use the net proceeds of the settlement with Honeywell to fund the re-structuring
  of our business and to repay short-term loans obtained by us to provide us with
  working capital and settle our other outstanding debts.

The focus of our business plan is presently to create near-term
  cash flow through aftermarket sales of two improved versions of our Turbopac
  product. This is intended to provide us with the ability to pursue long-term
  business development activities and licensing agreements with the OEMs and automotive
  suppliers, while reducing our need for further equity financing. We intend to
  complete and test two production configuration versions of our improved Turbopac
  products by mid 2004. Our ability to complete commercialization of our products
  remains subject to our ability to obtain additional financing, see Item
  6. Managements Discussion and Analysis or Plan of Operation, below.

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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 July 1998.
  We reincorporated under the laws of the State of Nevada in August 2002.

We have three wholly owned subsidiaries: Turbodyne Systems,
  Inc., a Nevada corporation, Turbodyne Germany Ltd., a German corporation, and
  Electronic Boosting Systems Inc., a Nevada corporation (Electronic Boosting
  Systems). We presently carry out our business operations through our wholly
  owned subsidiary Electronic Boosting Systems.

We acquired our original technology from Edward M. Halimi,
  a former director, president and chief executive officer, in July 1993 in consideration
  of the issuance of 4,150,000 shares of our common stock. See Item 12 
  Certain Relationships and Related Transactions.

DEVELOPMENT OF OUR BUSINESS DURING 2002 AND 2003

We have experienced the following significant changes since January 1, 2002:

|1. | We suspended our business operations during our third
        fiscal quarter in 2003 pending resolution of our outstanding legal proceedings
        and due to a lack of financing. Following our entry into the settlement
        agreement with Honeywell, described below, we resumed our business operations
        on February 1, 2004. We plan to use the net proceeds of the settlement
        to fund the re-structuring of our business and to repay short-term loans
        obtained by us to provide working capital and settle our outstanding debts.
        We have also decided to continue the development of our Turbopac products.
        See Plan of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|2. | On January 23, 2004, we entered into a settlement
        agreement and general release agreement (the Settlement Agreement)
        with Honeywell. The Settlement Agreement resolves disputes between Honeywell
        and Turbodyne that were the subject of arbitration proceedings initiated
        by Honeywell in June 2001 and federal litigation commenced by Turbodyne
        against Honeywell in August 2001. The arbitration proceedings and the
        federal litigation related to a joint development agreement and a license
        agreement between Honeywell and Turbodyne entered into on January 28,
        1999, as subsequently amended on December 15, 1999. We also entered into
        an Intellectual Property and Product Rights Agreement on December 15,
        1999 concurrent with the amendments to the original agreements whereby
        we assigned certain patent rights to Honeywell. The agreements related
        to the development of, and certain intellectual property associated with
        Electrically Assisted Turbocharger technology and products and Electrically
        Driven Compressor technology and products. The agreements referred to
        our version of the Electrically Assisted Turbochargers as the Dynacharger
        and our version of the Electrically Driven Compressors as the Turbopac.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3. | Under the terms of the Settlement Agreement, among
        other things, we agreed with Honeywell to terminate the joint development
        agreement and the license agreement, and Honeywell agreed to pay us the
        aggregate amount of $8,500,000 in full settlement of our claims against
        Honeywell subject to certain adjustments for legal expenses and our settling
        amounts owed to certain of our creditors and lien holders of $911,000,
        which resulted in a net payment from Honeywell of $6,375,000. We have
        received $4,770,900 to date net of legal fees and creditor payments, in
        connection with our settlement with Honeywell.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4. | Over the past two years we have been able to reach
        settlement and resolution of many of the legal proceedings that have been
        initiated against us. See Item 3. Legal Proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|5. | We now have a new board of directors and our business
        is currently managed by new principal executive officers. Our current
        board of directors, namely Eugene OHagan and Andrew Martyn-Smith
        were appointed at our annual general meeting held in July 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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|6. | In 2002 we focused our business strategy on becoming
        a leading design and engineering company engaged in the development of
        charging technology for the automotive industry. Our current business
        strategy contemplates that we will license our technology to leading automotive
        Original Equipment Manufacturers (OEMs), as well as
        develop products suitable for direct sale to the retrofit and performance
        enhancement market segments.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|7. | In 2003, we determined not to become a tier-one automotive
        OEM supplier due to the cost, time, infrastructure, and track-record required
        to be accepted by the OEMs as a tier-one supplier. We determined
        that it would be more economical to license the manufacture of our products
        to existing tier-one OEM suppliers. This remains our strategy in 2004.                                                                                                  

These corporate developments are discussed below. Detailed
  information regarding our legal proceedings is contained in the section of this
  Form 10-KSB entitled Item 3.  Legal Proceedings.

HONEYWELL AGREEMENTS

Original Agreements

In January 1999, we entered into a license agreement (the
  Honeywell License Agreement) and a joint development agreement (the
  Honeywell JDA) with Honeywell. Each of these agreements was amended
  in December 1999. Under the Honeywell License Agreement, we granted to Honeywell
  the exclusive license to make, use and sell products incorporating our Dynacharger
  technology for a term of twenty years. This technology included all designs,
  processes, data, inventions, developments and other proprietary information
  relating to electrically assisted turbochargers and motors and controls associated
  with the Dynacharger products. Under the Honeywell JDA, Honeywell and
  Turbodyne were required to engage in a concerted effort for the research, development
  and engineering for mass production of the Dynacharger and other electrically
  assisted charged air systems.

Assignment Agreement

The Honeywell License Agreement and Honeywell JDA were amended
  in December 1999 concurrent with the execution of an intellectual property and
  product rights agreement between Turbodyne and Honeywell. Under the terms of
  the intellectual property and products rights agreement, we assigned our patent
  and trademark portfolios, including Dynacharger and Turbopac, to
  Honeywell for $6.8 million. The assignment covered the Turbopac, Turboflow and
  Dynacharger trademarks, 18 patents and 14 patent applications pending with the
  U.S. Patent and Trademark Office. These trademarks, patents and applications
  encompassed the construction of the Dynacharger and Turbopac products.
  We applied for numerous patents with Honeywell since joint development of our
  products began. These patent rights were held jointly. We made the assignment
  of the patent portfolio subject to the Honeywell License Agreement, as amended.

Amended License Agreement

Under the amended Honeywell License Agreement, we granted
  to Honeywell the worldwide exclusive license to all improvements related to
  the Turbodyne technology that we develop through our efforts. In addition, Honeywell
  was granted all rights to manufacture and sell any motor driven compressor products
  currently sold in the Turbopac product line, including any developments and
  improvements. We retained the right to manufacture and sell electrical motor
  assistance systems for Cummins BHT turbochargers in the independent aftermarket.
  In exchange for the assignment of our patent portfolio and the exclusive licenses
  granted in the amended license agreement, Honeywell agreed to pay to us a royalty
  in the amount of 3.7% of net sales achieved by Honeywell of products incorporating
  the Turbodyne technology, and Turbodyne had the right to sell electric and light
  metal components of the Turbopac and Dynacharger systems to Honeywell at cost
  plus 7%.

The license also gave us the right to manufacture and sell
  electrical motor assistance systems for Cummins BHT turbochargers in the aftermarket
  if Honeywell decided not to do so.

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Status of the Joint Development Agreement and the License
  Agreement

Under the terms of the Settlement Agreement, we agreed with
  Honeywell to terminate both the Honeywell JDA and the Honeywell License Agreement.
  In accordance with the terms of the Settlement Agreement, Honeywell transferred
  to us all right, title and interest of Honeywell in all of those patents which
  have all of their independent claims directed in particular to products or technologies
  associated specifically with Electrically Driven Compressors (the EDC
  Patents) and not Electrically Assisted Turbochargers. Electrically Driven
  Compressors are devices used to compress air for use in internal combustion
  engines and which include a radial compressor wheel attached to and powered
  by an electrically driven motor. Electrically Driven Compressors, unlike turbochargers,
  do not include a turbine. Our version of the Electrically Driven Compressor
  is the Turbopac product. We are not obligated to make any royalty payments to
  Honeywell with respect to the Turbopac electrically driven compressor products
  and technology under the terms of the Settlement Agreement.

We, in turn, transferred to Honeywell all of our right, title
  and interest to all of the intellectual property, other than the EDC Patents,
  owned by us as of June 30, 2001 or which otherwise relates back to work completed
  in connection with the Honeywell License Agreement and the Honeywell JDA (the
  Assigned Intellectual Property Rights). The transfer of the Assigned
  Intellectual Property Rights is subject to certain license rights previously
  granted by us. In addition, we retained a non-exclusive, non-transferable license
  to use such portion of the Assigned Intellectual Property Rights as may be necessary
  solely in order to enable us to make or sell Electrically Driven Compressor
  products. Honeywell is not obligated to make any royalty payments to us with
  respect to the Dynacharger electrically assisted products and technology under
  the terms of the Settlement Agreement. See Item 3. Legal Proceedings

INDUSTRY BACKGROUND

Market Demand for Charging Technology for Internal Combustion
  Engines

We believe that the following market conditions will continue
  to shape the demand for our air charging technology for internal combustion
  engines:

| | Worldwide, turbocharged diesel engines will continue
        to represent a large share of the power plants in passenger cars, trucks,
        boats, and other vehicles;                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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;                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | All passenger cars equipped with diesel engines in
        the displacement range of 1.5 to 3.5 litres, about 4.5 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;                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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;
|  |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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.                                                                                          

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Turbocharging Technology

The prevailing means for significantly increasing engine power
  and torque is charging the internal combustion reciprocal cycling engine. Turbocharging
  has evolved as the preferred technology to accomplish this. This technology
  uses exhaust gas energy, via a turbine, to drive a compressor that delivers
  air and pressurizes the engine intake system. These types of turbo engines have
  been used in passenger cars for many years, as well as light, medium, and heavy-duty
  trucks. These vehicles show high peak performance but turbo lag, or inadequate
  takeoff performance, continues to be a problem due to the absence of initial
  exhaust gas energy required to drive the turbocharger turbine. Overcoming turbo
  lag can be accomplished by using an electric motor driven compressor to pressurize
  the engine intake air until the engine produces sufficient exhaust gas energy
  to do so with the turbochargers compressor.

For several decades, the automotive industry has sought a
  manufacturable solution to turbo lag. Although we know of no complete solution
  that has been offered or implemented into mass production, we are aware of other
  competing technologies.

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 turbolag
  in turbocharged engines, increase power and performance, reduce the pollution
  of non-turbocharged engines, and facilitate the successful downsizing of internal
  combustion engines.

THE TURBODYNE TECHNOLOGY

The Turbopac System

Our Turbopac systems provide nearly instantaneous pressurized
  air to internal combustion engines. This allows engine manufacturers to use
  larger turbochargers for a given engine size without suffering the lack of responsiveness
  normally caused by the corresponding introduction of excessive turbo-lag. The
  Turbopac allows the engine control system to immediately increase the fuel delivered
  to the engine, while still maintaining the proper air/fuel ratio for optimal
  combustion and minimal pollution. This additional combusted fuel serves not
  only to help the vehicle accelerate, but also to provide additional exhaust
  gas energy to more rapidly accelerate the turbocharger. Once the turbocharger
  has come up to sufficient speed to deliver pressurized air to the engine, the
  Turbopac is deactivated.

The Turbopac system is an electric-motor-driven centrifugal
  compressor that works in series with an engines existing turbocharger
  to eliminate turbo-lag and produce a turbo-compounding effect. The motor is
  driven by a high performance electronic controller that takes its energy from
  the vehicles electrical system. Because the Turbopac is active only during periods
  of turbocharger turbo-lag, the duty cycle of the Turbopac is low and the vehicles
  charging system is able to replenish the energy consumed by the Turbopac when
  it is not active.

Activation of the Turbopac is controlled by the vehicles engine
  control unit (ECU). In aftermarket applications other more simplified means
  of activation and control can be utilized.

The Dynacharger

We developed the Dynacharger product as an alternative way
  to address the turbo-lag problem that occurs in turbocharged internal combustion
  engines. The Dynacharger product incorporates a high speed, high power density
  electric motor that is mounted coaxially between a turbochargers turbine
  and the compressor. The Dynacharger is controlled by external controls that
  regulate the operation of the electric motor and the speed of the compressor
  of the turbocharger. The Dynacharger product enables the turbochargers
  compressor to compress the air supply delivered to the engine during periods,

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including start-up and acceleration, when the force provided
  by the engines exhaust gas is insufficient to provide adequate power to
  the turbochargers compressor.

Turbodyne is no longer pursuing the development of the Dynacharger
  technology. We believe that the Turbopac technology is a superior approach to
  elimination of turbo-lag for the following reasons:

| | The electric motor is not required to exist in the
        extremely harsh internal environment of a turbocharger.                                                                                                                                                                                                                             
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                
| | The size, power, and torque of the electric motor
        is not constrained by the limitations associated with placing the electric
        motor in the turbocharger.                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                
| | The compressor of the Turbopac can be optimized for
        low engine RPM performance while allowing the turbocharger compressor
        to remain optimized for high engine RPM performance. Using only one compressor
        forces design compromises that degrade performance when compared with
        a two-stage, compounding system.
|  |                                                                                                                                                                                                                                                                                                                                                
| | A conventional, low cost waste-gate turbocharger
        with a Turbopac can exceed the performance of more costly, more complex,
        and less reliable variable geometry turbochargers.                                                                                                                                                 

INTELLECTUAL PROPERTY

Turbopac and Dynacharger Technology

As of January 23, 2004, pursuant to the terms of the Settlement
  Agreement, Honeywell assigned all of its interest in the EDC Patents to us,
  and we assigned to Honeywell all of our interest in the intellectual property
  including issued patents and pending patent applications, other than the EDC
  Patents, that were owned jointly or solely by us as of June 30, 2001 as they
  related to work conducted in connection with our agreements with Honeywell.
  Our assignment to Honeywell of certain of our intellectual property was subject
  to our retaining the right to continue with our license agreements relating
  to the electrically driven compressor technology with our existing licensees,
  and Honeywells grant to us of a retained non-exclusive license to such
  limited portion of such intellectual property as may be necessary for us to
  sell electrically driven compressor products.

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.

STATUS OF THE DEVELOPMENT, MARKETING AND SALE OF OUR PRODUCTS

Turbopac Product

In the fourth quarter of 1997, under an arrangement with Detroit
  Diesel Corporation and in accordance with the United States Environmental Protection
  Agency Urban Bus Program, our Turbopac 2500 model was installed on city
  buses in Toledo, Ohio, Riverside, California and Milwaukee, Wisconsin. Following
  the successful installation of these products, Milwaukee Transit requested and
  received from the Environmental Protection Agency approval to equip 10 additional
  buses with the Turbopac 2500 model. In April 1998, the EPA certified the
  Detroit Diesel Corporation emission upgrade kit, which includes the Turbopac
  2500 model, under the Urban Bus Retrofit/Rebuild Program. Following EPA approval,
  we entered into a five-year sales and marketing agreement with Detroit Diesel
  Corporation under which Detroit Diesel Corporation will exclusively market the
  Turbopac as part of its mechanical engine rebuild kit for the EPA Urban
  Bus Program. In June 1998, we delivered the initial stocking order of 100 Turbopacs.
  We sold approximately 575 Turbopacs under our agreement with Detroit Diesel
  Corporation. Under the terms of the Honeywell JDA, we agreed that further sales
  to Detroit Diesel Corporation were to be made by Honeywell. No further sales
  of the Turbopac products have been

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completed under this arrangement due to Honeywells determination
  to halt sales of Turbopac products, including sales of Turbopac products to
  Detroit Diesel Corporation.

We completed the development of several different versions
  of the Turbopac products. We assigned our rights to the Turbopac product to
  Honeywell in December 1999. Due to this assignment we were unable to independently
  pursue the commercialization of the Turbopac products to date. As of January
  23, 2004, pursuant to the terms of the Settlement Agreement, Honeywell assigned
  all of its interest in the EDC Patents to us. We in turn transferred to Honeywell
  all of our interest in the intellectual property, other than the EDC Patents,
  that were owned jointly or solely by us as of June 30, 2001 as they related
  to work conducted in connection with the Honeywell License Agreement and the
  Honeywell JDA.

We anticipate that commercialization of our Turbopac product
  will be through a license arrangement with an OEM or direct sales to lower volume
  market segments. There is no assurance that we will be able to enter into a
  license agreement with an OEM or to achieve commercialization of the Turbopac
  product.

Dynacharger Products

We completed the development of our Dynacharger products for
  prototype evaluation and testing purposes. We do not plan to continue the commercial
  development of our Dynacharger product. However, we do intend to continue under
  our existing license agreements relating to this technology.

BUSINESS STRATEGY

Turbopac Systems

Our general business strategy is to develop products incorporating
  our technology to be licensed to automotive OEMs and to be sold directly
  into low-volume market applications. We have determined not to attempt to pursue
  the large scale manufacturing of our products in view of the high costs, extreme
  competition, and business risks associated with tier-one OEM manufacturing.
  We believe that the strategy of licensing our products to OEMs will enable
  the most rapid commercialization of products incorporating our technology. 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.

Dynacharger Products

Joint Development Agreement

In September 2002, our subsidiary, Turbodyne Systems, Inc.
  (TSI), entered into a licensing and joint development agreement
  with Ishikawajima-Harima Heavy Industries Co., Ltd. (IHI). The licensing
  and joint development agreement provides for the grant by TSI to IHI of a ten-year
  non-exclusive license for our motor assisted Dynacharger turbocharger technology
  for the territories of Asia and Europe. IHI was required to pay to TSI ¥8,000,000
  Japanese Yen (equal to approximately $66,300 US as of September 11, 2002) as
  an initial license fee upon execution of the agreement. IHI is also required
  to pay to TSI an additional license fee of ¥20,000,000 Japanese Yen (equal
  to approximately $165,900 US as of September 11, 2002) upon a decision by IHI
  to enter into mass production and delivery to IHI by TSI of complete design,
  engineering, drawings, specifications and parts lists. In addition to the additional
  license fee, IHI will pay to TSI a royalty based on the number of units sold
  by IHI that incorporate the licensed technology. The royalty will equal 3% of
  the amount of the sales price of motor assisted turbochargers sold that incorporate
  our technology less the price of a conventional turbocharger product for sales
  of the first 200,000 units. For sales in excess of 200,000 units, the royalty
  will be reduced to 1% of the price differential.

TSI has also agreed to manufacture and deliver to IHI four
  engineering sample units that will be designed to meet the specific requirements
  of IHI. The purpose of these engineering sample units will be for testing and
  evaluation purposes by IHI. IHI paid TSI the amount of ¥2,000,000 Japanese
  Yen (equal to approximately $16,600 US) upon the execution of the agreement.
  TSI will complete the fabrication of the

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electric motor and electronic components for the test units.
  IHI will supply the conventional turbocharger components to TSI for final assembly
  and testing by TSI. TSI will deliver the four samples to IHI for evaluation.
  Additional test units will be provided at a price of ¥500,000 Japanese Yen
  (equal to approximately $4,150 US as of September 11, 2002).

Non-Exclusive Agreement License Agreement

In 2003 we entered into a non-exclusive license agreement
  with a California technology development company (the Licensee).
  Pursuant to the terms of the agreement we granted the Licensee a worldwide license
  (the License) to make use of the technologies and inventions associated
  with our electrically assisted turbocharger technology otherwise known as the
  Dynacharger technology. In consideration of the grant of the License,
  the Licensee agreed to: (i) pay us $250,000 on the execution of the agreement;
  (ii) reduce by $150,000 amounts owing on a promissory note issued by us in favor
  of the License; and (iii) pay us a royalty of 3% of the net sales of licensed
  products made, used or sold by the Licensee or any of their sub-licensees, subject
  to any improvements made by the Licensee to our motor assisted turbocharger
  technology.

We do not plan to continue the commercial development of our
  Dynacharger product, however, we intend to continue to operate under our existing
  license agreements relating to this technology.

Additional Elements of Our Business Strategy

Additional key elements of our strategy include:

| |  | Increasing awareness in the automotive industry for
        our expertise and technology in the field of charging internal combustion
        engines;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                       
| |  | Continuing our engineering efforts to further advance
        our technology;                                                                         
| |   |                                                                                                                                                       
| |  | Establishing additional strategic relationships with
        OEMs.                                                                                    

COMPETITION

We expect that the primary competition for Turbopac
  products will come from improvements and refinements to conventional internal
  combustion engines that may result in moderate, but sufficient, increases in
  engine performance. Implementing these improvements may be less costly than
  installing a Turbopac product. In addition, OEMs and consumers may be
  more accepting of improvements to existing technology than a new technology.

Competition for Turbopac products may also come from
  existing products manufactured by OEMs that do not incorporate our products
  into their final product. A relatively small number of OEMs have a significant
  share of the automotive market. Accordingly, an OEM's decision not to incorporate
  our products into its product lines could pose a significant threat to our success.

RESEARCH AND DEVELOPMENT

We incurred research and development costs in the amount of
  $1,953,137 during our fiscal year ended December 31, 2003, compared to research
  and development costs in the amount of $4,947,824 during our fiscal year ended
  December 31, 2002. These expenditures included amounts on research and development
  with the objective of bringing Turbopac 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 will be coming into effect in 2005.
  The presence of these government regulations has the potential to create demand
  for our products as our

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products are designed to increase engine performance with
  resulting reductions in emissions and increases in fuel economy.

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

SEGMENT REPORTING

We are currently only engaged in one business segment, being
  the development and sale of products incorporating our Turbopac technology.
  Our business operations are primarily conducted within the United States at
  present. Accordingly, we do not report our financial information on separate
  geographic segments.

EMPLOYEES

As of May 5, 2004, we had approximately seven full-time employee
  equivalent consultants and employees, comprised of the following:

|1. | Our three executive officers, namely Mr. Andrew Martyn-Smith,
        Mr. David Willett and Ms. Marsha Chandler;
|-- | ----------------------------------------------------------------------------------------------------------------
|2. | Two engineers; and                                                                                              
|3. | Two administrative personnel.                                                                                   

RISK FACTORS

We face risks in executing our business plan and achieving
  revenues. The following risks are material risks that we face. We also face
  the risks identified elsewhere in this Annual Report on Form 10-KSB, including
  those risks identified under Item 1  Description of Business,
  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 continue business operations as a going concern.

RISKS RELATING TO OUR FINANCIAL CONDITION

We Presently have Insufficient Authorized Capital to Convert
  All of Our Outstanding Options, Warrants and Preferred Shares

Our authorized capital currently consists of 150,000,000 shares
  of common stock and 1,000,000 preferred shares. We had 148,914,616 shares of
  common stock outstanding as of May 5, 2004. In addition, as of December 31,
  2003 we had warrants to purchase 21,634,809 shares of our common stock outstanding,
  options to purchase 4,179,666 shares of our common stock outstanding and we
  had 97,175 shares of our Series X preferred shares outstanding that are convertible
  into an additional 9,717,500 shares of our common stock. If all share purchase
  warrants and options were exercised and all Series X preferred shares were converted,
  the number of required shares of common stock would exceed the authorized number
  of shares of common stock. Accordingly, we have recorded a liability of $2,715,322
  to account for the potential cash settlement of these outstanding options, share
  purchase warrants and convertible shares of Series X preferred stock in the
  accompanying financial statements. Our limited remaining number of shares of
  authorized common stock may adversely impact on our ability to raise additional
  financing through additional private placements.

We intend to submit to our stockholders a proposal to increase
  our authorized capital at our 2004 annual general meeting. If our stockholders
  do not vote in favour of the proposal our limited authorized capital may continue
  to have adverse consequences on our business operations and our ability to raise
  additional capital.

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There Is Substantial Doubt As To Our Ability To Raise Additional
  Capital Through Sales Of Our Common Stock.

There is substantial doubt as to our ability to raise additional
  capital through sales of our common stock due to the following factors:

| | 1. | We have a substantial working capital deficit;                                                                                                                                                          
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | We do not have any significant revenues;                                                                                                                                                                
| | 3. | We will not achieve significant revenues until we
        complete the commercialization of products incorporating our technology,
        whether by ourselves or in conjunction with automotive OEMs;
| | 4. | We will be required to incur substantial research
        and development expenses prior to the commercialization of products incorporating
        our technology;                                     
| | 5. | We are the subject of outstanding judgments and legal
        proceedings;                                                                                                                              
| | 6. | We have insufficient authorized capital for the exercise
        of our outstanding options, warrants, and convertible preferred shares;
        and                                                    
| | 7. | The presence of the other risks identified in this
        Annual Report on Form 10-KSB.                                                                                                                

There Is A Substantial Risk That We Will Not Be Able To
  Continue Our Business Operations Due To Our Financial Condition.

We had a working capital deficit of $14,691,564 as at December
  31, 2003. As we are not earning revenues, we require substantial amounts of
  additional capital in order to continue business operations. We do not have
  any arrangements in place for any financing. Subsequent to December 31, 2003,
  we settled our litigation with Honeywell which has provided us with sufficient
  working capital to continue our operations for ten months, however, we will
  require further financing to continue our business operations past this period.
  We anticipate that any future financing would be achieved by sales of additional
  shares of our common stock once our stockholders have approved the proposal
  to increase our authorized share capital at our 2004 annual general meeting
  of stockholders. Sales of additional shares of our common stock will result
  in significant dilution to our current stockholders.

There Is Substantial Doubt About Our Ability To Continue
  As A Going Concern.

We reported net losses of $6,884,717 and $9,002,745 for the
  two fiscal years ended December 2003 and 2002 respectively. We suffered net
  losses in recent years resulting in an accumulated deficit of $130,476,823 at
  December 31, 2003. 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 based on our projected
  cash flows for the ensuing year we will be required to seek additional equity
  or debt financing in order to continue our present operations, irrespective
  of the amounts to be paid or received, if any, in connection with the aforementioned
  lawsuits. 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, 2003.

Substantially All Of Our Historical Revenues Were Derived
  From Pacific Baja, Substantially All Of The Assets Of Which Were Sold In Bankruptcy
  Proceedings In 1999.

Substantially all of our historical revenues on a consolidated
  basis have been derived from Pacific Baja, our former subsidiary. The assets
  of Pacific Baja were sold in bankruptcy proceedings in December 1999. The sale
  of substantially all of the assets of Pacific Baja has had an adverse affect
  on our business and results of operations.

We Have No History Of Product Sales.

None of the Turbopac or Dynacharger products have been commercially
  produced except for the limited commercial production of the TurbopacTM
  2500 product. Sales of the TurbopacTM 2500 product have been terminated
  by Honeywell. We cannot assure you that TurbopacTM will be developed
  in a timely

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manner or that it will be commercially accepted. The failure
  of TurbopacTM to achieve commercial success will have a material
  adverse effect on our business, operating results and financial condition.

We May Not Be Able To Continue In Business.

Due to our past losses and our limited working capital, we
  may not be able to stay in business. Pursuant to our settlement with Honeywell,
  we have terminated the Honeywell License Agreement and the Honeywell JDA. Honeywell
  is also not currently proceeding with the commercial development of Dynacharger
  products and no sales of products incorporating the Dynacharger technology are
  being made under our license agreement. Accordingly, we are not earning revenues
  under the Honeywell License Agreement and Honeywell JDA. As we do not have any
  other products ready for commercial sale at this time, there is significant
  doubt as to our ability to continue business operations. Our current sources
  of working capital are not sufficient to meet our working capital needs beyond
  the next ten months.

RISKS RELATING TO ADDITIONAL LEGAL PROCEEDINGS

We Have Been Named As A Defendant In Legal Proceedings
  Arising From The Bankruptcy Of Pacific Baja.

We have been named as a defendant in legal proceedings commenced
  by the Pacific Baja Liquidating Trust on behalf of the creditors of Pacific
  Baja seeking damages in excess of $12 million from ourselves and the former
  officers and directors of Pacific Baja and Turbodyne Systems, our wholly owned
  subsidiary. We intend to pursue settlement of these claims through our insurers.
  If the Pacific Baja Liquidating Trust is successful in achieving an award of
  substantial damages against us in excess of our insurance coverage, it may have
  a materially adverse affect on our business operations. In addition, the continuation
  of these legal proceedings may have an adverse affect on our ability to raise
  additional capital.

RISKS RELATED TO OUR BUSINESS STRATEGY

Our Business May Be Adversely Affected If We Are Not Able
  To Achieve Management Stability.

There is no assurance that we will be able to retain a management
  team that is capable of implementing our business strategy successfully. Our
  board of directors and management has experienced a high rate of turnover over
  the last five years, which has affected our ability to focus on the core elements
  of our business. It is possible that we will continue to experience turnover,
  although we believe that our executive officers will retain their positions
  for the foreseeable future. If management resources continue to be diverted
  towards replacing directors and executive officers, 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 lack of stability will have a negative impact on the quality of management
  that we are able to retain to manage our business.

Our Business Will Not Succeed If We Cannot Convince OEMs
  To Incorporate Our Technology Into Their Product Lines.

Our future financial performance depends primarily on our
  ability to enter into agreements with automotive OEMs that lead to the
  commercialization of products incorporating our technology. If we are unable
  to convince automotive OEMs of the advantages and viability of our technology,
  we will not be successful.

We May Expend A Significant Amount Of Time And Resources
  Testing Programs That May Not Result In Any Sales.

A key component of our business strategy involves 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

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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 development 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 Products Incorporating
  Our Technology For Commercialization.

With the exception of limited commercial production of certain
  Turbopac models, 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 Get Patent Protection
  For Our Technology.

Protection of trade secrets and proprietary knowhow 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.

We may incur substantial costs seeking to enforce our patent
  rights against infringement or the unauthorized use of our proprietary technology
  by others or in defending ourselves against similar claims of others. 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.

If New, Commercially Successful Techniques Similar To Our
  Products Are Developed, Our Potential Market Share Will Be Reduced.

The business environment in which we operate is highly competitive.
  Although we know of no products that are technologically similar to ours, future
  competitors may develop related technologies that improve the performance of
  internal combustion engines or products that are not encompassed by our patents.
  In addition, competitors may be issued patents that inhibit our ability to develop
  certain products. There may also be improvements to current technologies that
  compete with ours. Successful development of new techniques may reduce our potential
  market share or make our products less attractive or obsolete, each of which
  would adversely affect our business. In addition, a relatively small number
  of OEMs hold a significant share of the automotive market. If any of the
  OEMs decides not to incorporate our products into their product lines,
  our potential market share might be significantly reduced. Our products may
  not be superior to existing or subsequently developed competitive products and
  we may not be able to obtain significant market share or be able to adapt to
  evolving markets or technologies.

We Must Keep Pace With Technological Change To Achieve
  Success.

The automotive 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 Turbopac
  product lines. However, development of these products under our agreements with
  Honeywell has not proceeded as planned. Due to this delay and the rapid pace
  of technological innovation in the automotive industry, there is a risk that
  these products may be superceded by new technology and become obsolete.

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We cannot assure you that our products will be commercially
  accepted or that we will be able to enhance existing products or develop new
  products. We also cannot assure you that technological change will not render
  obsolete or uneconomical any of our products. 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 have and potential competitors may have greater financial,
  marketing, technological and other resources. We believe that no products technologically
  similar to TurbopacTM have been sold. However, future competitors
  may develop related technologies that improve the performance of internal combustion
  engines and/or reduce emissions that are not encompassed by our patents. In
  addition, other companies may be issued patents which may inhibit our ability
  to develop certain products encompassed by those patents. There also may be
  improvements to existing technologies.

If new techniques are developed and are commercially successful,
  they may reduce our potential market share or make products incorporating our
  technology less attractive or obsolete, each of which will adversely affect
  our business. 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
  the TurbopacTM products into its product line may force us to expend
  additional amounts to gain market share and/or significantly reduce our potential
  market share.

RISKS RELATING TO OUR MARKET

Because Our Stock Is A Penny Stock, 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 shares 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 to resell their shares of
  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
  no cash dividends are expected to be paid on our common stock in the foreseeable
  future. 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.

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ITEM 2.           DESCRIPTION
  OF PROPERTY.

We maintain our corporate headquarters and our engineering,
  design and testing facilities in approximately 40,000 square feet of leased
  space located in Carpinteria, California. These premises are leased for a monthly
  rental of approximately $28,840 plus operating costs, including taxes, insurance
  and utilities for a term expiry in January 30, 2005.

We believe that our existing facilities are adequate for our
  current business. We are currently seeking to sublet approximately two-thirds
  of our leased premises that we are not using in order to reduce our administrative
  and operating costs.

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.

Honeywell International Inc.

We entered into the Settlement Agreement with Honeywell effective
  January 23, 2004. The Settlement Agreement resolves disputes between our company
  and Honeywell that were the subject of arbitration proceedings initiated by
  Honeywell in June 2001 (the Arbitration) and federal litigation
  commenced by us against Honeywell in August 2001 (the Federal Litigation).
  The Arbitration and the Federal Litigation related to a joint development agreement
  and a license agreement between us and Honeywell entered into on January 28,
  1999, as subsequently amended on December 15, 1999. We also entered into an
  Intellectual Property and Product Rights Agreement on December 15, 1999 concurrent
  with the amendments to the original agreements whereby we assigned certain patent
  rights to Honeywell. The agreements related to the development of, and certain
  intellectual property associated with, Electrically Assisted Turbocharger technology
  and products and Electrically Driven Compressor technology and products. The
  agreements referred to our version of the Electrically Assisted Turbochargers
  as the Dynacharger and our version of the Electrically Driven Compressors
  as the Turbopac.

Under the terms of the Settlement Agreement, we have agreed
  with Honeywell that each of the joint development agreement and the license
  agreement have been terminated and superseded by the Settlement Agreement. Honeywell
  has transferred to us all right, title and interest of Honeywell in all of those
  patents which have all of their independent claims directed in particular to
  products or technologies associated specifically with Electrically Driven Compressors
  and not Electrically Assisted Turbochargers. Electrically Driven Compressors
  are devices used to compress air for use in internal combustion engines and
  which include a radial compressor wheel attached to and powered by an electrically
  driven motor. Electrically Driven Compressors, unlike turbochargers, do not
  include a turbine. Our version of the Electrically Driven Compressor is the
  Turbopac product. We will not be obligated to make any royalty payments to Honeywell
  in respect of the Turbopac electrically driven compressor products and technology.

We have, in turn, transferred to Honeywell all of our right,
  title and interest to all of the intellectual property, other than the EDC Patents,
  owned by us as of June 30, 2001 or which otherwise relates back to work completed
  in connection with the license agreement and the joint development agreement
  (the Assigned Intellectual Property Rights). The transfer of the
  Assigned Intellectual Property Rights is subject to certain license rights previously
  granted by us. In addition, we have retained a non-exclusive, non-transferable
  license to use such portion of the Assigned Intellectual Property Rights as
  may be necessary solely in order to enable us to make or sell Electrically Driven
  Compressor products. Honeywell will not be obligated to make any royalty payments
  to us with respect to the Dynacharger electrically assisted products and technology.

Honeywell agreed to pay us the aggregate amount of $8,500,000
  in full settlement of our claims against Honeywell subject to certain adjustments
  for legal expenses and $911,000 owed to certain of our

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creditors and lien holders. We have received $4,770,900 net
  of legal fees and creditor liens from Honeywell to date.

The Settlement Agreement also includes mutual releases of
  each of our company and Honeywell in favor of the other and certain indemnification
  agreements. No payments were required to be made by us to Honeywell pursuant
  to the Settlement Agreement. The proceeds received by us are net of payments
  required to be made to creditors and lien holders, as described above, and payment
  of legal fees on a contingency basis.

Litigation Relating to Former Subsidiary

a)         
  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. Substantially all of the assets
  of Pacific Baja were purchased in December 1999.

In September 2001, the Pacific Baja Liquidating Trust commenced
  action against us in the United States Bankruptcy Court, Central District of
  California - Riverside Division. The Pacific Baja Liquidating Trust was established
  under the Pacific Baja bankruptcy proceedings for the benefit of the unsecured
  creditors of Pacific Baja. We did not become aware of this legal proceeding
  until February 2002.

The Pacific Baja Liquidating Trust is seeking:

|1. | the re-characterization of our advances to Pacific
        Baja as equity and the subordination of our unsecured claims against Pacific
        Baja;                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                        
|2. | the re-conveyance of an aggregate of up to approximately
        $7,190,000 transferred by Pacific Baja to us and Turbodyne Systems on
        the basis of an allegation of fraudulent transfer;                                                                                                      
|   |                                                                                                                                                                                                                                                                                                        
|3. | an order that we are liable for all of the debts
        of Pacific Baja totalling approximately $7,000,000;                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                        
|4. | damages and punitive damages against us and certain
        of our former officers and directors and the former officers and directors
        of Pacific Baja in excess of $12,000,000 based on various allegations
        of fraud, misrepresentation, breach of contract, alter ego and negligence.

We have filed an answer denying liability. We also contend
  that if we did have any liability to the creditors of Pacific Baja, our liability
  would be setoff against the full amount of our claims against Pacific Baja in
  the amount of approximately $6,000,000, which the bankruptcy court has subordinated
  but did not disallow.

We are pursuing settlement negotiations in this proceeding.
  We have proposed that we would surrender our claims as a creditor of Pacific
  Baja in consideration for a release of the other claims asserted by the Pacific
  Baja Liquidating Trust against us and the former officers and directors of Turbodyne
  Systems, Inc. and Pacific Baja. We will vigorously contest and defend any claim
  by the Pacific Baja Liquidating Trust that would exceed our claims as a creditor
  of Pacific Baja and that would be satisfied other than by a set-off of our claims
  against Pacific Baja. We also have filed proofs of claim with our insurers to
  cover any amounts exceeding our claims as a creditor of Pacific Baja.

b)         
  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.

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We agreed on the terms of settlement with TST on October 4, 2001. Under the terms of the settlement agreement, we agreed to:

| | (i)   | issue 1,000,000 shares of our common
        stock to Mr. Andrew Stein, the president of TST, and we would agree to
        register the resale of these shares by Mr. Stein by filing a registration
        statement with the Securities and Exchange Commission.                                                                                                                                                                                                                             
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (ii)  | issue 2,000,000 shares of our common
        stock to TST.                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (iii) | the stipulation for the entry of judgment
        that will provide 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,
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (iv)  | allow 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.                                                                                                                                                                                                                                                                               

We completed all share issuances to TST required under the
  terms of our settlement with TST in 2003. We included an amount of $4,803,000
  in our reserve for lawsuit settlements on our consolidated balance sheet as
  at December 31, 2003 in regard to this settlement with TST. However, if it is
  determined that TST received payment in preference to other creditors before
  Pacific Baja filed its Chapter 11 petition in bankruptcy, TST will likely increase
  its claim by $2,130,000, which is included in the provision amount.

c)         
  Heartland Financial Corporation

In May 2000, Heartland Financial Corporation (Heartland)
  filed a complaint for arbitration against us seeking approximately $600,000
  representing a success fee it claimed it is entitled to for investment banking
  services provided to Pacific Baja based on a letter agreement between Heartland,
  Turbodyne and Pacific Baja. After the letter agreement was signed, Pacific Baja
  filed a Chapter 11 petition in bankruptcy. At the conclusion of the bankruptcy
  proceedings, the bankruptcy court awarded Heartland a portion of its fees. Heartland
  then sought the balance of the fees from us.

Heartland obtained an arbitration award against us in the
  amount of approximately $535,490. This arbitration award was entered as a judgment
  against us in the Superior Court of the State of California, City and County
  of San Francisco in June 2001. We have entered into a forbearance agreement
  with Heartland whereby we agreed to pay $250,000 out of the proceeds of other
  litigation, which amount has been paid, and agreed to assign to Heartland the
  proceeds of any arbitration award that is granted in our favour in the Honeywell
  arbitration proceedings, to the extent required to satisfy the outstanding balance
  due on Heartlands judgment. In exchange, Heartland has agreed to forbear
  on any efforts to collect on their judgment until the Honeywell arbitration
  has been finalized. Following our entry into the settlement with Honeywell,
  we paid $506,408 in complete settlement of the Heartland claim.

Class Action Law Suits

In January through March of 1999, six purported class action
  complaints were filed against us and certain of our officers and directors in
  the United States District Court on behalf of individuals claiming that they
  purchased shares of our common stock during the period from March 1, 1997 through
  January 22, 1999. The plaintiffs alleged that we made misstatements that caused
  the price of our common stock to be artificially inflated during the class period.
  These actions were tendered to our insurance carriers who appointed counsel
  to represent us.

We have reached a settlement agreement that has resulted in
  the final disposition of these legal proceedings. The insurance companies involved
  have approved this settlement agreement. We have signed a stipulation of settlement
  with the legal counsel for the plaintiffs that sets forth the terms and conditions
  of this settlement. The United States District Court for the Central District
  of California has

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given its final approval to the settlement agreement, the
  judgment of the court has been entered and the statutory 30-day period for appealing
  from the judgment has expired without any appeal having been filed. Accordingly,
  the settlement agreement has now been finalized. The agreed terms of settlement
  provide for a stipulated judgment against us in the amount of $7.9 million.
  This judgment will be satisfied solely through our directors and officers
  liability insurance policies. Our primary and excess insurers will pay approximately
  $2.9 million of this amount as a condition of settlement. The balance of $5.0
  million will be satisfied from the proceeds of the second layer of an excess
  policy issued by Reliance Insurance Company to be assigned to the plaintiffs.
  The plaintiffs case against us and our co-defendants has been dismissed.
  We do not have any liability beyond the proceeds from the insurance policies
  and accordingly we are not required to fund any portion of the judgment. The
  settlement is binding on all class members, with the exception of two shareholders
  representing 14,100 shares who requested to be excluded.

Sheppard, Mullin, Richter & Hampton (Sheppard
  Mullin)

We commenced an action in Superior Court of the State of California
  for the County of Santa Barbara against Sheppard, Mullin in February 2001. Sheppard,
  Mullin were engaged by us as our legal counsel for securities matters in 2000.
  We claimed against Sheppard, Mullin for damages in excess of $100 million dollars.
  Our action against Sheppard, Mullin was based on attorney malpractice arising
  from the alleged failure of Sheppard Mullin to advise Easdaq of our concern
  that we may have issued unregistered securities without an available exemption
  from the registration requirements of the 1933 Act. We alleged that the failure
  of Sheppard, Mullin to advise Easdaq of this issue in a timely manner caused
  Easdaq to suspend the trading of our common stock on the Easdaq market, with
  the result that the market price for our common stock was significantly devalued.

Sheppard, Mullin filed a defence in this legal proceeding
  denying any liability to us. This action was set for trial in December 2002.
  We were able to resolve our legal proceedings against Sheppard, Mullin, to the
  mutual satisfaction of Sheppard Mullin and ourselves. A dismissal with prejudice
  was filed in the Santa Barbara Superior Court in February 2003 pursuant to this
  resolution.

Leon Nowek

Mr. Leon Nowek, one of our former directors and former officer,
  had threatened to take action against us for an alleged breach of his employment
  agreement dated August 1, 1997, as amended July 27, 1998. Mr. Nowek claimed
  to be entitled to payment of $1,620,000 in respect of alleged breaches by us
  of the employment agreement. Mr. Nowek claimed an additional amount of $32,511
  for reimbursement of legal costs incurred by Mr. Nowek in connection with the
  SEC investigation and class action lawsuit in which Mr. Nowek was named a party.
  We claimed against Mr. Nowek in the amount of $225,000 in respect of a housing
  loan that we advanced to Mr. Nowek and that had not been repaid.

We concluded a settlement agreement with Mr. Nowek dated effective
  as of January 29, 2003. Under the terms of this settlement agreement, Mr. Nowek
  agreed to release us from any liability under the employment agreement and the
  claimed reimbursable expenses. In exchange for this release, we issued to Mr.
  Nowek 35,675 shares of our Series X Preferred Stock at a deemed price of $20.00
  per share and released Mr. Nowek from his $225,000 obligation under the housing
  loan, for aggregate consideration of $938,500. Each share of Series X Preferred
  Stock is identical to our common stock except that the shares are non-voting
  and are convertible at the option of the holder into one hundred shares of our
  common stock. We also agreed with Mr. Nowek to the exchange of 900,000 shares
  held by a private company controlled by Mr. Nowek into 9,000 shares of Series
  X Preferred Stock. Mr. Nowek has agreed not to exercise his conversion rights
  to the extent that as a result of such conversion Mr. Nowek would own more than
  0.5% of our outstanding common stock.

Other Legal Proceedings

We filed an action in Superior Court of the State of California
  for the County of Santa Barbara (Case No. 01046250) in March 2001 against Wendell
  Anderson, Gerhard Delf, Sadayappa K. Durairaj, Naresh C. Saxena, Mugerdish Balabanian,
  Kenneth Fitzpatrick, Alain G. Chardon, Joseph D. Castano and Marsha Chandler.
  We determined to abandon this lawsuit against all defendants, other than Mr.
  Delf. Mr.

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Delf is one of our former directors and our former chief executive
  officer. We are seeking damages for alleged breach of fiduciary duty by Mr.
  Delf in connection with his handling of our dealings with Sheppard, Mullin,
  our former securities legal counsel, that gave rise to our litigation against
  Sheppard, Mullin and our acquisition of Pacific Baja. Mr. Delf has filed a cross-complaint
  against us for indemnity and for compensation alleged to be payable by us to
  Mr. Delf relating to his former position as chief executive officer. Following
  our entry into the settlement with Honeywell, we paid this claim.

In December 2000, Alain F. Lombard, one of our former consultants,
  served us with a demand for arbitration. Mr. Lombard alleged breach of contract.
  We agreed to a stipulated judgment against us in the amount of $180,535 in August
  2001. Repayment of this judgment is stipulated at $15,000 per month, commencing
  October 2001. We completed the first payment of this stipulated judgment but
  did not complete any further payments. Mr. Lombard has the right to accelerate
  the unpaid portion of the judgment and enter judgment for the full amount if
  we default on our payments to Mr. Lombard. Mr. Lombard has again commenced working
  for us as a consultant and has orally agreed not to enforce the judgment until
  such time as we have sufficient funds to pay the judgment. Following our entry
  into the settlement with Honeywell, we paid this claim.

In December 2000, Bowne of Los Angeles served us with a complaint
  for breach of contract for services rendered. Bowne sought payment for past
  services plus attorneys' fees and costs. Bowne was granted a judgment in the
  Superior Court of Los Angeles against us in the amount of $49,427.74. This claim
  was settled in connection with the Honeywell settlement.

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

No matters were submitted to our security holders for a vote
  during the fourth quarter of our fiscal year ending December 31, 2003.

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PART II

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

Turbodynes common shares are quoted on the OTC Bulletin
  Board under the symbol TRBD and on the Berlin Stock Exchange under
  the symbol TUD. Turbodynes common stock was traded on the
  Pink Sheets under the symbol "TRBD" from April 2, 1999 to May 3, 2002 when trading
  commenced on the OTC Bulletin Board.

The following table indicates the high and low bid prices
  of the common shares during the periods indicated:

|               |   | 2002 |  |   | 2003 | 
|-------------- | - | ---- |  | - | ---- | 
|               |   |      |  |   |      | 
|               |   | High |  |   | Low  | 
|               |   |      |  |   |      | 
|First Quarter  | $ | 0.49 |  | $ | 0.22 | 
|Second Quarter | $ | 0.28 |  | $ | 0.15 | 
|Third Quarter  | $ | 0.33 |  | $ | 0.09 | 
|Fourth Quarter | $ | 0.19 |  | $ | 0.10 | 

For the first quarter of 2004, the high bid price for our
  common stock was $0.27 per share and the low bid price was $0.09 per share.
  The source of the high and low bid price information since May 3, 2002 is the
  OTC Bulletin Board. The market quotations provided reflect inter-dealer prices,
  without retail mark-up, markdown or commission and may not represent actual
  transactions.

Registered Holders of Our Common Stock

As of May 5, 2004, there were approximately 430 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

Turbodyne did not complete any sales of securities without
  registration pursuant to the Securities Act of 1933, as amended during the fiscal
  year ended December 31, 2003 that have not been reported on our previous Quarterly
  Reports on Form 10-QSB during the year.

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

OVERVIEW

The following discussion and analysis of our financial condition
  and results of operations as at and for the two years ended December 31, 2003
  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".

We suspended our business operations during our third fiscal
  quarter in 2003 pending resolution of certain of our outstanding legal proceedings
  and due to a lack of financing. Following our entry into the settlement agreement
  with Honeywell, we resumed our business operations in February 2004. We plan
  to use the net proceeds of the settlement with Honeywell to fund the re-structuring
  of our business and to repay short-term loans obtained by us to provide us with
  working capital. The focus of our business plan is presently to create near-term
  cash flow through aftermarket sales of our Turbopac product. This is intended
  to provide us with the ability to pursue long-term business development activities
  and licensing agreements with the OEMs and automotive suppliers, while reducing
  our need for further equity financing. We intend to complete and test a working
  prototype of our Turbopac product by mid 2004.

We are currently in a transition phase of our business to
  an engineering and design business from a business model that originally included
  high-volume manufacturing and marketing of products incorporating our technology.
  We are presently pursuing development agreements with original equipment manufacturers
  for the commercialization of our products. None of our products are currently
  being sold commercially.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER
  31, 2002

Net Sales

We did not achieve any sales during the year ended December
  31, 2003 or 2002. Prior to the suspension of operations, our policy was to recognize
  revenue upon shipment of product. Since the recommencement of our operations,
  we recognize license and royalty fees over the term of the license or royalty
  agreement. During the year ended December 31, 2003, $14,050 of licensing fees
  were recognized as income. Our current inability to earn revenues reflects the
  fact that: (i) our Turbopac product remains in the development stage; and (ii)
  we did not earn any revenues pursuant to our license and development agreement
  with Honeywell.

We anticipate that we will earn revenues during fiscal 2004
  through license and royalty fees from the licensing of our technology. We anticipate
  that we will not be able to generate any significant revenues from the licensing
  of Turbopac until we are successful in entering into a new license and
  manufacturing arrangement with a new automotive OEM. We anticipate that we will
  be able to generate sales of our Turbopac product in the aftermarket arena.

Costs of Sales

We did not have any costs of sales during the years ended
  December 31, 2002 and 2003 in view of the fact that we had no sales. We did
  not engage in any manufacturing activity during the year ended December 31,
  2003 and we anticipate that we will not undertake any manufacturing activity
  during 2004, other than manufacturing of prototypes for evaluation and demonstration
  purposes.

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Gross Profit

Gross profit was nil for the year ended December 31, 2003
  and 2002. Our gross profit for 2003 and 2002 reflects our lack of revenues and
  the fact that we were not engaged in any manufacturing activities during this
  period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year
  ended December 31, 2003 increased to $2,701,491 from $1,236,957 for the year
  ended December 31, 2002, representing an increase of $1,464,534 or 118%. General
  and administrative costs included expenses associated with our Carpinteria,
  California office, our European office, management compensation, administrative
  staff and overhead. Selling expenses were minimal, as we did not undertake any
  marketing efforts with respect to the Turbopac and Dynacharger products in 2003
  or 2002 as these products were governed by our agreements with Honeywell. Our
  European office was closed in the second quarter of 2002.

Research and Development

Research and development costs for the year ended December
  31, 2003 decreased to $1,953,137 from $4,947,824 for the year ended December
  31, 2002, representing a decrease of $2,994,687 or approximately 60.5%. Our
  research and development activities during the year ended December 31, 2003
  did not include any joint research and development with Honeywell and testing
  prototypes. Our research and development costs related to present and future
  products are charged to operations in the year incurred. Current research and
  development costs are associated with the development of our Turbopac product.

Compensation Expense

We increased our reliance on stock based compensation in order
  to fund our operations during 2003 due to our limited ability to raise funds
  for these activities through sales of our equity securities or from revenues
  generated by operations. Stock based compensation was used primarily to fund
  our research and development activities. Stock based compensation included in
  research and development expenses were $824,725, equaling 42.2% of total research
  and development expenses for the year ended December 31, 2003, compared to $2,029,160
  for the year ended December 31, 2002, equaling 41% of total research and development
  expenses. Stock based compensation included in selling, general and administrative
  expenses was $907,891 for the year ended December 31, 2003, equaling 33.6% of
  selling, general and administrative expenses, compared to $507,292 for the year
  ended December 31, 2002, equaling 41% of total selling, general and administrative
  expenses.

During 2003, we granted options to purchase 13,345,666 shares
  of our common stock to various consultants associated with marketing, legal
  and related matters that we deemed essential to our operations, compared to
  options to purchase 5,857,143 shares granted in 2002. As a result, we recognized
  $1,130,526 of non-employee compensation expense during the year ended December
  31, 2003 compared to $1,470,930 during the year ended December 31, 2002. From
  time to time we may grant a significant number of options to purchase common
  stock to non-employees.

We recognize 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. Had we adopted the fair value method of accounting, our total
  stock-based compensation expense would have increased from $1,130,526 to $1,220,426
  and our loss would have increased from $6,884,717, or $0.04 per share, to $6,974,617,
  or $0.05 per share. This pro forma information is disclosed in further detail
  in Note 8 to our financial statements and in the Summary of Significant Accounting
  Policies included in our financial statements under the heading Stock-Based
  Compensation.

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Litigation Expense

We incurred expenses related to litigation in the amount of
  $1,334,686 for the year ended December 31, 2003 compared to $2,576,217 for the
  year ended December 31, 2002, representing a decrease of $1,241,531 or 48.2%.
  Our litigation expenses are attributable to our involvement in the legal proceedings
  described in Item 3 of Part I of this Annual Report on Form 10-KSB. The increased
  litigation expenses are primarily attributable to our settlement of litigation
  with TST which resulted in an expense of $1,293,000 including interest. Litigation
  expenses decreased overall in 2003 due to our signing of a contingency fee agreement
  with our Honeywell attorneys. During 2003 we received $899,000 less legal expenses
  pursuant to our settlement with Sheppard, Mullin. Litigation expenses in 2004
  are anticipated to consist primarily of legal expenses relating to the final
  resolution of the Honeywell litigation and proceedings involving our former
  subsidiary Pacific Baja. We believe that our resolution of the Honeywell dispute,
  the Sheppard Mullin law suit, the class action law suits and the Nowek claim
  and our forbearance agreement with Heartland Financial, as described in Item
  3 of Part I of this Annual Report on Form 10-KSB, will contribute to lower litigation
  expenses in 2004 compared to 2003 and 2002.

Net Loss

Our net loss for the year ended December 31, 2003 decreased
  to $6,884,717 from a net loss of $9,002,745 for the year ended December 31,
  2002, representing a decrease of $2,118,028 or 23.5%. The decrease to our net
  loss was due to a reduction in our overhead and administration costs in 2003
  and our decision to suspend our operations from August, 2003 to January 31,
  2004.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Working Capital

We had cash of $2,145 as at December 31, 2003, compared with
  cash of $137,517 as at December 31, 2002. Our working capital deficit increased
  to $14,691,564 as at December 31, 2003, compared to a working capital deficit
  of $12,904,380 as at December 31, 2002.

Liabilities

The largest component of our working capital deficit is a
  reserve for lawsuit settlements in the amount of $7,019,439 as at December 31,
  2003, compared to $4,309,909 as at December 31, 2002.

Our accounts payable increased during 2003 due to our inability
  to generate revenues and our limited ability to raise capital to fund our operations.
  Accounts payable increased to $3,791,191 as at December 31, 2003 from $3,442,541
  as at December 31, 2002. Accrued liabilities decreased to $3,068,259 as at December
  31, 2003 from $5,061,515 as at December 31, 2002. We have continued during 2003
  and are continuing during 2004 to negotiate with our creditors for the payment
  of our accounts payable and accrued liabilities. Our ability to continue our
  operations is also conditional upon the forbearance of our creditors.

We arranged for short-term loans from shareholders and other
  parties in the amount of $147,927 during the year ended December 31, 2003. These
  loans were unsecured, and included interest of 5% or a bonus payment contingent
  on specified amount of Honeywell proceeds being received. These loans were repaid
  from our proceeds from the Honeywell settlement.

Cash Used in Operating Activities

Cash used in operating activities for the year ended December
  31, 2003 was $1,710,010, compared to $3,051,691 for the year ended December
  31, 2002, representing a decrease of $1,341,681 or 44%. The decrease in cash
  used in operating activities resulted from the continued streamlining of our
  operations, reductions in our staff and the suspension of our operations in
  2003.

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Cash Provided by Financing Activities

We financed our business operations during 2003 primarily
  through private placement sales of our common stock, exercises of stock options,
  short term loans, conversion of accrued liabilities into stock and through an
  increase in our accounts payable. Cash provided by financing activities for
  the year ended December 31, 2003 was $1,574,638, compared to $3,185,176 for
  the year ended December 31, 2002.

Financing activities included the issuance of common stock
  and share purchase warrants for aggregate proceeds of $666,670 during the year
  ended December 31, 2003, compared to $2,594,151 for the year ended December
  31, 2002. We raised $666,670 in 2003 in private placement transactions that
  included the issue of an aggregate of 12,511,820 shares of our common stock
  and 1,809,237 of associated share purchase warrants, representing an average
  price of $0.05 per share. We raised $2,594,151 in 2002 in private placement
  transactions that included the issue of an aggregate of 21,832,459 shares of
  our common stock and associated share purchase warrants, representing an average
  price of $0.119 per share. The price at which we completed private placements
  during 2003 declined from 2002 due to the overall decline in the market price
  of our common stock.

We raised $577,320 during the year ended December 31, 2003
  by the issuance of an aggregate of 10,294,000 shares pursuant to exercise of
  stock options by our employees and consultants, compared to raising $555,714
  during the year ended December 31, 2002 by the issuance of an aggregate of 5,377,143
  shares pursuant to exercise of stock options by our employees and consultants.

Financing Requirements

We are continuing with a restructuring program that began
  in 1999 in order to reduce our working capital requirements. This restructuring
  program has included the reduction of debts, settlement of lawsuits, closing
  offices, efforts to sublet unused space at our headquarters, staff reduction
  and staff attrition, disposal of unnecessary assets and overall attempts at
  reducing operating costs. In addition we focused our resources on research and
  development of our products incorporating our proprietary technology, rather
  than manufacture of our developed products.

As at December 31, 2003 we had minimal cash and working capital
  resources. Following our entry into the Settlement Agreement with Honeywell
  we believe that we have adequate financial resources in order to enable us to
  continue our business operations without additional financing for approximately
  ten months. We will require additional financing if we are to continue as a
  going concern and to finance our business operations. 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 anticipate that any additional financing would be through
  the sales of our common or preferred stock or placement of convertible debt.
  We are presently in the process of negotiating private placements of our securities
  to raise working capital to finance our operations. However, we do not have
  any arrangements in place for the sale of any of our securities and there 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 scale back our plan of operations
  and operating expenditures. We anticipate that we will continue to incur losses
  until such time as the revenues we are able to generate from 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.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that have or are
  reasonably likely to have a current or future effect on our financial condition,
  changes in financial condition, revenues or expenses, results of operations,
  liquidity, capital expenditures or capital resources that are material to stockholders.

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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.

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 $130,476,823 at December 31, 2003, 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, irrespective of the amounts paid
  or to be paid, if any, in connection with the aforementioned lawsuits. These
  matters raise substantial doubt about our ability to continue as a going concern.
  Subsequent to December 31, 2003, we settled our litigation with Honeywell which
  provided us with sufficient working capital to recommence our operations.

Stock Based Compensation

We account for our employee stock-based compensation plans
  in accordance with APB Opinion No. 25 (APB No. 25), Accounting for Stock Issued
  to Employees and Financial Accounting Standards Board Interpretation No.44,
  Accounting for Certain Transactions Involving Stock Compensation--an Interpretation
  of APB Opinion No. 25, and comply with the disclosure provisions of SFAS No.
  123 (SFAS No. 123), Accounting for Stock-Based Compensation. Accordingly, no
  compensation cost is recognized for any of our fixed stock options granted to
  employees when the exercise price of each option equals or exceeds the fair
  value of the underlying common stock as of the grant date for each stock option.
  Changes in the terms of stock option grants, such as extensions of the vesting
  period or changes in the exercise price, result in variable accounting in accordance
  with APB Opinion No. 25. Accordingly, compensation expense is measured in accordance
  with APB No. 25 and recognized over the vesting period. If the modified grant
  is fully vested, any additional compensation costs are recognized immediately.
  We account for equity instruments issued to non-employees in accordance with
  the provisions of SFAS No. 123. Under variable accounting, changes in the underlying
  price of our stock may have a significant impact to earnings. A rise in the
  stock price would be treated as additional compensation expense and a decrease
  in the stock price would result in a reduction of reported compensation expense.

Revenue Recognition

Prior to the suspension of our operations in 2003, we recognized
  revenue upon shipment of product. Since the re-commencement of operations, we
  recognize license and royalty fees over the term of the license or royalty agreement.
  During the year ended December 31, 2003, $400,000 in license fees were deferred
  and amortized over 18 years. As a result, $14,050 of licensing fees were recognized
  as income.

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

26 of 43

---

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 year incurred.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board
  issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation
  of ARB 51." The primary objectives of FIN No. 46 are to provide guidance on
  the identification of entities for which control is achieved through means other
  than voting rights (variable interest entities or "VIEs") and how to determine
  when and which business enterprise should consolidate the VIE. This new model
  for consolidation applies to an entity for which either: (1) the equity investors
  do not have a controlling financial interest; or (2) the equity investment at
  risk is insufficient to finance that entitys activities without receiving
  additional subordinated financial support from other parties. In addition, FIN
  No. 46 requires that both the primary beneficiary and all other enterprises
  with a significant variable interest in a VIE make additional disclosures. As
  amended in December 2003, the effective dates of FIN No. 46 for public entities
  that are small business issuers, as defined ("SBIs"), are as follows: (a) For
  interests in special-purpose entities: periods ended after December 15, 2003;
  (b) For all VIEs created before January 31, 2003: periods ending after December
  15, 2004; and (c) For all VIEs created after January 31, 2003, FIN 46 is applicable
  immediately. The December 2003 amendment of FIN No. 46 also includes transition
  provisions that govern how an SBI which previously adopted the pronouncement
  (as it was originally issued) must account for consolidated VIEs. The implementation
  of this standard is not expected to have a material effect on our financial
  statements.

On May 15, 2003, FASB issued SFAS No. 150, "Accounting for
  Certain Financial Instruments with Characteristics of both Liabilities and Equity".
  SFAS No. 150 changes the accounting for certain financial instruments that,
  under previous guidance, could be classified as equity or "mezzanine" equity,
  by now requiring those instruments to be classified as liabilities (or assets
  in some circumstances) on the balance sheet. Further, SFAS No. 150 requires
  disclosure regarding the terms of those instruments and settlement alternatives.
  SFAS No. 150 affects an entity's classification of the following freestanding
  instruments: a) Mandatorily redeemable instruments b) Financial instruments
  to repurchase an entity's own equity instruments c) Financial instruments embodying
  obligations that the issuer must or could choose to settle by issuing a variable
  number of its shares or other equity instruments based solely on (i) a fixed
  monetary amount known at inception or (ii) something other than changes in its
  own equity instruments d) SFAS No. 150 does not apply to features embedded in
  a financial instrument that is not a derivative in its entirety. The guidance
  in SFAS No. 150 is generally effective for all financial instruments entered
  into or modified after May 31, 2003, and is otherwise effective at the beginning
  of the first interim period beginning after June 15, 2003.

The implementation of these new standards did not have a material
  effect on our financial statements.

27 of 43

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ITEM 7.           FINANCIAL
  STATEMENTS.

Included with this Annual Report on Form 10-KSB are our audited
  financial statements for the years ended December 31, 2003 and 2002, including
  the following:

|1. | Independent Auditors Report
        of BDO Dunwoody;                                                          
|-- | ---------------------------------------------------------------------------------------------------------------
|   |                                                                                                                
|2. | Consolidated Balance Sheets as
        at December 31, 2003 and December 31, 2002.                             
|   |                                                                                                                
|3. | Consolidated Statements of Operations
        for the years ended December 31, 2003 and December 31, 2002.     
|   |                                                                                                                
|4. | Consolidated Statements of Capital
        Deficit for the years ended December 31, 2003 and December 31, 2002.
|   |                                                                                                                
|5. | Consolidated Statements of Cash
        Flows for the years ended December 31, 2003 and December 31, 2002.     
|   |                                                                                                                
|6. | Summary of Significant Accounting
        Policies.                                                            
|   |                                                                                                                
|7. | Notes to the Consolidated Financial
        Statements                                                         

28 of 43

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**Turbodyne Technologies, Inc.
  and Subsidiaries******Consolidated Financial Statements For the years ended December 31, 2003 and 2002



F-1

---



**Turbodyne Technologies, Inc.
  and Subsidiaries******Consolidated Financial Statements For the years ended December 31, 2003 and 2002

|                                                 | Contents
|------------------------------------------------ | --------
|Independent Auditors Report                     |         
|                                                 |         
|Consolidated Financial Statements                |         
|                                                 |         
|Balance
      Sheets                             |         
|                                                 |         
|Statements
      of Operations                   |         
|                                                 |         
|Statements
      of Capital Deficit              |         
|                                                 |         
|Statements
      of Cash Flows                   |         
|                                                 |         
|Summary
      of Significant Accounting Policies |         
|                                                 |         
|Notes
      to the Financial Statements          |         

F-2

---

|                      | BDO Dunwoody LLP              | 600 Park Place          
|--------------------- | ----------------------------- | ------------------------
|Chartered Accountants | 666 Burrard Street           
|                      | Vancouver, BC, Canada V6C 2X8
|                      | Telephone: (604) 688-5421    
|                      | Telefax: (604) 688-5132      
|                      |                               | E-mail: vancouver@bdo.ca
|                      |                               | www.bdo.ca              

|                                  
|----------------------------------
|Independent Auditors
      Report
|                                  

The Board of Directors and Stockholders of 
  Turbodyne Technologies, Inc.

We have audited the Consolidated Balance Sheets of Turbodyne
  Technologies, Inc. and subsidiaries as at December 31, 2003 and 2002 and the
  related Consolidated Statements of Operations, Capital Deficit and Cash Flows
  for the years then ended. These consolidated financial statements are the responsibility
  of the Company’s management. Our responsibility is to express an opinion
  on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards
  generally accepted in the United States. Those standards require that we plan
  and perform an audit to obtain reasonable assurance whether the consolidated
  financial statements are free of material misstatement. An audit includes examining,
  on a test basis, evidence supporting the amounts and disclosures in the financial
  statements. An audit also includes 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 consolidated financial statements referred
  to above present fairly, in all material respects, the financial position of
  Turbodyne Technologies, Inc. and subsidiaries at December 31, 2003 and 2002
  and the results of its operations and its cash flows for the years then ended
  in conformity with accounting principles generally accepted in the United States.

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 $130,476,823
  and a total capital deficit of $14,966,647 at December 31, 2003. 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 numerous 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/ BDO Dunwoody LLP

Chartered Accountants

Vancouver, Canada 
  April 6, 2004

F-3

---

|                                                                               
|-------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Consolidated Balance Sheets
|                                                                               



|December
      31                                                |   | 2003         |   |   | 2002         |  
|---------------------------------------------------------------- | - | ------------ | - | - | ------------ | -
|                                                                 |   |              |   |   |              |  
|Assets                                                           |   |              |   |   |              |  
|                                                                 |   |              |   |   |              |  
|Current                                                          |   |              |   |   |              |  
|Cash                                                             | $ | 2,145        |   | $ | 137,517      |  
|Prepaid expenses
      and other current assets                  |   | 28,840       |   |   | 14,194       |  
|                                                                 |   |              |   |   |              |  
|Total
      current assets                                       |   | 30,985       |   |   | 151,711      |  
|                                                                 |   |              |   |   |              |  
|Property and equipment(Note 2)                                   |   | 110,867      |   |   | 168,918      |  
|Licenses, less accumulated amortization and writedowns of        |   |              |   |   |              |  
|$1,040,000 (2002
      - $208,000)                               |   | -            |   |   | 832,000      |  
|                                                                 |   |              |   |   |              |  
|Total Assets                                                     | $ | 141,852      |   | $ | 1,152,629    |  
|                                                                 |   |              |   |   |              |  
|Liabilities and Capital Deficit                                  |   |              |   |   |              |  
|                                                                 |   |              |   |   |              |  
|Liabilities                                                      |   |              |   |   |              |  
|                                                                 |   |              |   |   |              |  
|Current                                                          |   |              |   |   |              |  
|Term debts (Note
      3)                                        | $ | 76,082       |   | $ | 73,071       |  
|Accounts payable
      (Note 4)                                  |   | 3,791,191    |   |   | 3,442,541    |  
|Accrued liabilities                                              |   | 3,068,259    |   |   | 5,061,515    |  
|Provision for lawsuit
      settlements (Notes 7, 11, 12 and 13) |   | 7,019,439    |   |   | 4,309,909    |  
|Loans payable (Note
      5)                                     |   | 767,578      |   |   | 169,055      |  
|                                                                 |   |              |   |   |              |  
|Total
      current liabilities                                  |   | 14,722,549   |   |   | 13,056,091   |  
|                                                                 |   |              |   |   |              |  
|Deferred revenue                                                 |   | 385,950      |   |   | -            |  
|                                                                 |   |              |   |   |              |  
|Total
      liabilities                                          |   | 15,108,499   |   |   | 13,056,091   |  
|                                                                 |   |              |   |   |              |  
|Capital Deficit                                                  |   |              |   |   |              |  
|Share Capital (Note
      9)                                     |   |              |   |   |              |  
|Authorized                                                       |   |              |   |   |              |  
|1,000,000
      preferred shares, par value $0.001               |   |              |   |   |              |  
|150,000,000
      common shares, par value $ 0.001               |   |              |   |   |              |  
|Issued                                                           |   |              |   |   |              |  
|97,175
      preferred shares in 2003 (2002  Nil)               |   | 97           |   |   | -            |  
|148,771,749
      common shares in 2003 (2002115,620,517)       |   | 148,772      |   |   | 115,621      |  
|Treasury stock,
      at cost (378,580 shares)                   |   | (1,907,612   | ) |   | (1,907,612   | )
|Additional paid-in
      capital                                 |   |              |   |   | 113,445,516  |  
|                                                                 |   | 117,233,800  |   |   |              |  
|Other comprehensive
      income -                               |   |              |   |   |              |  
|Foreign
      exchange translation gain                          |   | 35,119       |   |   | 35,119       |  
|Accumulated deficit                                              |   | (130,476,823 | ) |   | (123,592,106 | )
|                                                                 |   |              |   |   |              |  
|Total
      capital deficit                                      |   | (14,966,647  | ) |   | (11,903,462  | )
|                                                                 |   |              |   |   |              |  
|Total Liabilities
      and Capital Deficit                      | $ | 141,852      |   | $ | 1,152,629    |  

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

F-4

---

|                                                                                         
|-----------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Consolidated Statements of Operations
|                                                                                         

|For
      the years ended December 31                        |   | 2003        |   |   | 2002       |  
|------------------------------------------------------------ | - | ----------- | - | - | ---------- | -
|                                                             |   |             |   |   |            |  
|Licensing fees                                               | $ | 14,050      |   | $ | -          |  
|                                                             |   |             |   |   |            |  
|Expenses                                                     |   |             |   |   |            |  
|Selling,
      general and administrative (Notes 7, 8 and 9) |   | 2,701,491   |   |   | 1,236,957  |  
|Research
      and developments costs (Notes 8 and 9)        |   | 1,953,137   |   |   | 4,947,824  |  
|Litigation
      expense (Notes 7, 11, 12 and 13)            |   | 1,334,686   |   |   | 2,576,217  |  
|License
      impairment provision                           |   | 624,000     |   |   | -          |  
|Depreciation
      and amortization                          |   | 266,051     |   |   | 265,857    |  
|                                                             |   |             |   |   |            |  
|                                                             |   | 6,897,365   |   |   | 9,026,855  |  
|                                                             |   |             |   |   |            |  
|Loss from operations                                         |   | (6,865,315  | ) |   | (9,026,855 | )
|                                                             |   |             |   |   |            |  
|Other income (expense)                                       |   |             |   |   |            |  
|Miscellaneous
      income                                   |   | 3,415       |   |   | 35,355     |  
|Interest
      expense, net                                  |   | (22,817     | ) |   | (7,245     | )
|                                                             |   |             |   |   |            |  
|Loss before income taxes                                     |   | (6,884,717  | ) |   | (8,998,745 | )
|                                                             |   |             |   |   |            |  
|Income tax expense(Note 6)                                   |   | -           |   |   | (4,000     | )
|                                                             |   |             |   |   |            |  
|Net
      loss for the year                                  | $ | (6,884,717  | ) | $ | (9,002,745 | )
|                                                             |   |             |   |   |            |  
|Loss
      per common share basic and diluted               | $ | (0.05       | ) | $ | (0.09      | )
|                                                             |   |             |   |   |            |  
|Weighted average shares used for basic and                   |   |             |   |   |            |  
|diluted
      loss per share                                 |   | 138,005,331 |   |   | 95,855,458 |  

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

F-5

---

|                                                                               
|-------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Consolidated Balance Sheets
|                                                                               

Turbodyne Technologies, Inc. and Subsidiaries Consolidated
  Statements of Capital Deficit

|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   | Additional  |   |   | Other  |  |   |              |   |   |             |  
|--------------------------------------- | --------------------- | - | ------------------ | ------ | -------------------- | ----------- | - | ------- | ------- | - | --------- |  | - | ----------- | - | - | ----------- | - | - | ------ |  | - | ------------ | - | - | ----------- | -
|                                        | Preferred
      Stock |   | Common
      Stock |        | Treasury
      Stock |             |   | Paid-in |         |   | Comprehen |  |   | Accumulated |   |   | Capital     |  
|                                        | Shares                |   |                    | Amount |                      | Shares      |   |         | Amount  |   | Shares    |  |   | Amount      |   |   | Capital     |   |   | Income |  |   | Deficil      |   |   | Deficit     |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Balance, January 1, 2002                | -                     |   | $                  | -      |                      | 84,036,915  |   | $       | 84,037  |   | 378,580   |  | $ | (1,755,534  | ) |   | 108,147,994 |   | $ | 35,119 |  | $ | (114,589,361 | ) | $ | (8,077,745  | )
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Exercise of stock options (Note 8)      | -                     |   |                    | -      |                      | 5,377,143   |   |         | 5,377   |   | -         |  |   | -           |   |   | 550,337     |   |   | -      |  |   | -            |   |   | 555,714     |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Private placements of common stock      | -                     |   |                    | -      |                      | 21,832,459  |   |         | 21,833  |   | -         |  |   | -           |   |   | 2,572,318   |   |   | -      |  |   | -            |   |   | 2,594,151   |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Issuance of stock for services (Note 9) | -                     |   |                    | -      |                      | 4,374,000   |   |         | 4,374   |   | -         |  |   | -           |   |   | 1,061,156   |   |   | -      |  |   | -            |   |   | 1,065,530   |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Issuance of stock options to non-       |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|employees for services (Note 8)         | -                     |   |                    | -      |                      | -           |   |         | -       |   | -         |  |   | -           |   |   | 1,470,930   |   |   | -      |  |   | -            |   |   | 1,470,930   |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Inception of Turbodyne Technologies     |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Inc. (Nevada Company)
      on          |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|August 15, 2003                         | -                     |   |                    | -      |                      | 1           |   |         | 1       |   | -         |  |   | -           |   |   | -           |   |   | -      |  |   | -            |   |   | 1           |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Adjustment for reverse acquisition of   |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Turbodyne Technologies,
      Inc.      |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|(Nevada Company) on                     |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|September 12, 2002                      | -                     |   |                    | -      |                      | (1          | ) |         | (1      | ) | -         |  |   | -           |   |   | -           |   |   | -      |  |   | -            |   |   | (1          | )
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Obligation to acquire Company           |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|shares (Note 9(c))                      | -                     |   |                    | -      |                      | -           |   |         | -       |   | -         |  |   | (152,078    | ) |   | -           |   |   | -      |  |   | -            |   |   | (152,078    | )
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Liability for settlement of equity      |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|instruments (Note 9(a))                 | -                     |   |                    | -      |                      | -           |   |         | -       |   | -         |  |   | -           |   |   | (357,219    | ) |   | -      |  |   | -            |   |   | (357,219    | )
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Net loss for the year                   | -                     |   |                    | -      |                      | -           |   |         | -       |   | -         |  |   | -           |   |   | -           |   |   | -      |  |   | (9,002,745   | ) |   | (9,002,745  | )
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Balance, December 31, 2002              | -                     |   |                    | -      |                      | 115,620,517 |   |         | 115,621 |   | 378,580   |  |   | (1,907,612  | ) |   | 113,445,516 |   |   | 35,119 |  |   | (123,592,106 | ) |   | (11,903,462 | )
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Issuance of Series X preferred          |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|shares (Note 9)                         | 122,175               |   |                    | 122    |                      | -           |   |         | -       |   | -         |  |   | -           |   |   | 1,613,378   |   |   | -      |  |   | -            |   |   | 1,613,500   |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Exercise of stock options (Note 8)      | -                     |   |                    | -      |                      | 10,294,000  |   |         | 10,294  |   | -         |  |   | -           |   |   | 567,026     |   |   | -      |  |   | -            |   |   | 577,320     |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Private placement of common stock       | -                     |   |                    | -      |                      | 12,511,820  |   |         | 12,512  |   | -         |  |   | -           |   |   | 654,158     |   |   | -      |  |   | -            |   |   | 666,670     |  
|(Note 9)                                |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Issuance of stock for services (Note 9) | -                     |   |                    | -      |                      | 4,845,412   |   |         | 4,845   |   | -         |  |   | -           |   |   | 597,245     |   |   | -      |  |   | -            |   |   | 602,090     |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Issuance of stock for settlement of     |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|lawsuits (Notes 7 and 9)                | -                     |   |                    | -      |                      | 3,000,000   |   |         | 3,000   |   | -         |  |   | -           |   |   | 1,047,000   |   |   | -      |  |   | -            |   |   | 1,050,000   |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Conversion of preferred Series X        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|shares (Note 9)                         | (25,000               | ) |                    | (25    | )                    | 2,500,000   |   |         | 2,500   |   | -         |  |   | -           |   |   | (2,475      | ) |   | -      |  |   | -            |   |   | -           |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Issuance of stock options to non-       |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|employees for services (Note 8)         | -                     |   |                    | -      |                      | -           |   |         | -       |   | -         |  |   | -           |   |   | 1,130,526   |   |   | -      |  |   | -            |   |   | 1,130,526   |  
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Liability for settlement of equity      |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|instruments  (Note 9())                 | -                     |   |                    | -      |                      | -           |   |         | -       |   | -         |  |   | -           |   |   | (1,818,574  | ) |   | -      |  |   | -            |   |   | (1,818,574  | )
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Net loss for the year                   | -                     |   |                    | -      |                      | -           |   |         | -       |   | -         |  |   | -           |   |   | -           |   |   | -      |  |   | (6,884717    | ) |   | (6,884,717  | )
|                                        |                       |   |                    |        |                      |             |   |         |         |   |           |  |   |             |   |   |             |   |   |        |  |   |              |   |   |             |  
|Balance,
      December 31, 2003        | 97,175                |   | $                  | 97     |                      | 148,771,749 |   | $       | 148,772 |   | 378,580   |  | $ | (1,907,612  | ) | $ | 117,233,800 |   | $ | 35,119 |  | $ | (130,476,823 | ) | $ | (14,966,647 | )

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

F-6

---

|                                                                                               
|-----------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Consolidated Statements of Cash
      Flows
|                                                                                               

|For
      the years ended December 31                                       |   | 2003       |   |   | 2002       |  
|--------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                                                            |   |            |   |   |            |  
|Cash provided by (used in)                                                  |   |            |   |   |            |  
|Operating activities                                                        |   |            |   |   |            |  
|Net
      loss for the year                                                 | $ | (6,884,717 | ) | $ | (9,002,745 | )
|Adjustments
      to reconcile net loss to net                              |   |            |   |   |            |  
|cash
      used in operating activities:                                    |   |            |   |   |            |  
|Amortization
      of deferred licensing fees                               |   | (14,050    | ) |   | -          |  
|Depreciation
      and amortization                                         |   | 266,051    |   |   | 265,857    |  
|License
      impairment provision                                          |   | 624,000    |   |   | -          |  
|Stock
      option compensation (Note 8)                                    |   | 1,130,526  |   |   | 1,470,930  |  
|Stock
      issued for services (Note 9)                                    |   | 602,090    |   |   | 1,065,530  |  
|Stock
      issued for settlement of lawsuit (Note 9)                       |   | 1,050,000  |   |   | -          |  
|Issuance
      of note payable for consulting fees (Note 5)                 |   | 270,886    |   |   | -          |  
|Liability
      in connection with settlement of equity instrument          |   | 539,530    |   |   | -          |  
|Increase
      in operating assets                                          |   |            |   |   |            |  
|Prepaid
      expenses and other current assets                             |   | (14,646    | ) |   | (14,194    | )
|Increase
      (decrease) in operating liabilities                          |   |            |   |   |            |  
|Accounts
      payable                                                      |   | 498,650    |   |   | 690,772    |  
|Accrued
      liabilities and provision for lawsuit settlements             |   | (28,330    | ) |   | 2,472,159  |  
|Deferred
      licensing fees                                               |   | 250,000    |   |   | -          |  
|                                                                            |   |            |   |   |            |  
|                                                                            |   | (1,710,010 | ) |   | (3,051,691 | )
|                                                                            |   |            |   |   |            |  
|Investing activity                                                          |   |            |   |   |            |  
|Purchase
      of property and equipment                                    |   | -          |   |   | (16,225    | )
|                                                                            |   |            |   |   |            |  
|Financing activities                                                        |   |            |   |   |            |  
|Net
      proceeds from loans payable and short-term                        |   |            |   |   |            |  
|borrowings                                                                  |   | 3,011      |   |   | 169,055    |  
|Loans
      payable                                                         |   | 327,637    |   |   | -          |  
|Issuance
      of common stock and stock subscriptions                      |   | 666,670    |   |   | 2,594,151  |  
|Proceeds
      from exercise of stock options                               |   | 577,320    |   |   | 555,714    |  
|Purchase
      of treasury stock                                            |   | -          |   |   | (133,744   | )
|                                                                            |   |            |   |   |            |  
|                                                                            |   | 1,574,638  |   |   | 3,185,176  |  
|                                                                            |   |            |   |   |            |  
|Net increase (decrease) in cash                                             |   | (135,372   | ) |   | 117,260    |  
|                                                                            |   |            |   |   |            |  
|Cash,beginning of year                                                      |   | 137,517    |   |   | 20,257     |  
|                                                                            |   |            |   |   |            |  
|Cash,end of year                                                            | $ | 2,145      |   | $ | 137,517    |  
|                                                                            |   |            |   |   |            |  
|Supplementary disclosure of cash flow information                           |   |            |   |   |            |  
|Cash
      paid during the year                                             |   |            |   |   |            |  
|Interest                                                                    | $ | -          |   | $ | -          |  
|Income
      taxes                                                          | $ | -          |   | $ | 4,000      |  
|Supplementary disclosure of non-cash                                        |   |            |   |   |            |  
|investing and financing
      activities:                                   |   |            |   |   |            |  
|Accrued
      liability for repurchase of shares                            | $ | -          |   | $ | 18,334     |  
|Liability
      for settlement of equity instruments (Note 9)               | $ | 2,715,322  |   | $ | 357,219    |  
|Preferred
      stock issued on settlement of accrued liabilities (Note 9)  | $ | 1,613,500  |   | $ | -          |  
|Reduction
      in accounts payable as partial settlement of licensing fees | $ | 150,000    |   | $ | -          |  

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

F-7

---

|                                                                                              
|----------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Summary of Significant Accounting Policies
|                                                                                              
|December
      31, 2003 and 2002                                                              

|Nature of Business            |  | During 2003, Turbodyne Technologies, Inc., a Nevada
        corporation, and its subsidiaries (the Company) suspended business operations
        due to a lack of financing. Subsequent to December 31, 2003 operations
        recommenced (see Note 13).
      Prior to the suspension of operations, the Company
        engineered, developed and marketed products designed to enhance performance
        and reduce emissions of internal combustion engines. The Company has not
        generated significant revenues from its operations that develop engine
        enhancement products. The Company anticipates that future revenue from
        operations will come from license and royalty fees, not product sales.
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|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) (Note 11). 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 
        Transportation equipment               
        - 5 years 
        Furniture and fixtures                        -
        5 to 10 years 
        Leasehold improvements                 
        - length of lease, not to exceed economic life                                                                                                                                                                                                                                             
|                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|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.                                                                                                                                                                                                                                                                                                                                                                                                                        

F-8

---

|                                                                                              
|----------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Summary of Significant Accounting Policies
|                                                                                              
|December
      31, 2003 and 2002                                                              

|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 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Recognition of Revenue              |  | Prior to the suspension of operations, the Company
        recognized revenue upon shipment of product. Since the recommencement
        of operations, the Company recognizes license fees over the term of the
        license agreement and royalty income as the product is sold and income
        earned. During the year ended December 31, 2003, $400,000 in license fees
        was deferred and are being amortized over 18 years. As a result, $14,050
        of licensing fees were recognized as income in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Earnings (Loss) Per Share           |  | Loss per share is computed in accordance with SFAS
        No. 128, "Earnings Per Share". Basic loss per share is calculated by dividing
        the net 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.
        Basic and diluted loss per share are the same for the years presented.
      For the years ended December 31, 2003 and 2002, 97,175
        (2002  Nil) preferred shares convertible into 9,717,500 shares of
        common stock, options and warrants to purchase 25,814,475 and 36,557,751
        shares of common stock were outstanding during the years but were not
        included in the computation of diluted earnings per share because the
        options would have an antidilutive effect on net 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            |  | The Company has adopted SFAS No. 123, Accounting
        for Stock-Based Compensation and has elected to continue to measure
        compensation cost for employees under Accounting Principles Board (APB)
        Opinion No. 25, including interpretations provided in Interpretation (FIN)
        No. 44. Generally, under APB No. 25 compensation expense is recognized
        for stock options granted to employees at prices below the market price
        of the underlying common stock on the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-9

---

|                                                                                              
|----------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Summary of Significant Accounting Policies
|                                                                                              
|December
      31, 2003 and 2002                                                              

|Stock-Based Compensation -Continued |  | In accordance with FIN 44, a change in the status of
        the optionee creates a new measurement date and compensation costs shall
        be measured under the appropriate method of accounting as if the outstanding
        award was granted on that date. However, no adjustment is made to compensation
        expense recognized prior to the change in status of the optionee when
        there is no modification to the terms of the options or awards.
      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. The value of stock options granted to non-employees is recognized
        in these financial statements as compensation expense under SFAS No. 123
        (See Note 8) using the Black-Scholes option pricing model.
      The Company has not adopted the fair value method
        of accounting for stock-based compensation awarded to employees. Consequently,
        related pro-forma information as described in SFAS No. 123 has been disclosed,
        as follows:
|----------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |                                             |   | Years Ended       |  
| |  | ------------------------------------------- | - | ----------------- | -
| |  |                                             |   | December
      31 |  
| |  |                                             |   | 2003              |  
| |  |                                             |   |                   |  
| |  | Net loss, as reported                       | $ | (6,884,717        | )
| |  | Deduct: Stock-based employee                |   |                   |  
| |  | compensation expense
      determined       |   |                   |  
| |  | under fair-value based method for
      all |   |                   |  
| |  | awards not included
      in net loss       |   | (89,900           | )
| |  |                                             |   |                   |  
| |  | Pro-forma net loss                          | $ | (6,974,617        | )
| |  | Loss per share:                             |   |                   |  
| |  | Basic and diluted
       as reported       | $ | (0.05             | )
| |  | Basic and diluted  pro-forma               | $ | (0.05             | )

|Research and Development |  | Research and development costs related to present and
        future products are charged to operations in the year incurred.                                                                                                                                                                                                                                                                                                                                                                       
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|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.

F-10

---

|                                                                                              
|----------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Summary of Significant Accounting Policies
|                                                                                              
|December
      31, 2003 and 2002                                                              

|Foreign Currency Translation |  | The Company translates the financial statements of
        its foreign subsidiaries in accordance with the requirements of SFAS No.
        52, Foreign Currency Translation. Accordingly, assets and
        liabilities of the Company denominated in foreign currencies have been
        translated at the exchange rate in effect at the year end date while revenues
        and expenses are translated at the average exchange rate for the period.
        Gains or losses on translation are deferred as a separate component of
        capital deficit.                                                                                                                                                                                                                                                                                                   
|---------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|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 years ended December 31, 2003 and 2002.
|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Legal Fees                   |  | The Company expenses legal fees in connection with
        litigation as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-11

---

|                                                                                              
|----------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Summary of Significant Accounting Policies
|                                                                                              
|December
      31, 2003 and 2002                                                              

|New Accounting Pronouncements |  | In January 2003, the Financial Accounting Standards
        Board issued FIN No. 46, "Consolidation of Variable Interest Entities,
        an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
        to provide guidance on the identification of entities for which control
        is achieved through means other than voting rights (variable interest
        entities or "VIEs") and how to determine when and which business enterprise
        should consolidate the VIE. This new model for consolidation applies to
        an entity for which either: (1) the equity investors do not have a controlling
        financial interest; or (2) the equity investment at risk is insufficient
        to finance that entitys activities without receiving additional
        subordinated financial support from other parties. In addition, FIN No.
        46 requires that both the primary beneficiary and all other enterprises
        with a significant variable interest in a VIE make additional disclosures.
        As amended in December 2003, the effective dates of FIN No. 46 for public
        entities that are small business issuers, as defined ("SBIs"), are as
        follows: (a) For interests in special-purpose entities: periods ended
        after December 15, 2003; (b) For all VIEs created before January 31, 2003:
        periods ending after December 15, 2004; and (c) For all VIEs created after
        January 31, 2003, FIN 46 is applicable immediately. The December 2003
        amendment of FIN No. 46 also includes transition provisions that govern
        how an SBI which previously adopted the pronouncement (as it was originally
        issued) must account for consolidated VIEs.
      The implementation of this new standard is not
        expected to have a material effect on the Companys financial statements.
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

---

|                                                                                              
|----------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Summary of Significant Accounting Policies
|                                                                                              
|December
      31, 2003 and 2002                                                              

|New Accounting Pronouncements -
      Continued |  | On May 15, 2003, FASB issued SFAS No. 150, "Accounting
        for Certain Financial Instruments with Characteristics of both Liabilities
        and Equity". SFAS No. 150 changes the accounting for certain financial
        instruments that, under previous guidance, could be classified as equity
        or "mezzanine" equity, by now requiring those instruments to be classified
        as liabilities (or assets in some circumstances) on the balance sheet.
        Further, SFAS No. 150 requires disclosure regarding the terms of those
        instruments and settlement alternatives. SFAS No. 150 affects an entity's
        classification of the following freestanding instruments: a) Mandatorily
        redeemable instruments b) Financial instruments to repurchase an entity's
        own equity instruments c) Financial instruments embodying obligations
        that the issuer must or could choose to settle by issuing a variable number
        of its shares or other equity instruments based solely on (i) a fixed
        monetary amount known at inception or (ii) something other than changes
        in its own equity instruments d) SFAS No. 150 does not apply to features
        embedded in a financial instrument that is not a derivative in its entirety.
        The guidance in SFAS No. 150 is generally effective for all financial
        instruments entered into or modified after May 31, 2003, and is otherwise
        effective at the beginning of the first interim period beginning after
        June 15, 2003.
      The implementation of this new standard did
        not have a material effect on the Companys financial statements
|----------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Reclassification                                |  | Certain comparative amounts have been reclassified
        to conform with the current year's presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-13

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|1. | Ability to Continue as a Going Concern
      The accompanying consolidated financial statements have
        been prepared assuming that the Company will continue as a going concern.
        The Company has incurred significant losses in recent years, has an accumulated
        deficit of $130,476,823 and a total capital deficit of $14,966,647 at
        December 31, 2003. 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.
      The Company's operations have been financed principally
        through a combination of private and public sales of equity and debt securities.
        There is no guarantee that the Company will be able to continue to finance
        operations by this method.
      The Company continues to examine its operations and
        processes for further methods of cutting costs and gaining efficiencies.
        However, there is no assurance that the cost reductions will be realized
        in the full amount. The Company is examining alternatives for financing
        and fulfilling its working capital needs based on its working capital
        projections. 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. Subsequent to December 31,
        2003, the Company settled its litigation with Honeywell which provided
        working capital to the Company (Note 13). 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.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|2. | Property and Equipment
      Property and equipment, at cost, is summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |                                                  |   | 2003      |  |   | 2002      | 
| | ------------------------------------------------ | - | --------- |  | - | --------- | 
| |                                                  |   |           |  |   |           | 
| | Machinery and equipment                          | $ | 2,068,014 |  | $ | 2,068,014 | 
| | Transportation equipment                         |   | 135,991   |  |   | 135,991   | 
| | Furniture and fixtures                           |   | 165,723   |  |   | 165,723   | 
| | Leasehold improvements                           |   | 116,304   |  |   | 116,304   | 
| |                                                  |   | 2,486,032 |  |   | 2,486,032 | 
| | Less: accumulated depreciation, amortization and |   |           |  |   |           | 
| | provision
      for impairment of assets         |   | 2,375,165 |  |   | 2,317,114 | 
| |                                                  |   |           |  |   |           | 
| | Net property and equipment                       | $ | 110,867   |  | $ | 168,918   | 

F-14

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|**3.** | Term Debts
      Term debts at December 31, 2003 and 2002 consist of the following:
|------ | -----------------------------------------------------------------------------------

| |                           |   | 2003   |  |   | 2002   | 
| | ------------------------- | - | ------ |  | - | ------ | 
| |                           |   |        |  |   |        | 
| | Notes payable to officers | $ | -      |  | $ | 15,500 | 
| | Other term debts          |   | 76,082 |  |   | 57,571 | 
| | Total term debts          | $ | 76,082 |  | $ | 73,071 | 

|   | The Company was in arrears on capital lease obligations included in
          other term debts, accordingly, amounts owing were classified as current.
          On January 16, 2004 the Company settled the other term debts with the
          return of the leased assets.
        Notes payable to officers were unsecured, due on demand and non-interest
          bearing.                                                                 
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4. | Accounts Payable
        Included in accounts payable was $361,485 (2002 - $224,285) in amounts
          collateralized by certain assets, including the proceeds in litigation
          settlements and bearing interest at 7% per annum. Interest charges were
          due annually on December 10 and the principal was due no later than
          December 10, 2005. These amounts were repaid subsequent to December
          31, 2003.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|5. | Loans Payable                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                           |   | 2003    |  |   | 2002    | 
| | --------------------------------------------------------- | - | ------- |  | - | ------- | 
| |                                                           |   |         |  |   |         | 
| | Promissory notes payable to stockholders and other        |   |         |  |   |         | 
| | parties, unsecured, bearing interest at 5% per annum, due |   |         |  |   |         | 
| | on the later of August 14, 2004 or when settlement of     |   |         |  |   |         | 
| | litigation with Honeywell is reached (Note 13). *         | $ | 147,927 |  | $ | -       | 
| |                                                           |   |         |  |   |         | 
| | Note payable issued for settlement of consulting fees,    |   |         |  |   |         | 
| | unsecured, bearing interest at 7% per annum and payable   |   |         |  |   |         | 
| | on demand                                                 |   | 270,886 |  |   | -       | 
| |                                                           |   |         |  |   |         | 
| | Unsecured, non-interest bearing loan payable, due on      |   |         |  |   |         | 
| | demand from stockholders and other parties                |   | 348,765 |  |   | 169,055 | 
| |                                                           | $ | 767,578 |  | $ | 169,055 | 
| |                                                           |   |         |  |   |         | 
| |                                                           |   |         |  |   |         | 

| | * | The promissory notes were also subject to bonus payments
        based on the settlement of the Honeywell litigation totaling approximately
        $115,000, included in accrued liabilities and general and administrative
        expenses.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|**6.** | Income Taxes
      Income tax expense is comprised of the following for the years ended
        December 31, 2003 and 2002:
|------ | ---------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                                                                                                                                                    |   | 2003 |  |   | 2002  | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---- |  | - | ----- | 
| | Current                                                                                                                                                                                                                                            |   |      |  |   |       | 
| | State                                                                                                                                                                                                                                              | $ | -    |  | $ | 4,000 | 
| |                                                                                                                                                                                                                                                   
| | Total income tax expense for the years
        ended December 31, 2003 and 2002 differed from the amounts computed by
        applying the statutory Federal income tax rate to earnings before income
        taxes as a result of the following:

| |                                                                                                                                                                  |   | 2003       |   |   | 2002       |  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
| |                                                                                                                                                                  |   |            |   |   |            |  
| | Computed expected income tax benefit                                                                                                                           | $ | (2,753,887 | ) | $ | (3,601,097 | )
| | Non-deductible stock option compensation                                                                                                                         |   | 452,210    |   |   | 588,372    |  
| | Non-deductible expenses                                                                                                                                          |   | 293,612    |   |   | 185,507    |  
| | Effect of elimination of dissolved subsidiary's loss                                                                                                             |   |            |   |   |            |  
| | carryforward                                                                                                                                                     |   | -          |   |   | 6,225,437  |  
| | Change in valuation allowance                                                                                                                                    |   | 2,008,065  |   |   | (3,394,219 | )
| |                                                                                                                                                                  | $ | -          |   | $ | 4,000      |  
| |                                                                                                                                                                 
| | The tax effects of temporary differences
        that give rise to the deferred tax assets and liabilities at December
        31, 2003 and 2002 are as follows:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 2003        |   |   | 2002        |  
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ----------- | - | - | ----------- | -
| | Deferred tax assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |             |   |   |             |  
| | Accrued liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | $ | 1,227,304   |   | $ | 2,024,605   |  
| | Reserve
      for lawsuit settlements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 2,794,776   |   |   | 1,723,964   |  
| | Property and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 216,958     |   |   | 254,138     |  
| | Alternative
      minimum tax credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 55,000      |   |   | 55,000      |  
| | Net operating loss
      carryover                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 29,076,488  |   |   | 27,304,754  |  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |             |   |   |             |  
| | Gross
      deferred tax assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 33,370,526  |   |   | 31,362,461  |  
| | Less valuation allowance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | (33,370,526 | ) |   | (31,362,461 | )
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |             |   |   |             |  
| | 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, 2003 or 2002. Accordingly, a valuation allowance has been provided
        for the total net deferred tax assets.

F-16

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|6. | Income Taxes - Continued
      At December 31, 2003, the Company had net operating
        loss carryforwards of approximately $72,000,000 (2002 - $68,000,000) for
        US income tax purposes, which if not used, will expire between the years
        2010 and 2024. 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.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|7. | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Year ending December 31                                                                                                                                                                                                                                                                                                                  |   |         | 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 2004                                                                                                                                                                                                                                                                                                                                     | $ | 346,080 | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 2005                                                                                                                                                                                                                                                                                                                                     |   | 28,840  | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Total future minimum lease payments                                                                                                                                                                                                                                                                                                      | $ | 374,920 | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                          |   |         | 
| | b) | Litigation
      In March 2000, TST, Inc. (TST), a vendor
        to a subsidiary of Pacific Baja (Note 11) 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 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;                                                                                                                                                                  

F-17

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|7. | Commitments and Contingencies
         Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|8. | Stock Options
      On June 3, 2002, the Company established its 2002 stock
        option plan (the 2002 Plan). Under the 2002 Plan, the Company
        may grant options to its directors, officers, employees and consultants
        for up to 6,000,000 shares of common stock. The options maximum
        term is ten years. The Board of Directors will determine the terms of
        any options or other rights granted under the 2002 Plan, including the
        grant date of any option, the exercise price and the term, which in any
        event shall not exceed ten years. The maximum number of options to be
        granted under the 2002 Plan to any participant is 180,000 per year. As
        of December 31, 2003 and 2002, the number of unoptioned shares available
        for granting of options under the plan was Nil and 2,155,461, respectively.

F-18

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|**8.** | Stock Options - Continued
        On December 6, 2002, the Company established the 2002 Nevada stock
          incentive plan (the 2002 Nevada Plan). Under the 2002 Nevada
          Plan, the Company may grant common stock to its directors, officers,
          employees and consultants for up to 7,500,000 shares. The maximum term
          of the 2002 Nevada Plan is ten years. The Board of Directors will determine
          the terms and matters relating to any awards under the 2002 Nevada Plan
          including the type of awards 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 the grant. As of December 31, 2003 and
          2002, the number of unoptioned shares available for granting of options
          under the plan was Nil and 7,500,000, respectively.
        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, 2003 the number of unoptioned shares available for granting
          of options under the plan was 9,786,795.
        All options granted under the above plans are fully vested and exercisable
          immediately.
        The following summarizes information relating to stock options during
          2003 and 2002:
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                       | 2003          |  
| | ------------------------------------- | ------------- | -
| |                                       | Non-employees |  
| |                                       |               |  
| |                                       |               |  
| |                                       |               |  
| |                                       | Options       |  
| |                                       |               |  
| | Outstanding at beginning of year      | 1,131,715     |  
| | Granted                               | 13,345,666    |  
| | Exercised                             | (10,294,000   | )
| | Expired                               | (2,051,715    | )
| | Options outstanding and               |               |  
| | exercisable at end of year            | 2,131,666     |  
| | Weighted average fair value of        |               |  
| | options granted during
      the year | -             |  

F-19

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|8. | Stock Options  Continued
|-- | -------------------------

| |                                                                                      | 2002          |  
| | ------------------------------------------------------------------------------------ | ------------- | -
| |                                                                                      | Non-employees |  
| |                                                                                      |               |  
| |                                                                                      |               |  
| |                                                                                      |               |  
| |                                                                                      | Options       |  
| | Outstanding at beginning of year                                                     | 1,913,415     |  
| | Granted                                                                              | 5,857,143     |  
| | Exercised                                                                            | (5,377,143    | )
| | Expired                                                                              | (100,000      | )
| | Outstanding at end of year                                                           | 2,293,415     |  
| | Change of status of optionee                                                         | (1,161,700    | )
| | Options outstanding and                                                              |               |  
| | exercisable at end of year                                                           | 1,131,715     |  
| | Weighted average fair value of                                                       |               |  
| | options granted during the year                                                      | -             |  
| |                                                                                     
| | At December 31, 2003, the following is a summary of stock
      options outstanding:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                      |  |           |  | Weighted-          |  |          | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------- |  | --------- |  | ------------------ |  | -------- | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                      |  |           |  | Average            |  | Weighted | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                      |  |           |  | Remaining          |  | Average  | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                      |  |           |  | Contractual        |  | Exercise | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Exercise
      Price |  | Number    |  | Life
      (Years) |  | Price    | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                      |  |           |  |                    |  |          | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 0.04  0.07          |  | 1,705,000 |  | 2.6                |  | 0.05     | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 0.09  0.22          |  | 1,724,666 |  | 2.8                |  | 0.17     | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 0.30  0.35          |  | 750,000   |  | 1.3                |  | 0.34     | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                      |  |           |  |                    |  |          | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                      |  | 4,179,666 |  | 2.5                |  | 0.15     | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Issuance of Stock Options to Non-employees for Services
      The Company has recorded in general and administrative
        expenses, $1,130,526 and $1,470,930 of compensation expense in 2003 and
        2002, respectively, relating to stock options issued to non-employees
        for services rendered during those years.
      The per share weighted average fair value of stock options
        granted during 2003 and 2002 was $0.08 and $0.25, respectively, on the
        date of grant using the Black-Scholes option-pricing model with the following
        weighted average assumptions: 2003 and 2002 expected dividend yield 0%;
        expected volatility of 139% in 2003 (2002  100%) 2003 risk-free
        interest rate of 2.56% (2002 - between 2.36% and 4.18%) and expected life
        equal to 1.89 years (2002  1 to 3 years).

F-20

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|8. | Stock Options  Continued
      Issuance of Stock Options to Employees for Services
      The Company applies APB Opinion 25 and related interpretations
        in accounting for stock options granted to employees. Generally, under
        APB No. 25, compensation expense is only recognized for stock options
        granted to employees at prices below the market price of the underlying
        common stock on the date of grant. Accordingly, no compensation costs
        have been recognized in connection with options granted to employees in
        2003 and 2002. Had compensation cost been determined based upon the fair
        value of the stock options at the grant date consistent with the fair
        value method prescribed in SFAS Statement 123, the Company's net loss
        and earnings per share would have been reduced to the pro-forma amounts
        indicated in the summary of significant accounting policies in connection
        with options granted to employees.
      The per share weighted average fair value of stock options
        granted to employees during 2003 and 2002 was $0.06 and $0.27, respectively,
        calculated on the date of grant using the Black-Scholes option pricing
        model with the following weighted average assumptions: 2003 and 2002 expected
        dividend yield 0%; expected volatility of 152% in 2003 (2002  190%),
        risk-free interest rate of 1.68% (2002  2.36% and 4.18%); and an
        expected life of 1 year (2002  3 years).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|9. | Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-21

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|**9.** | Share Capital 
        Continued
|------ | ---------------------------------
|       |                                  
|       | d)                               
|       |                                  
|       | e)                               
|       |                                  
|       | f)                               
|       |                                  
|       | g)                               

F-22

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|**9.** | Share Capital  Continued
|------ | -------------------------
|       |                          
|       |                          

| |  |                                                                                                                |             |   |   | Weighted | 
| |  | -------------------------------------------------------------------------------------------------------------- | ----------- | - | - | -------- | 
| |  |                                                                                                                |             |   |   | Average  | 
| |  |                                                                                                                |             |   |   | Exercise | 
| |  |                                                                                                                | Warrants    |   |   | Price    | 
| |  | Outstanding at January 1, 2002                                                                                 | 18,046,498  |   | $ | 0.60     | 
| |  | Issued                                                                                                         | 15,310,713  |   |   | 0.35     | 
| |  | Expired                                                                                                        | (222,875    | ) |   | 1.49     | 
| |  | Outstanding at December 31, 2002                                                                               | 33,134,336  |   |   | 0.48     | 
| |  | Issued                                                                                                         | 1,809,237   |   |   | 0.15     | 
| |  | Expired                                                                                                        | (13,308,764 | ) |   | 0.66     | 
| |  | Outstanding at December 31, 2003                                                                               | 21,634,809  |   | $ | 0.34     | 
| |  |                                                                                                                |             |   |   |          | 
| |  | At December 31, 2003, 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    | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |            |  |                    |  |          | 
| |    | 0.12  0.15                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 1,500,000  |  | 2.27               |  | 0.13     | 
| |    | 0.20  0.22                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 5,645,183  |  | 1.59               |  | 0.21     | 
| |    | 0.24  0.26                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 1,793,363  |  | 1.53               |  | 0.25     | 
| |    | 0.30  0.38                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 3,499,134  |  | 0.91               |  | 0.31     | 
| |    | 0.40  0.48                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 6,282,462  |  | 0.65               |  | 0.41     | 
| |    | 0.50  0.56                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 1,223,722  |  | 0.30               |  | 0.53     | 
| |    | 0.60  1.74                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 1,690,945  |  | 1.18               |  | 0.69     | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |            |  |                    |  |          | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 21,634,809 |  | 1.14               |  | 0.34     | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | h) | Shares in Escrow
      Of the Company's issued and outstanding shares, 4,150,000
        are held in escrow to be released in accordance with a formula based on
        cumulative cash flow of the Company. (See Note 9(e)).                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | i) | Share Buy-Back
        Plan
      On September 17, 1998, the Company announced that its
        Board of Directors authorized the Company to repurchase up to 3,500,000
        of its shares of common stock. The actual number of shares repurchased,
        and the timing of the purchases, has been based on the stock price, general
        conditions and other factors. The Company has repurchased 378,580 shares
        for a total of $1,755,534 at December 31, 2003 and 2002.

F-23

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|**10.** | Related Party Transactions
      The Company made payments to related parties not disclosed elsewhere
        in these financial statements, as follows:
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                      |         | 2003 |   |         | 2002 | 
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------- | ---- | - | ------- | ---- | 
|        | Rent                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | $                                                                                                                                                                                    | 360,000 |      | $ | 370,000 |     
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                     
|        | 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.
      Pursuant to the Bankruptcy court order, the assets were
        sold to the highest bidder at an auction on December 23, 1999, for approximately
        $14.4 million. There were no proceeds available for distribution to unsecured
        creditors, after the payment of Pacific Baja's secured debt. The Company
        was owed approximately $6 million. There were no remaining assets and
        liabilities of Pacific Baja as of December 31, 1999.
      In connection with the bankruptcy proceedings, which
        are still pending, the creditors' committee was investigating the Company
        and some of its former directors and officers as to whether preferential
        transfers were made to the Company and its affiliates before the Chapter
        11 case began (see Note 7(b)).
      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 totalling approximately $7,000,000;
        and                                           

F-24

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|11. | Pacific Baja Bankruptcy - Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | iv)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Company has filed a response
        denying liability. The Company intends to vigorously contest and defend
        any claim by the Trust that would exceed its claims as a creditor of Pacific
        Baja and that would be satisfied other than by a set-off of its claims
        against Pacific Baja and to pursue settlement of these claims through
        its insurers. The outcome of this litigation is not presently determinable
        and no amounts have been included in this regard in the reserve for lawsuit
        settlements.
      In May 2000, Heartland Financial Corporation (Heartland),
        a firm that provided investment banking services to Pacific Baja, filed
        a complaint for arbitration against the Company seeking approximately
        $600,000 representing a success fee it claims it was entitled to for investment
        banking services provided to Pacific Baja based on a letter agreement
        between Heartland, the Company and Pacific Baja. After the letter agreement
        was signed, Pacific Baja filed a Chapter 11 petition in bankruptcy. At
        the conclusion of the bankruptcy proceedings, the bankruptcy court awarded
        Heartland a portion of its fees. Heartland then sought the balance of
        the fees and obtained judgement against the Company, which was included
        in the legal liability reserve. Subsequent to December 31, 2003, the Company
        paid $506,408 in complete settlement of these claims.                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|12. | Joint Agreement
      In 1999, the Company entered into joint development
        and licensing agreements which were subsequently amended with Honeywell
        Turbocharging Systems (Honeywell), a division of AlliedSignal
        Inc. (Honeywell). Under its agreements with Honeywell, the
        Company assigned to Honeywell its patent and trademark portfolio (including
        both the Dynacharger and the Turbopac) for $6.8 million. This
        amount was used in settlement of a judgment. In addition, under these
        agreements, the Company and Honeywell were to share the development costs
        of the Dynacharger and the Turbopac, the Company 40% and Honeywell
        60%. The Company was to retain the sole worldwide rights to manufacture,
        market and sell all motors, generators, electronic controls and light
        metals for the Dynacharger and Turbopac, and Honeywell was
        to hold the sole worldwide rights to manufacture, market and sell the
        Dynacharger and Turbopac product lines. The Company was to
        receive from Honeywell royalties of 3.7% of the net sales of the Dynacharger
        and Turbopac product lines.
      The Company commenced an action for damages against
        Honeywell in the United States District Court, Central District of California
        in August 2002 alleging, among other matters, that Honeywells conduct
        constituted a restraint of trade and the delay of the commercialization
        of the Companys technology. The Company was seeking unspecified
        damages and costs. This litigation was withdrawn pending the outcome of
        the arbitration proceedings discussed below.

F-25

---

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Turbodyne Technologies, Inc.
      and Subsidiaries Notes to the Consolidated Financial
      Statements
|                                                                                                        
|December
      31, 2003 and 2002                                                                        

|12. | Joint Agreement - Continued
      Prior to the Company commencing the above legal proceedings,
        Honeywell initiated arbitration proceedings under the joint development
        and licensing agreements. Honeywell was seeking unspecified damages and
        costs and termination of the license agreement and the joint development
        agreement based on their allegations that the Company breached the agreements
        and was unwilling and unable to perform future obligations under the agreements.
      Subsequent to December 31, 2003 the Company entered into
        a settlement agreement and general release with Honeywell (Note 13)                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|13. | Subsequent Event
      Subsequent to year end, the Company entered into a settlement
        agreement and general release (the "Settlement Agreement") with Honeywell
        whereby Honeywell agreed and paid $6,375,000 (net of legal fees to the
        Company).
      In connection with the Settlement Agreement, the Company
        and Honeywell agreed to terminate the agreements referred to in Note 12,
        settled on the ownership of certain patent interests and resolved the
        disputes that were subject to the arbitration proceedings referred to
        in Note 12.
      The receipt of the above-noted funds enabled the Company
        to commence settlement of certain amounts owed to creditors (Notes 4,
        5 and 11), to pay employee and director bonuses of $1,290,000 and to resume
        its business operations.

F-26

---

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

None.

ITEM 8A.         CONTROLS
  AND PROCEDURES.

As required by Rule 13a-15 under the Exchange Act, we carried
  out an evaluation of the effectiveness of the design and operation of our disclosure
  controls and procedures as of December 31, 2003, being the date of our fiscal
  year end covered by this Annual Report. This evaluation was carried out under
  the supervision and with the participation of our Chief Executive Officer and
  Chief Financial Officer, Mr. Andrew Martyn-Smith. Based upon that evaluation,
  our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
  controls and procedures are effective in timely alerting management to material
  information relating to us required to be included in our periodic SEC filings.
  There have been no significant changes in our internal controls or in other
  factors that could significantly affect internal controls subsequent to the
  date we carried out our evaluation.

Disclosure controls and procedures are controls and other
  procedures that are designed to ensure that information required to be disclosed
  in our reports filed or submitted under the Exchange Act is recorded, processed,
  summarized and reported, within the time periods specified in the SECs
  rules and forms. Disclosure controls and procedures include, without limitation,
  controls and procedures designed to ensure that information required to be disclosed
  in our reports filed under the Exchange Act is accumulated and communicated
  to management, including our Chief Executive Officer and Chief Financial Officer,
  to allow timely decisions regarding required disclosure.

During our fiscal year ended December 31, 2003, there were
  no changes in our internal control over financial reporting that have materially
  affected, or are reasonably likely to affect, our internal control over financial
  reporting.

The term internal control over financial reporting
  is defined as a process designed by, or under the supervision of, the registrant's
  principal executive and principal financial officers, or persons performing
  similar functions, and effected by the registrant's board of directors, management
  and other personnel, to provide reasonable assurance regarding the reliability
  of financial reporting and the preparation of financial statements for external
  purposes in accordance with generally accepted accounting principles and includes
  those policies and procedures that:

| | (1) | Pertain to the maintenance of records
        that in reasonable detail accurately and fairly reflect the transactions
        and dispositions of the assets of the registrant;                                                                                                                                                                                                 
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                  
| | (2) | Provide reasonable assurance that transactions
        are recorded as necessary to permit preparation of financial statements
        in accordance with generally accepted accounting principles, and that
        receipts and expenditures of the registrant are being made only in accordance
        with authorizations of management and directors of the registrant; and
| |     |                                                                                                                                                                                                                                                                                                                                                                                  
| | (3) | Provide reasonable assurance regarding
        prevention or timely detection of unauthorized acquisition, use or disposition
        of the registrant's assets that could have a material effect on the financial
        statements.                                                                                                                                          

29 of 43

---

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 May 5, 2004 are as follows:

DIRECTORS:

|Name of Director    | Age
|------------------- | ---
|Eugene OHagan      | 65 
|Andrew Martyn-Smith | 54 

OFFICERS:

|Name of Officer     | Age | Office Held                                                                    
|------------------- | --- | -------------------------------------------------------------------------------
|Andrew Martyn-Smith | 54  | President, Chief Executive Officer, Chief Financial Officer
      and Treasurer
|Marsha Chandler     | 53  | Secretary                                                                      
|David Willett       | 38  | Chief Operating Officer                                                        

Set forth below is a brief description of the background and
  business experience of each of our executive officers and directors for the
  past five years:

Mr. Eugene OHagan,has been a member of our board
  of directors since August 19, 2001. Mr. OHagans principal employment
  has been in the business of real estate brokerage and investments since 1970.

Mr. Andrew Martyn-Smithhas been a member of our board
  of directors since April 13, 2001, and was appointed as our chief executive
  officer, chief financial officer, president and treasurer on March 26, 2004.
  Mr. Martyn-Smiths principal employment has been in the business of advertising,
  marketing, real estate brokerage and investments since 1976.

Ms. Marsha Chandlerwas appointed as our secretary
  on March 26, 2004. Ms. Chandler is a licensed California attorney and has acted
  as in-house counsel and/or consultant to us since 1999.

Mr. David Willetthas been our Chief Operating Officer
  since February 1, 2004. Mr. Willett managed the engineering department at Pacific
  Scientific Electro-Kinetics Division, serving nine years prior to joining Turbodyne
  in 1996. From 1996 to 1999 he served as Vice President of Engineering for Turbodyne,
  building our engineering department and introducing our technology and products
  to the U.S and European automotive communities. In 2000, he became Vice President
  of Engineering and Operations for Vetronix Corporation, a world leader in automotive
  diagnostics, where he managed a staff of over 90 engineering and operations
  professionals and was responsible for a $12 million budget. Mr. Willett holds
  an MBA from Pepperdine University and an MSEE from the University of Wisconsin,
  Madison. As the sole owner of Enertran, Mr. Willett was a consultant to Turbodyne
  in 2002 and 2003.

Committees of the Board Of Directors

We have an audit committee which currently consists of Mr.
  Martyn-Smith and Mr. OHagan. Our audit committee recommends the engagement
  of our independent public accountants, reviews the scope of the audit to be
  conducted by such independent public accountants, and meets with the independent
  public accountants to review matters relating to our financial statements, our
  accounting principles and our system of internal accounting controls, and reports
  its recommendations as to the approval of our financial statements to our board
  of directors. Our board of directors has adopted an audit committee

30 of 43

---

charter, a copy of which is attached to our Annual Report
  on Form 10-KSB for the year ended December 31, 2002.

Our audit committee may form and delegate authority to subcommittees
  consisting of one or more members when appropriate, including the authority
  to grant pre-approvals of audit and permitted non-audit services, provided that
  decisions of such subcommittee to grant pre-approvals are presented to the full
  Audit Committee at its scheduled meetings.

We presently do not have a compensation committee, nominating
  committee, an executive committee of our board of directors, stock plan committee
  or any other committees. However, our board of directors will consider establishing
  various committees during the current fiscal year.

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. Our board of directors does not
  contain a member that can be classified as an "audit committee financial expert"
  under the referenced definition. Our board of directors believes that attracting
  and retaining board members that could be classified as an "audit committee
  financial expert" is unlikely due to the high cost of such director candidates.

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.

ELECTION OF DIRECTORS AND OFFICERS

Our board of directors is divided into three classes that
  are elected for staggered three-year terms. The term of each class expires as
  follows:

| |  | Class I directorsterms expire at the annual
        meeting of stockholders in 2004;     
| | - | ------------------------------------------------------------------------------------------
| |   |                                                                                           
| |  | Class II directorsterms expire at the annual
        meeting of stockholders in 2005; and
| |   |                                                                                           
| |  | Class III directorsterms expire at the annual
        meeting of stockholders in 2003.   

The classifications of our board of directors and the expiry
  of their terms are as follows:

| | Name of Director    | Class     | Expiry of Term
| | ------------------- | --------- | --------------
| |                     |           |               
| | EUGENE OHAGAN      | Class II  | 2005 AGM      
| | ANDREW MARTYN-SMITH | Class III | 2003 AGM      

31 of 43

---

We did not hold an annual meeting of stockholders in 2003.
  Accordingly, the members of both Class I and Class III will be elected at our
  2004 annual meeting, to serve until the annual meeting of stockholders to be
  held in 2007 and 2006, respectively, and until their successors have been elected
  and qualified. Mr. Manfred Hanno Janssen our sole Class I director, resigned
  on July 29, 2003. Management intends to nominate another Class I director to
  fill the vacancy on our board of directors at our 2004 annual general meeting.

Each director serves until the end of his term and until his
  successor has been elected and qualified.

Our officers serve at the discretion of our board of directors.

COMPENSATION OF DIRECTORS

As at December 31, 2003, our directors are reimbursed for
  reasonable out-of-pocket expenses in connection with attendance at board of
  director and committee meetings, and are periodically granted options to purchase
  shares of our common stock at the discretion of our board of directors or our
  stock option committee, when constituted.

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, 2003 all such filing requirements applicable to our officers and directors
  were complied with exception that reports were filed late by the following persons:

|                                    |                        |  |              |  | Known       | 
|----------------------------------- | ---------------------- |  | ------------ |  | ----------- | 
|                                    |                        |  |              |  | Failures to | 
|                                    |                        |  | Transactions |  | File a      | 
|                                    |                        |  | Not Timely   |  | Required    | 
|Name and Principal Position         | Number of Late Reports |  | Reported     |  | Form        | 
|Andrew Martyn-Smith,                | 1                      |  | 1            |  | 1           | 
|President, Chief Executive Officer, |                        |  |              |  |             | 
|Chief Financial Officer, Treasurer  |                        |  |              |  |             | 
|and Director                        |                        |  |              |  |             | 
|                                    |                        |  |              |  |             | 
|Marsha Chandler,                    | 1                      |  | 1            |  | 1           | 
|Secretary                           |                        |  |              |  |             | 
|                                    |                        |  |              |  |             | 
|Eugene OHagan,                     | 1                      |  | 1            |  | 1           | 
|Director                            |                        |  |              |  |             | 

32 of 43

---

ITEM 10.         EXECUTIVE
  COMPENSATION.

The following table sets forth certain compensation information
  as to the following individuals (our named executive officers) for
  the three most recently completed fiscal years ended December 31, 2003, 2002
  and 2001:

|(i)  | our chief executive officer and chief financial officer; and
|---- | ------------------------------------------------------------
|(ii) | our most highly compensated executive officer.              

No other compensation was paid to our named executive officers
  other than the compensation set forth below.

|SUMMARY COMPENSATION TABLE
|--------------------------
|                          
|Name                      
|Restricted Stock Awarded  
|Andrew Martyn-Smith(1)    
|Daniel Black(3)           
|Charles Caverno(4)        

Notes:

| | (1) | Mr. Martyn-Smith was appointed as our president,
        chief executive officer, chief financial officer and treasurer on March
        26, 2004.                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Mr. Martyn-Smith received a bonus payment of $26,970
        upon settlement of our claims against Sheppard, Mulllin.                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (3) | Mr. Black resigned as our president, chief executive
        officer and chief financial officer on March 26, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (4) | Mr. Caverno resigned as our chief financial officer
        and secretary on September 10, 2003 and March 26, 2004 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (5) | During the year ended December 31, 2003, our board
        of directors approved the issuance of 223,000 options to replace options
        previously granted in favor of Mr. Dan Black, our former chief executive
        officer and president, which were cancelled or expired during the year.
        The new options have a $0.09 exercise price and expire November 10, 2008.
        Mr. Black has agreed not to exercise any options held by him unless we
        have sufficient authorized capital for the exercise of such options.

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STOCK OPTION GRANTS

The following table sets forth information with respect to
  stock options granted to each of our named executive officers during our most
  recent fiscal year ended December 31, 2003:

|OPTION/SAR GRANTS IN LAST FISCAL YEAR
      (INDIVIDUAL GRANTS)                                                
|---------------------------------------------------------------------------------------------------------------
|Name                                                                                                           
|Andrew Martyn-Smith
      President, Chief Executive
      Officer, Chief Financial Officer
      and Treasurer
|Daniel Black
      Former President and Chief
      Executive Officer                                          
|Charles Caverno
      Former Secretary and Chief
      Financial Officer                                       

EXERCISES OF STOCK OPTIONS AND YEAR-END OPTION VALUES

The following is a summary of the share purchase options exercised
  by our chief executive officer and our named executive officers during the financial
  year ended December 31, 2003:

|AGGREGATED OPTION/SAR EXERCISES DURING THE
      LASTFINANCIAL YEAR END AND FINANCIAL YEAR-END OPTION/SAR VALUES
|----------------------------------------------------------------------------------------------------------------
|Name (#)                                                                                                        
|Andrew Martyn-Smith President, Chief Executive
      Officer, Chief Financial Officer and Treasurer             
|Marsha Chandler, Secretary                                                                                      

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|AGGREGATED OPTION/SAR EXERCISES DURING THE LASTFINANCIAL YEAR END AND FINANCIAL YEAR-END OPTION/SAR VALUES
|----------------------------------------------------------------------------------------------------------
|Name (#)                                                                                                  
|Daniel Black Former President
      and Former Chief Executive Officer                                    
|Charles Caverno Former Secretary
      and Former Chief Financial Officer                                 

COMPENSATION ARRANGEMENTS

Management Agreements

We paid our former president and chief executive officer,
  Mr. Daniel Black, a salary of $75,000 per annum. Mr. Black resigned in March,
  2004. Following Mr. Blacks resignation in 2004, we employed Mr. Black
  as one of our engineers pursuant to a written compensation agreement.

We paid our former secretary and chief financial officer,
  Mr. Charles Caverno, a salary of $99,000 per annum. Mr. Caverno resigned as
  our chief financial officer in September, 2003. We are not party to any written
  compensation agreement with Mr. Caverno.

REPRICING OF OPTIONS

During the year ended December 31, 2002, our board of directors
  approved the re-pricing of options to purchase 38,000 shares granted in favor
  of Mr. Dan Black, our chief executive officer. The option price was reduced
  to $0.38 per share in order that the exercise price was more reflective of the
  then current trading price of our common stock and in order to provide a continuing
  performance incentive. These options were cancelled or expired in November,
  2003 and 223,000 options were issued on November 13, 2003 to replace these and
  other previously cancelled options. The new options have a $0.09 exercise price
  and expire November 10, 2008. The option price was reduced to $0.09 per share
  in order that the exercise price was more reflective of the then current trading
  price of our common stock and in order to provide a continuing performance incentive.

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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 May 5, 2004
  by: (i) each of our directors; (ii) each of our named executive officers, and
  (iii) officers and directors as a group. No person or group is known by us to
  beneficially own more than 5% of our outstanding shares of common stock. Unless
  otherwise indicated, the shareholders listed possess sole voting and investment
  power with respect to the shares shown.

|Title of class | Name and Address of Beneficial Owner                                                                          | Amount and Nature of Beneficial Ownership | Percentage of Common Stock(1)
|-------------- | ------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | -----------------------------
|Common Stock   | Eugene OHagan Director                                                                                       | 675,000(2)Indirect                        | 0.45%                        
|Common Stock   | Andrew Martyn-Smith Director, President,
      Chief Executive Officer, Chief Financial Officer and Treasurer | 675,000(3)Indirect                        | 0.45%                        
|Common Stock   | Marsha Chandler Secretary                                                                                     | 800 Direct                                | 0.001%                       
|Common Stock   | All Officers and Directors as a Group (3
      persons)                                                       | 1,350,800                                 | 0.9%                         

|(1) | Under Rule 13d-3, a beneficial owner
        of a security includes any person who, directly or indirectly, through
        any contract, arrangement, understanding, relationship, or otherwise has
        or shares: (i) voting power, which includes the power to vote, or to direct
        the voting of shares; and (ii) investment power, which includes the power
        to dispose or direct the disposition of shares. Certain shares may be
        deemed to be beneficially owned by more than one person (if, for example,
        persons share the power to vote or the power to dispose of the shares).
        In addition, shares are deemed to be beneficially owned by a person if
        the person has the right to acquire the shares (for example, upon exercise
        of an option) within 60 days of the date as of which the information is
        provided. In computing the percentage ownership of any person, the amount
        of shares outstanding is deemed to include the amount of shares beneficially
        owned by such person (and only such person) by reason of these acquisition
        rights. As a result, the percentage of outstanding shares of any person
        as shown in this table does not necessarily reflect the persons
        actual ownership or voting power with respect to the number of shares
        of common stock actually outstanding on May 5, 2004. As of May 5, 2004,
        there were 148,914,616 shares of our common stock issued and outstanding.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(2) | Consists of 675,000 shares that are
        immediately acquirable upon the exercise of stock options held by Mr.
        OHagan within 60 days of May 5, 2004. Mr. OHagan has agreed
        not to exercise any options held by him unless we have sufficient authorized
        capital for the exercise of such options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(3) | Consists of 675,000 shares that are
        immediately acquirable upon the exercise of stock options held by Mr.
        Martyn-Smith within 60 days of May 5, 2004. Mr. Martyn-Smith has agreed
        not to exercise any options held by him unless we have sufficient authorized
        capital for the exercise of such options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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COMPENSATION PLANS

2000 Stock Option Plan

On October 1, 1999, our 2000 Stock Option Plan was adopted
  by the board of directors and was subsequently approved by our stockholders.
  The purpose of the plan is to advance our interests and that of our stockholders
  by strengthening our ability to obtain and retain the services of employees,
  consultants, officers and directors that will contribute to our long-term success.
  The plan is administered by the stock option committee. The plan provides for
  the granting of restricted stock, stock options, reload stock options, stock
  purchase warrants and other rights to acquire stock or securities convertible
  into or redeemable for stock, stock appreciation rights, phantom stock, dividend
  equivalents, performance units or performance shares. The maximum number of
  shares of common stock authorized for issuance under the plan is 4,800,000.
  As of December 31, 2003 the number of un-optioned shares available for granting
  under the plan was nil.

2002 Stock Option Plan

On June 3, 2002, we established our 2002 stock option plan
  (the 2002 Nevada Plan). Under the 2002 Stock Option Plan, we may
  grant options to our directors, officers, employees and consultants for up to
  6,000,000 shares of common stock. The maximum term of any option is ten years.
  Our stock option committee, or our board of directors if no committee is constituted,
  will determine the terms of any options or other rights granted under the 2002
  Plan, including the grant date of any option, the exercise price and the term,
  which in any event shall not exceed ten years. The maximum number of options
  to be granted under the 2002 Plan to any participant is 180,000 per year. As
  of December 31, 2003 and 2002, the number of unoptioned shares available for
  granting under the plan was nil and 2,155,461, respectively.

2002 Stock Incentive Plan

On December 6, 2002, we established our 2002 stock incentive
  plan (the 2002 Stock Incentive Plan). Under the 2002 Nevada Plan,
  we may grant common stock to our directors, officers, employees and consultants
  for up to 7,500,000 shares. The maximum term of the 2002 Nevada Plan is ten
  years. Our board of directors will determine the terms and matters of any awards
  under the 2002 Nevada Plan including the type of awards 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 our common
  shares on the date of the grant. As of December 31, 2003 and 2002, the number
  of unoptioned shares available for granting of options under the plan was Nil
  and 7,500,000, respectively.

2003 Stock Incentive Plan

On June 30, 2003, we established our 2003 stock incentive
  plan (the 2003 Stock Incentive Plan). Under the 2003 Stock Incentive
  Plan, we may grant common stock to our directors, officers, employees and consultants
  for up to 15,000,000 shares. The maximum term of the 2003 Stock Incentive Plan
  is ten years. Our board of directors will determine the terms and matters of
  any awards under the 2003 Stock Incentive Plan including the type of awards
  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 our common shares on the date of the grant. As of December 31, 2003
  the number of unoptioned shares available for granting of options under the
  plan was 9,786,795.

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EQUITY COMPENSATION PLAN INFORMATION

We currently have four equity compensation plans under which
  shares of our common stock have been authorized for issuance to our officers,
  directors, employees and eligible consultants. These equity compensation plans
  include our 2000 Stock Option Plan, our 2002 Nevada Plan, our 2002 Stock Incentive
  Plan, and our 2003 Stock Incentive Plan. We filed: (i) a registration statement
  on Form S-8 under the Securities Act of 1933, as amended, to register the 3,000,000
  shares of our common stock granted under the 2003 Stock Incentive Plan on August
  14, 2003; (ii) a registration statement on Form S-8 under the Securities Act
  of 1933, as amended, to register the 7,500,000 shares of our common stock which
  may be issued pursuant to the 2002 Stock Incentive Plan on December 19, 2002;
  and (iii) a registration statement on Form S-8 under the Securities Act of 1933,
  as amended, to register the 6,000,000 shares of our common stock which may be
  issued pursuant to the 2002 Nevada Plan on November 2, 2002.

Our 2000 Stock Option Plan and our 2002 Nevada Plan have been
  approved by our stockholders. Our 2002 Stock Incentive Plan and 2003 Stock Incentive
  Plans have not been approved by our stockholders.

The following summary information is presented for our 2000
  Stock Option Plan, 2002 Stock Option Plan, 2002 Stock Incentive Plan and 2003
  Stock Incentive Plan on an aggregate basis as of December 31, 2003. For a more
  detailed discussion, please refer to Note 8 to our financial statements attached
  to this annual report.

|                                                                 | Number of Securities to be Issued Upon
      Exercise of Outstanding Options | Weighted-Average Exercise Price of
      Outstanding Options | Number of Securities Remaining Available
      for Future Issuance Under Equity Compensation Plans (Excluding
      Securities Reflected in column (a))
|---------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Plan Category                                                    | (a)                                                                          | (b)                                                          | (c)                                                                                                                                                    
|Equity Compensation Plans Approved By
      Security Holders     | 2,251,666 Shares of Common
      Stock                                       | $0.21 per Share of Common
      Stock                        | Nil                                                                                                                                                    
|Equity Compensation Plans Not Approved By
      Security Holders | 1,928,000 Shares of Common
      Stock                                       | $0.8 per Share of Common Stock                               | 9,786,795 Shares                                                                                                                                       

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ITEM 12.         CERTAIN RELATIONSHIPS
  AND RELATED TRANSACTIONS.

Except as described below, none of the following persons has
  any direct or indirect material interest in any transaction to which we were
  or are a party during the past two years, or in any proposed transaction to
  which we propose to be a party:

| | (a) | any of our directors or executive officers;                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                         
| | (b) | any nominee for election as one of our
        directors;                                                                                                                               
| |     |                                                                                                                                                                                         
| | (c) | any person who is known by us to beneficially
        own, directly or indirectly, shares carrying more than 5% of the voting
        rights attached to our common stock; or           
| |     |                                                                                                                                                                                         
| | (d) | any member of the immediate family (including
        spouse, parents, children, siblings and in-laws) of any of the foregoing
        persons named in paragraph (a), (b) or (c) above.

Mr. Edward Halimi

Mr. Edward Halimi, now deceased, was one of our founders and
  a former director, president and chief executive officer of our company until
  June 30, 2001.

We subleased our Carpinteria facility on a month-to-month
  basis from a private company controlled by Mr. Halimi. This arrangement with
  Mr. Halimis private company was terminated when Turbodyne Systems entered
  into a new sub-lease for these premises on July 1, 2001. The monthly rental
  paid prior to July 1, 2001 was $28,840 plus operating costs, including taxes,
  insurance and utilities. We agreed to the payment of a total of $118,761 on
  execution of the sub-lease to the landlord on account of late rent from March
  31, 2001 to June 30, 2001, late rent fees, a late tax payment fee, attorney
  fees and an annual insurance payment.Mr. Halimis estate remains
  a guarantor of our new lease for these premises.

We had previously been a party to an employment agreement
  with Mr. Halimi dated August 1, 1997, as amended January 27, 1998, whereby Mr.
  Halimi was employed as our president and chief executive officer and the president
  and chief executive officer of Turbodyne Systems Inc., one of our subsidiaries.
  We ceased making payments to Mr. Halimi as required by the employment agreement
  in November 2000. We concluded a settlement agreement with Mr. Halimi dated
  effective as of January 29, 2003. Under the terms of this settlement agreement,
  Mr. Halimi agreed to release us from any liability under the employment agreement.
  In exchange for this release, we issued to Mr. Halimi 45,000 shares of our Series
  X Preferred Stock at a deemed price of $20 per share, for aggregate consideration
  of $900,000. Each share of Series X Preferred Stock is identical to our common
  stock except that the shares are non-voting and are convertible at the option
  of the holder into one hundred shares of our common stock. We also agreed with
  Mr. Halimi to the exchange of 3,250,000 shares held by a private company controlled
  by Mr. Halimi into 32,500 shares of Series X Preferred Stock. In aggregate,
  a total of 77,500 shares of Series X Preferred Stock were issued to the private
  company controlled by Mr. Halimi. Mr. Halimi agreed not to exercise his conversion
  rights to the extent that as a result of such conversion Mr. Halimi would own
  more than 0.5% of our outstanding common stock.

Dieter and Lars Neujeffski

Dieter and Lars Neujeffski are former directors of Turbodyne.
  We issued 3,500,000 shares of our common stock to Lars Neujeffski, one of our
  former directors, for which proper consideration was not received. We have demanded
  that these shares be returned for cancellation. To date, Mr. Neujeffski has
  not agreed to the return of these shares for cancellation. We intend to vigorously
  pursue the return of these shares. An amount of $1,470,000 has been recorded
  as a selling, general and administration expense on our financial statements
  for the year ended December 31, 2001 in respect of this share issuance.

We issued 3,142,048 shares to Mr. Dieter Neujeffski, one of
  our directors, at various prices ranging from $0.14 per share to $0.284 per
  share on a private placement basis for total proceeds of $509,739. The

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prices of the stock issued were based on the market price
  of our common stock at the date of issuance, with a discount to market to reflect
  the fact that the securities were issued as restricted shares. All shares were
  issued during the period from October 16, 2000 to June 28, 2001. Mr. Neujeffski
  was appointed as one of our directors on July 3, 2001 but was not elected as
  one of our directors at our last annual general meeting.

We entered into a settlement agreement with Dieter and Lars
  Neujeffski dated July 12, 2002. Under the terms of this agreement, we agreed
  pay to Dieter and Lars Neujeffski an amount of $152,077.50. Mr. Lars Neujeffski
  agreed to return the 3,500,000 shares registered in his name, subject to release
  by a third party bank to whom the shares have been pledged as collateral by
  Mr. Neujeffski. We have completed all payments to Dieter and Lars Neujeffski,
  however the release of shares by the bank has not been effected to date. In
  addition, we have agreed to buy back the 3,142,000 shares in the name of Dieter
  Neujeffski at a price of $0.17 per share. This buy back arrangement has not
  been completed to date.

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

(a)        Exhibits

|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  |                                                                                                                                                                                                       
|3.1            |  | Restated Articles of Incorporation
        of Registrant.(1)                                                                                                                                          
|               |  |                                                                                                                                                                                                       
|3.2            |  | Amended Bylaws of the Registrant.(1)                                                                                                                                                                  
|               |  |                                                                                                                                                                                                       
|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)                                                       
|               |  |                                                                                                                                                                                                       
|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.                                                  
|               |  |                                                                                                                                                                                                       
|14.1           |  | Code
        of Ethics.                                                                                                                                                                               
|               |  |                                                                                                                                                                                                       
|21.1           |  | List
        of Subsidiaries.                                                                                                                                                                         
|               |  |                                                                                                                                                                                                       
|23.1           |  | Consent
        of BDO Dunwoody LLP.                                                                                                                                                                  
|               |  |                                                                                                                                                                                                       
|31.1           |  | Certification
        of Chief Executive Officer and Chief Financial Officer pursuant to Section
        302 of the Sarbanes-Oxley Act of 2002.                                                       
|               |  |                                                                                                                                                                                                       
|32.2           |  | 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) | Previously filed with the Securities and Exchange Commission
        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.                                            
|    |                                                                                                                                                         

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(b)        Current Reports on Form 8-K.

We did not file any Current Reports on Form 8-K during our
  fourth quarter ended December 31, 2003. The following reports on Form 8-K were
  filed since the last quarter of our fiscal year ended December 31, 2003:

|Date of Form 8-K | Date of Filing with the SEC | Description of the Form
      8-K                                        
|---------------- | --------------------------- | -------------------------------------------------------------------------
|                 |                             |                                                                          
|February 3, 2004 | February 3, 2004            | Disclosure of Settlement Agreement dated effective
      January 24, 2004

ITEM 14.         PRINCIPAL ACCOUNTANT
  FEES AND SERVICES.

Audit Fees

The aggregate fees billed for the two most recently completed
  fiscal years ended December 31, 2003 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 were as follows:

|                   | Year Ended December 31, 2003 | Year Ended December 31, 2002
|------------------ | ---------------------------- | ----------------------------
|Audit Related Fees | $102,000                     | $150,000                    
|Tax Fees           | $7,000                       | $0                          
|All Other Fees     | $0                           | $0                          
|Total              | $109,000                     | $150,000                    

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

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act,
  the registrant caused this report to be signed on its behalf by the undersigned,
  thereunto duly authorized.

| |     | TURBODYNE TECHNOLOGIES, INC.                           
| | --- | -------------------------------------------------------
| |     |                                                        
| | By: | /s/ Andrew Martyn-Smith                                
| |     | Andrew Martyn-Smith, President, Chief Executive Officer
| |     | Chief Financial Officer and Treasurer                  
| |     | Director                                               
| |     | Date: May 17, 2004                                     

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

|By: | /s/ Andrew Martyn-Smith                                 | 
|--- | ------------------------------------------------------- | 
|    | Andrew Martyn-Smith, President, Chief Executive Officer | 
|    | Chief Financial Officer, Treasurer and Director         | 
|    | (Principal Executive Officer)                           | 
|    | (Principal Accounting Officer)                          | 
|    | Date: May 17, 2004                                      | 
|    |                                                         | 
|By: | /s/ Marsha Chandler                                     | 
|    | Marsha Chandler, Secretary                              | 
|    | Date: May 17, 2004                                      | 
|    |                                                         | 
|    |                                                         | 
|By: | /s/ Eugene OHagan                                      | 
|    | Eugene OHagan                                          | 
|    | Director                                                | 
|    | Date: May 17, 2004                                      | 

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