U.S. SECURITIES 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, 2004

[ ]   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.
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                 (Name of small business issuer in its charter)

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

2848 SIOUX
VENTURA, CA                                           93001
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(Address of principal executive offices)              (Zip Code)

(805) 201-3133
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Issuer's telephone number

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

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

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

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

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


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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.) $ 0.01

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 320,559,444 SHARES OF COMMON STOCK AS
OF JUNE 14, 2006

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...........................................    4

Item 2.  Description Of Property...........................................   15

Item 3.  Legal Proceedings.................................................   15

Item 4.  Submission Of Matters To A Vote Of Security Holders...............   19

PART II

Item 5.  Market For Common Equity And Related Stockholder Matters..........   20

Item 6.  Management's Discussion And Analysis Or Plan Of Operation.........   22

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

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

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

PART III

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

Item 10. Executive Compensation............................................   37

Item 11. Security Ownership Of Certain Beneficial Owners and
         Management and Related Stockholder Matters........................   40

Item 12. Certain Relationships And Related Transactions....................   42

Item 13. Exhibits And Reports On Form 8-K..................................   44

Item 14. Principal Accountant Fees and Services............................   46

Signatures ................................................................   47


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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

FORWARD LOOKING STATEMENTS

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

GENERAL

We are filing this annual report for 2004 on Form 10-K late. Information
contained herein is as of the end of 2004 and, in some instances, as of April or
May 2005 or the latest practicable date for these items. Where appropriate the
Company has supplied additional information to discuss subsequent events through
2005. This is particularly true with respect to Item 1 Business.

At the time this late-filed document was prepared, the person who had been Chief
Executive Officer and Chief Financial Officer through most of this period was no
longer with the Company. For the most part no prior corporate officers or
Directors participated significantly in the preparation of this document. The
non-financial portion of this document is a re-construction of events from
records remaining with the Company after the departure of prior management and
was prepared by new management with some assistance of prior employees and
officers.

CORPORATE ORGANIZATION

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

In 2004 we had two wholly owned significant subsidiaries: Turbodyne Systems,
Inc., a Nevada corporation, and Electronic Boosting Systems, Inc. We carried out
our business operations in 2004 through Electronic Boosting Systems, Inc. We now
intend to carry out our future business through the parent.


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<PAGE>

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

INTRODUCTION

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

Prior to 2004 Turbodyne pursued two major product technologies: (i) the
Dynacharger(TM) and (ii) the Turbopac(TM). The Dynacharger(TM) combines an
electric motor and a turbocharger into a single unit. The Turbopac(TM) is an
electric Motor without a turbocharger that can be used on both turbocharged and
non-turbocharged engines.

In 1999 Turbodyne entered into a license and joint development contract with
Honeywell International Inc. ("Honeywell"). From 1999 to early 2004 we
transferred intellectual property associated with our Dynacharger and Turbopac
technologies to Honeywell. In 2004 the agreements with Honeywell were terminated
pursuant to a settlement agreement. In accordance with the Terms of the
Definitive Settlement Agreement Honeywell (Settlement Agreement) retained the
intellectual property rights to the Dynacharger(TM) (with the exception of
pre-existiNg licenses granted by Turbodyne) and Turbodyne retained all rights to
the Turbopac(TM).

During 2004 Turbodyne was pursuing development of two Turbopac(TM) product
lines. The Model 800 is intended fOr heavy-duty applications such as trucks and
buses. The Model 801 is for smaller applications such as passenger vehicles.

RECENT CHANGES

2004

Prior to the 1999 Honeywell Agreement, Turbodyne developed proprietary
technologies that became the basis for Honeywell's interest in our technology.
For the period from 1999 to 2003 the Company's business centered on our
agreement with Honeywell. During that period we had limited activity and from
time to time suspended operations including a period of late 2003 to February
2004. Litigation commenced in 2001 between Honeywell and Turbodyne. In January
2004 we reached a global settlement agreement with Honeywell pursuant to which
almost all arrangements with Honeywell were terminated. We received cash
payments in January and February 2004, which enabled us to resume operations
under a new business strategy limited to our Turbopac(TM) product line. Our
rights to tHe Turbopac technology were returned to us as part of the Settlement
Agreement. We also retained the rights to two Licenses of the Dynacharger that
will return Royalties as our Licensees generate revenue. Turbodyne continues to
pursue patents and other filings worldwide to protect our rights.


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<PAGE>

2005

Lack of funds caused the Company to again gradually curtail its operations until
it ceased almost all activities in 2005. During that period it had no business
operations, place of business and no employees. In September 2005, new
management took control with the purpose of attempting to resurrect the
Company's business and has been seeking financing for such purpose.
As of September 2, 2005 the Company entered into an AGREEMENT AND PLAN OF MERGER
(the "Agreement"). A majority owned subsidiary of Aspatuck Holdings Ltd.
("Aspatuck") was merged into our newly formed wholly owned subsidiary. Prior to
the merger, this subsidiary of Aspatuck entered into a consulting agreement
("CONSULTING AGREEMENT") with Stamford Research LLC, which is obligated to
provide the services of Albert Case to the Company. Upon completion of the
merger, 139,192,222 shares of the Company's Common Stock were issuable to
holders of the subsidiary of Aspatuck and 1,300,000 such shares became issuable
to Stamford Research LLC, under the Consulting Agreement. At this time Mr.
Albert Case became President and Chief Executive Officer and Mr. Jason Meyers,
principal shareholder of Aspatuck, became Chairman of the Board of Directors.
Additional shares are issuable to the former shareholders of the Aspatuck
subsidiary when the Company issues any securities related directly or indirectly
to pre-merger events.

TURBODYNE'S OPPORTUNITIES

Turbodyne's management believes that the market demands for improved internal
combustion engine performance will continue. While many factors contribute to
demands for improved engine performance, we believe the key factors are:

      o     a large share of the worldwide heavy diesel and smaller internal
            combustion engine market is being equipped with turbochargers. If
            the vehicles suffer from `turbolag' (delays inherent in their engine
            installation) then they can benefit from a Turbopac(TM),
      o     an even higher share of both gasoline and diesel engines would be
            equipped with a turbocharger if their performance was not impacted
            by `turbolag'.
      o     the auto and truck industry is continuing the pursuit of improved
            engine efficiency and fuel economy. These smaller engines are
            intended to reduce the cost, weight, size, and some emissions, but
            often have performance penalties. Turbochargers are one technique to
            retain `pep' in the vehicle, but `turbolag' is still a problem that
            the major manufacturers need to address.


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<PAGE>

These key factors create opportunities for Turbodyne both in the Original
Equipment Manufacturer ("OEM") and post-purchase ("aftermarket") for our
technology to overcome `turbolag' in vehicles. Our experience with prototype and
testing installations includes trucks, buses, cars, and other specialized
vehicles.

THE TURBODYNE PROPRIETARY TECHNOLOGY

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

The Turbopac(TM) uses a powerful electric motor, running off the vehicle
electrical system, to blow useful amounTs of air into an engine during the
period when the turbocharger does not have enough exhaust gas to blow all the
air required for optimal engine acceleration performance. The improvement in
`take-off' (initial acceleration) performance is perceptible to the vehicle
driver, and thus improves the driver's anecdotal analysis of vehicle power and
performance.

The Turbopac(TM) can either be applied in a multi-stage combination with an
existing turbocharger or by itseLf ("standalone"). The Turbopac(TM) can be
turned on and off by the external engine control system or other means. WhEn
combined with a turbocharger the Turbopac(TM) supplies air to the engine until
the turbocharger's performance meeTs engine air needs; when standalone the
Turbopac(TM) supplies air for brief periods during acceleration.


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<PAGE>

PLAN OF OPERATIONS

Initially in 2004 when the Company resumed operations our strategy was to
complete commercial development of our two Turbopac(TM) products and to enter
into licensing agreements with OEM's in the automotive industry. Later In 2004,
we determined that selling the Turbopac(TM) products in the aftermarket would
bring in needed cash flow moRe quickly. We did not complete either objective
while we had funds. During 2004 we also sought to settle outstanding obligations
against us.

After resumption of our business in 2005 under new management we determined to
follow the plan set forth below, not necessarily in the order listed, dependent
upon the ability to obtain sufficient working capital.

      1. We continue research and development of our Turbopac(TM) products for
further improvements with tHe objective of completing the necessary development
work to make the product more attractive in the market.

      2. Continuing plans to complete development of production ready
Turbopac(TM) units for 1.5 to 3.5-litRe turbocharged diesel and gasoline engines
for aftermarket sales. Engineering work is continuing on controller, motor, and
product features.

      3. Along with aftermarket sales, pursue negotiations with OEM's in the
automobile industry for the incorporation of our Turbopac(TM) products into
their product lines.

      4. Pursue further resolution of outstanding indebtedness and the
outstanding litigation against us, including resolution of the claims
summarized.

      5. We are pursuing additional financing possibilities necessary for us to
continue operations. There is no assurance that such financing will be obtained.
We believe that conventional debt financing is not an option at this time due to
risks associated with the development stage of our products, our lack of
revenues and the litigation to which we are party. Based on these risks, there
is no assurance that we will be able to carry out our plan of operations. If we
achieve less financing than required to pursue our stated plan of operations,
then we will be forced to reduce our research and development activities and our
administrative overhead costs.

INTELLECTUAL PROPERTY

We now have a total of 28 patents and applications. The most significant patent
and applications are for the use of large scale motor for compressed air systems
for internal combustion engines and several patents relating to high speed
motors [in a heat sensitive environment]. We also received a license from
Honeywell for certain Dynocharger patents involving technology overlapping both
the Dynacharger and the Turbopac(TM). We also own tHe trademark for Turbopac.
The Company has agreed to pay a royalty equal to 2% of the gross sales of
products manufactured and sold that incorporate certain licensed technology
which is not being used.


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<PAGE>

The Company has issued Licenses covering some intellectual property that will
return Royalties as our Licenses generate revenues.

PROPRIETARY INFORMATION AGREEMENTS

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

RESEARCH AND DEVELOPMENT

We incurred research and development costs in the amount of $1,246,128 during
our fiscal year end December 31, 2004, compared to research and development
costs in the amount of $1,953,137 during our fiscal year ended December 31,
2003. These expenditures included amounts for research and development with the
objective of bringing Turbopac(TM) 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 come into effect in 2005. The presence of these
government regulations has the potential to create demand for our products as
our products are designed to increase engine performance with resulting
reductions in emissions.
We must continue to design and develop products that help mitigate failures to
meet worldwide vehicle emissions standards that are imposed by regulatory
agencies. Testing to ensure our products help meet these government regulations
will be an integral component of our research and development expense on new
products.

EMPLOYEES

As of December 31, 2004 we had approximately six full-time equivalent employees
and consultants. By May 2005 this number had reduced. As of April 2006 we have
no full-time employees but several consultants which devote significant time to
the Company's affairs.

RISK FACTORS

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


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<PAGE>

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

We reported net income (loss) of $2,909,740 and ($6,884,717) for the fiscal
years ended December 2004 and 2003 respectively. All our income for 2004 was
attributable to the Honeywell settlement. We have derived negligible revenue
from operations. We suffered net losses in recent years resulting in an
accumulated deficit of $127,567,083 at December 31, 2004. Since our inception we
have disposed of our most significant subsidiary through bankruptcy, have been
subject to lawsuits, used most of our available cash to conduct our operating
activities and are required to seek additional equity or debt financing in order
to continue operations. These matters raise substantial doubt about our ability
to continue as a going concern. Our auditors have made reference to the
substantial doubt about our ability to continue as a going concern in their
audit report on our audited financial statements for the year ended December 31,
2004.

FINANCIAL HISTORY PROBLEMS

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

VOIDABLE REINCORPORATION

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

COMPANY REQUIRES ADDITIONAL FUNDING

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


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<PAGE>

THE COMPANY WILL BE DEPENDENT ON THIRD PARTIES FOR THE PRODUCTION OF ITS PRODUCT

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

POTENTIAL PRODUCT LIABILITY

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

WE HAVE NO CURRENT SALES AND MARKETING

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


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INCREASED COMPLIANCE COSTS MAY BE A BURDEN

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

WE HAVE NO HISTORY OF PRODUCT SALES

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

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

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

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

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

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

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

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

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


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<PAGE>

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

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

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

WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO ACHIEVE SUCCESS

The 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 product
lines. Due to delay and the rapid pace of technological innovation in the
automotive industry, there is a risk that these products may be superseded by
new technology and become obsolete.

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

INTENSE COMPETITION

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

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


                                       13
<PAGE>

RISKS RELATING TO OUR MARKET

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

Our common stock is traded on the OTC Bulletin Board and constitutes a penny
stock under the Securities Exchange Act of 1934. Our common stock will remain
classified as a penny stock for the foreseeable future. The classification as a
penny stock makes it more difficult for a broker-dealer to sell the stock into a
secondary market, which makes it more difficult for a purchaser to liquidate his
or her investment. Any broker-dealer engaged by the purchaser for the purpose of
selling his or her shares will be subject to rules 15g-1 through 15g-10 of the
Securities and Exchange Act. Rather than having to comply with these rules, some
broker-dealers will refuse to attempt to sell a penny stock. These rules may
affect the ability of broker-dealers to sell our common stock and also may
affect the ability of holders of our common stock.

OUR STOCK PRICE IS EXTREMELY VOLATILE

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

ABSENCE OF DIVIDENDS

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


                                       14
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY.

During 2004 we maintained 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 were leased for a monthly
rental of approximately $28,840 plus operating costs, including taxes, insurance
and utilities for a term expired January 30, 2005. At December 31, 2004 the
Company owed $77,252 in rent, which is included in accounts payable. In March
2005 the Company moved out of the premises and relinquished the majority of the
fixed assets to the landlord to sell and offset against rent payable.

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 resolved disputes between us 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"). Honeywell agreed to pay us the aggregate
amount of $8,500,000 in full settlement of our claims against Honeywell subject
to $2,125,000 of contingency legal fees, $60,000 of legal costs, $911,030 owed
to certain of our creditors and lien holders. The Directors also elected to pay
the following amounts directly from settlement proceeds: $633,070 owed to note
holders and $1,290,000 in bonuses to officers and employees. We received
$3,480,900 ($4,770,900 less $1,290,000) which is the full settlement amount less
legal fees, creditor liens, note payments and settlement bonuses. The Settlement
Agreement also includes mutual releases 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.

PACIFIC BAJA LIQUIDATING TRUST

In September 1999, Pacific Baja Light Metals Corporation, our former wholly
owned subsidiary, filed a Chapter 11 petition in bankruptcy in the United States
Bankruptcy Court, Central District of California (Case No. RS99-26477MG) in
Riverside, California. ("Bankruptcy Proceeding")

In September 2001, the Pacific Baja Liquidating Trust (the "Trust") commenced
action against us in the aforesaid Bankruptcy Court. The Trust was established
under the Pacific Baja bankruptcy proceedings for the benefit of the unsecured
creditors of Pacific Baja. The Trust sought:

1.    the re-characterization of our advances to Pacific Baja as equity and the
      subordination of our unsecured claims against Pacific Baja;


                                       15
<PAGE>

2.    the return of approximately $7,190,000 transferred by Pacific Baja to us
      as an alleged fraudulent transfer;

3.    an order that we are liable for all of the debts of Pacific Baja totaling
      approximately $7,000,000;

4.    damages and punitive damages against us and certain of our former officers
      and directors in excess of $12,000,000 based on various allegations of
      fraud, misrepresentation, breach of contract, alter ego and negligence.

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

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

TST, INC.

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

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

The settlement provided for the immediate entry of judgment against us in the
amount of $2,068,078 plus interest from the date of entry at the rate of 10% per
annum. The amount of this judgment would immediately increase by any amount that
TST is compelled by judgment or court order or settlement to return as a
preferential transfer in connection with the bankruptcy proceedings of Pacific
Baja. Any proceeds received by TST or Mr. Stein from the sale of the issued
shares to be automatically applied as a credit against that amount of the
judgment against us in favor of TST. At December 31, 2004, the Company has
included $4,766,656 ($4,803,000 - 2003) in regard to this matter in provision
for lawsuit settlements.


                                       16
<PAGE>

HOFBAUER ACTION

On May 20, 2004, an action entitled Hofbauer vs. Turbodyne Technologies, Inc.,
et al. (Case No. 1157661) (the "Hofbauer Action") was filed with the Santa
Barbara Superior Court (the "Court"). Peter Hofbauer, a former officer of
Turbodyne, alleged that we failed to pay him $369,266 pursuant to the terms of a
purported settlement agreement dated May 17, 2002, made for the purpose of
settling amounts owed to Mr. Hofbauer for services provided to us by Mr.
Hofbauer. On August 3, 2004, pursuant to a writ of attachment, Mr. Hofbauer
attached certain of our bank accounts in the amount of $315,000 (the "Attached
Funds").

We entered into a stipulation filed with the Court on October 27, 2004 with Mr.
Hofbauer to resolve and conclude the Hofbauer Action. Pursuant to the terms of
the stipulation:

      - we issued 4,000,000 unrestricted shares (the "Shares") of our common
      stock to Mr. Hofbauer. The proceeds of the sale of this stock were applied
      against the agreed upon claim amount of approximately $300,000.

      - if at the end of six months from the date of the stipulation, the Claim
      Amount had not been fully satisfied Mr. Hofbauer had the option of: (i)
      releasing the Attached Funds to us and keep and sell without restriction
      the unsold Shares, or (ii) satisfy the remaining balance from the Attached
      Funds.

Subsequent to December 31, 2004, the unpaid amount of $210,496 was satisfied
from the attached funds and we are awaiting the return of 1,400,000 shares of
our common stock.

KRAMER ACTION

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

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

The Plaintiff's attorney, Claus Schmidt, also filed similar suits on behalf of
Frank Walter and Herbert Taeuber. The German courts are indicating that all
three suits need to be filed in the United States not Germany. Presently the
suits have not been filed in the United States. We vigorously dispute this claim
and have retained German counsel to defend it and seek its dismissal. At
December 31, 2004, the Company has included $405,785 in regard to this matter in
the provision for lawsuit settlements.


                                       17
<PAGE>

FOLLOWING OUR SETTLEMENT WITH HONEYWELL, WE SETTLED SEVERAL ACTIONS AS DESCRIBED
BELOW:

We paid $506,408 to Heartland Financial Corporation ("Heartland") to settle the
balance owing on an arbitration award against us in the amount of approximately
$535,496 plus interest.

We paid $221,155 to Alain F. Lombard, one of our former consultants,
representing the balance due on a stipulated judgment amount.

We paid $63,972 to Bowne of Los Angeles settling an outstanding fee for services
(and costs, etc.).

We paid $80,000 to Gerhard Delf, one of our former officers, representing the
balance due for compensation relating to his former position as chief executive
officer.

We paid $39,495 to Wendell Anderson, one of our former officers, representing
the balance due for compensation.

We paid $272,465 to Peter Kitzinski, one of our former officers, representing
the balance due for compensation relating to his former position as General
Manager of Turbodyne Europe GmbH.


                                       18
<PAGE>

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

Our Annual Meeting of the Shareholders was held on June 30, 2004.

The following proposals were adopted by the margins indicated in the table
below:

1.    To elect Andrew Martyn-Smith as a Class I director and Randall Fox as a
      Class III director, to serve until the annual meeting to be held in 2007
      and 2006, respectively, or until their successors have been elected and
      qualified.

2.    To increase the number of authorized shares of common stock, par value
      $0.001 per share, of the Company from 150,000,000 shares to 1,000,000,000
      shares.

3.    To approve our 2004 Stock Incentive Plan.

4.    To ratify the appointment of BDO Dunwoody, LLP as our independent auditors
      for the year ending December 31, 2004. Subsequently, BDO Dunwoody LLP
      resigned on November 7, 2005.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
                                                      NUMBER OF SHARES

                                                                 WITHHELD/       BROKER
PROPOSAL                               FOR         AGAINST       ABSTAINED      NON-VOTES
-----------------------------------------------------------------------------------------
<S>            <C>                  <C>           <C>             <C>            <C>
PROPOSAL 1     ELECTION OF
               DIRECTORS

               Andrew
               Martyn-Smith         55,679,476      5,600          4,733            0

               Randall Fox          55,646,601      6,600          26,608        10,000

PROPOSAL 2     INCREASE OF
               AUTHORIZED
               CAPITAL
                                    61,759,338    1,255,565       131,133           0
PROPOSAL 3     APPROVAL OF 2004
               STOCK INCENTIVE
               PLAN
                                    54,865,271     333,705        166,833        324,000
PROPOSAL 4     APPOINTMENT OF
               AUDITORS
                                    55,683,501      1,975          4,333            0
</TABLE>

The term of office of our sole Class II director, Eugene O'Hagan, was to
continue until his term expired at our 2005 annual general meeting or until his
successor has been elected and qualified. Both he and Mr. Martyn-Smith
subsequently resigned in 2005.


                                       19
<PAGE>

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.PK" 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
Company's shares are now listed in the "Pink Sheets".

The following table indicates the high and low bid prices of the common shares
during the periods indicated:
                                                2003                2004
                                          ----------------    ----------------
                                           HIGH       LOW      HIGH       LOW
First Quarter                             $ 0.20    $ 0.08    $ 0.15    $ 0.07
Second Quarter                            $ 0.12    $ 0.06    $ 0.14    $ 0.06
Third Quarter                             $ 0.30    $ 0.04    $ 0.11    $ 0.03
Fourth Quarter                            $ 0.21    $ 0.08    $ 0.04    $ 0.01

The source of the 2003 high and low bid price information is the OTC Bulletin
Board. The 2003 market quotations provided reflect inter-dealer prices, without
retail mark-up, markdown or commission and may not represent actual
transactions. The source of the 2004 high and low bid price is BigCharts.com.

REGISTERED HOLDERS OF OUR COMMON STOCK

As of January 31, 2006, there were approximately 418 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.


                                       20
<PAGE>

RECENT SALES OF UNREGISTERED SECURITIES

The description below only covers the year 2004.

During the twelve months ended December 31, 2004, we completed the sale of the
following securities that were not registered pursuant to the Securities Act:

The Company issued 1,000,000 shares in connection with private placements for
net proceeds of $49,678, in connection with the above-mentioned private
placement, the Company issued 1,000,000 warrants which entitle the holder to
purchase one common share at $0.10 for each warrant for a three-year period. The
issuance was completed pursuant to Section 4(2) of the Securities Act on the
basis that it did not involve a public offering, the recipient took the shares
for investment purposes and not for resale and we took appropriate measures to
restrict transfer.

During 2004, the Company issued 332,500 shares to consultants in consideration
for services. The issuance was completed pursuant to Section 4(2) of the
Securities Act on the basis that it did not involve a public offering, the
recipient took the shares for investment purposes and not for resale and we took
appropriate measures to restrict transfer.

On July 16, 2004, we completed the issuance of 1,000,000 shares of our common
stock pursuant to the conversion of 10,000 shares of our Series X Preferred
Stock. The issuance was completed pursuant to Section 3(9) of the Securities Act
on the basis that it involved the exchange of one security of an issuer for
another security of the issuer. No underwriters or agents were involved in the
issuance and no consideration was paid by us in connection therewith.

On October 4, 2004, we completed the issuance of 179,670 shares of our common
stock to Mr. Charles Caverno pursuant to a court ordered settlement. The Company
took the position that the issuance was completed pursuant to Section 3(a)(10)
of the Securities Act.

On November 6, 2004, we completed the issuance of 4,000,000 unrestricted shares
of our common stock to Mr. Peter Hofbauer pursuant to a court ordered
settlement. The issuance was completed pursuant to Section 3(a)(10) of the
Securities Act.

On November 18, 2004, we completed the issuance of 3,500,000 shares of our
common stock pursuant to the conversion of 35,000 shares of our Series X
Preferred Stock. The issuance was completed pursuant to Section 3(9) of the
Securities Act on the basis that it involved the exchange of one security of an
issuer for another security of the issuer. No underwriters or agents were
involved in the issuance and no consideration was paid by us in connection
therewith.

The foregoing does not include options granted and/or exercised during 2004.


                                       21
<PAGE>

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

OVERVIEW

The following discussion and analysis of our financial condition as of December
31, 2004 and results of operations for the two years ended December 31, 2004 and
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" under Item I - Business.

We resumed our business operations on February 2, 2004, following settlement
with Honeywell. We received a net amount from Honeywell of $4,770,900 which
represents the $8,500,000 settlement net of legal fees and creditor payments. We
used these net proceeds to fund resumption of our business and to settle some
other outstanding debts and award payments to our management and employees.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

                              --------------------------------------------------
                                            Year Ended December 31
                              --------------------------------------------------
                                                                 Percentage
                                  2004            2003       Increase/(Decrease)

Total Revenue                   $22,224         $14,050            58.18%

Operating Expenses             $3,544,609      $6,879,365         (48.47%)

Net (Loss) From Operations    ($3,522,385)    ($6,865,315)        (48.69%)

Settlement of Litigation       $6,375,000         Nil               n/a

Other Income and Expenses        57,125         (19,402)          394.43%

Total Net Income (Loss)        $2,909,740     ($6,884,717)        142.26%

The increase in our net income for the year ended December 31, 2004 as compared
to 2003 was due to the proceeds we received pursuant to our settlement with
Honeywell. Our continued net losses from operations reflect our continued
operating expenses and our inability to generate revenues.


                                       22
<PAGE>

NET REVENUE

                              --------------------------------------------------
                                            Year Ended December 31
                              --------------------------------------------------
                                                                 Percentage
                                  2004            2003            Increase

License Fee                     $22,224          $14,050            58.18%

License fee revenue is recognized over the term of the license agreement. During
2003, $400,000 in license fees were deferred and are being amortized over 18
years. As a result, for the year ended December 31, 2004 $22,224 of licensing
fees was recognized as income. Our limited current receipts (not reflected as
revenue) are derived for the most part from selling "shop" versions of our
product and reflect the fact that our Turbopac(TM) products are In the
development stage. During 2004, we sold two prototypes for $17,400, which
reduced our research and development expenses. We believe that we will not be
able to generate any significant revenues from Turbopac(TM) until we complete
our production models and enter into a manufacturing arrangement. We are
attempting to generate sales of our Turbopac(TM) product in the aftermarket
arena in 2006.

COSTS OF SALES

We did not have any costs of sales in 2004 due to the fact that we had no sales
during this period nor did we engage in any manufacturing activity during 2004
or 2003.

OPERATING EXPENSES

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

                              --------------------------------------------------
                                            Year Ended December 31
                              --------------------------------------------------
                                                                 Percentage
                                  2004            2003            Decrease

Selling, General and
Administrative Expenses          592,241        2,701,491         (78.08%)

Research and Development
Expenses                        1,246,128       1,953,137         (36.20%)

Litigation Expense              1,554,431       1,334,686         (16.46%)

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

The decrease in our selling, general and administrative expenses for 2004, not
withstanding that we had suspended operations for a significant portion of 2003,
was attributable to: (i) the streamlining of our operations, (ii) reductions in
our staff, and (iii) adjustments to the recorded liability for the authorized
capital deficiency discussed below under "Liabilities". General and
administrative costs included expenses associated with our Carpinteria,
California office, management compensation, administrative staff and overhead.
Selling expenses were minimal and reflected the fact that our products are not
being commercially sold at present. RESEARCH AND DEVELOPMENT The decrease in
research and development costs in 2004 was a result of management's strategic
efforts to streamline our operations. Our research and development costs related
to present and future products are charged to operations in the period incurred.
Our research and development activities during 2004 are associated with the
development of our Turbopac product.


                                       23
<PAGE>

LITIGATION EXPENSE

The increase in litigation expense is primarily attributable to our payment of
$1,290,000 bonuses out of the settlement of litigation with Honeywell. We also
recorded an adjustment to management's estimate of provision for lawsuits of
$391,970. The adjustment is due to additional information on outstanding
litigation.

COMPENSATION EXPENSE

For 2004, our stock based compensation for consultants and employees decreased
to $466,934 from $1,732,616 for 2003, representing a decrease of $1,265,682 or
approximately 73%. In the fourth quarter of 2004 we increased our reliance on
stock based compensation in order to fund our operations 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 and was
higher during periods when cash was unavailable.

During 2004, we granted 2,857,500 options to purchase shares of our common stock
to various consultants associated with legal and related matters that we deemed
essential to our operations, compared to options to purchase 13,345,666 shares
granted in 2003. As a result, we recognized $268,192 of non-employee
compensation expense during the year ended December 31, 2004 compared to
$1,130,526 during the year ended December 31, 2003. 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 $172,343 to $856,467 and our net income would
have decreased from $2,909,740 or $0.02 per share, to $2,225,616, or $0.01 per
share. This pro forma information is disclosed in further detail in our
financial statements in the Summary of Significant Accounting Policies under the
heading "Stock-Based Compensation".


                                       24
<PAGE>

NET INCOME

Our net income for the year ended December 31, 2004 increased to $2,909,740 from
a net loss of $6,884,717 for the year ended December 31, 2003, representing an
increase of $9,794,457 or 142.26%. The increase in our net income is primarily
due to receipt of the Honeywell settlement in the amount of $6,375,000.
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 $911,030 owed to certain of our creditors and lien holders. We
received $4,770,940 net of legal fees and creditor liens from Honeywell. Our
increase in net income was also due to a reduction in our overhead and
administration costs in 2004 and our decision to suspend our operations from
August 2003 to January 31, 2004.

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.

FINANCIAL CONDITION

At the end of 2004 we had no cash reserves and by early 2005 we were compelled
to suspend operations. Subsequent to September 2005 we received additional funds
from equity raises. We require additional financing to complete our plans.
During 2004 our available cash were amounts received from the Honeywell
settlement.

CASH AND WORKING CAPITAL

                                                                   Percentage
                          At December 31,      At December 31,       Increase/
                                    2004                 2003       (Decrease)

Current Assets                   $51,670              $30,985              67%

Current Liabilities          ($8,680,295)        ($14,722,549)            (41%)

Working Capital Deficit      ($8,628,625)        ($14,691,564)            (41%)

The reduction to our working capital deficit was primarily attributable to an
increase in cash arising from the settlement of our claims against Honeywell,
and a reduction in accounts payable, accrued liabilities, provisions for lawsuit
settlements and loans payable as discussed below.


                                       25
<PAGE>

LIABILITIES
                          At December 31,      At December 31,     Percentage
                                    2004                 2003        Decrease

Provisions for Lawsuit        $6,013,198           $7,019,439             (14%)
Settlements

Accounts Payable              $2,226,102           $3,791,191             (41%)

Accrued Liabilities             $285,935           $3,068,259             (91%)

Short-Term Loans                $148,600             $767,578             (81%)

The decrease in accrued liabilities is primarily from the reversal of the
liability for potentially diluted common shares. Prior to the annual
shareholders meeting held on September 30, 2004, our potentially diluted common
shares exceeded our authorized share capital and a $2,134,322 accrual was
provided to account for potential share issues that could not previously have
been settled due to the limited amount of authorized share capital. At our
annual meeting the shareholders voted to increase our authorized capital to one
billion shares of common stock. As a result, potentially diluted common shares
do not presently exceed authorized capital and the corresponding liability has
been reversed.

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

Included in short-term loans at December 31, 2004 are unsecured, non-interest
bearing advances of $148,600 that we anticipate will be converted into shares of
our common stock.

CASH FLOWS

                                                   --------------------------
                                                         At December 31,
                                                   --------------------------
                                                        2004             2003
                                                        ----             ----
Net Cash from (used in) Operating Activities        $776,832      ($1,710,010)

Net Cash from (used in) Investing Activities       ($351,988)              --

Net Cash from (used in) Financing Activities       ($425,374)      $1,574,638

Net Decrease in Cash During Period                     ($530)       ($135,372)
                                                   ==========================

CASH USED IN OPERATING ACTIVITIES

The increase in cash from operating activities was due to the litigation
recovery from settlement of the Honeywell claims. There were no material
revenues from sales.


                                       26
<PAGE>

CASH PROVIDED BY INVESTMENT ACTIVITIES

The increase in cash used in investment activities is primarily as a result of
the purchase of $123,137 in new equipment for the development and demonstration
of prototypes. In prior years, we have financed our business primarily through
private placement sales of our common stock, exercises of stock options, short
term loans, conversion of accrued liabilities into stock and through increases
in our accrued liabilities and accounts payable.

FINANCING REQUIREMENTS

After we commenced operations in 2004 with the Honeywell proceeds we focused our
resources on research and development of our products incorporating our
proprietary technology. As of December 31, 2004 we had minimal cash and working
capital resources and ultimately curtailed and finally ceased operations in
early 2005. We will require additional financing if we are to continue as a
going concern and to finance our business operations. Our plan of operations
calls for us to spend approximately $1,500,000 over the next twelve months plus
the agreement of our creditors to the settlement of outstanding accounts payable
and accrued liabilities or their agreement to forbear on collection of
outstanding accounts payable and accrued liabilities. While we have obtained
some financing in 2005 and early 2006 we need substantially more capital. We may
not be able to obtain additional working capital on acceptable terms, or at all.
Accordingly, there is substantial doubt about our ability to continue as a going
concern.

We 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 which is no assurance that we will be able to
raise the additional capital that we require to continue operations. In the
event that we are unable to raise additional financing on acceptable terms, then
we may have to cease operating and seek relief under appropriate statutes.


                                       27
<PAGE>

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 $127,567,083 at December 31, 2004, have used cash in our
operating activities in recent periods, have disposed of our most significant
subsidiary through bankruptcy, are subject to lawsuits brought against us by
shareholders and other parties, and based on our projected cash flows for the
ensuing year, we may be required to seek additional equity or debt financing in
order to continue our present operations. These matters raise substantial doubt
about our ability to continue as a going concern.

STOCK BASED COMPENSATION

In December 2004, SFAS No. 123R, "Share-based Payment" was issued and replaces
SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees." SFAS 123R requires the measurement of all employee share-based
payments, including grants of employee stock options, using a fair-value based
model. Deferred compensation calculated under the fair value method would then
be amortized into income over the respective vesting period of the stock option.
The accounting provisions of SFAS 123R are effective for reporting periods
beginning after June 15, 2005.

We continue to 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.


                                       28
<PAGE>

REVENUE RECOGNITION

Prior to the suspension of our operations in 2003, we recognized revenue upon
shipment of product. Since the re-commencement of operations, 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, as of December 31, 2004 $22,224
($14,050 - 2003) 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 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. During the year ended December 31,
2004 sales of prototypes totaling $17,400 offset research and development costs.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, SFAS No. 123R, "Share-based Payment" was issued and replaces
SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees." SFAS 123R requires the measurement of all employee share-based
payments, including grants of employee stock options, using a fair-value based
model. Deferred compensation calculated under the fair value method would then
be amortized into income over the respective vesting period of the stock option.
The accounting provisions of SFAS 123R are effective for reporting periods
beginning after June 15, 2005.


                                       29
<PAGE>

In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an
amendment of APB Opinion No. 29. SFAS 153 addresses the measurement of exchanges
of nonmonetary assets. It eliminates the exception from fair value measurement
for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an
exception for exchanges that do not have commercial substance. This Statement
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for no monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company is considering the
provisions of SFAS No. 153 and its effect on nonmonetary exchanges in the
future.

In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections,
a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 applies
to all voluntary accounting principle changes as well as the accounting for and
reporting of such changes. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.

SFAS 154 requires voluntary changes in accounting principle be retrospectively
applied to financial statements from previous periods unless such application is
impracticable. Changes in depreciation, amortization, or depletion for
long-lived, non-financial assets are accounted for as a change in accounting
estimate that is affected by a change in accounting principle, under the newly
issued standard.

SFAS 154 replaces APB Opinion No. 20 and SFAS 3. SFAS 154 carries forward many
provisions of Opinion 20 and SFAS 3 without change including those provisions
related to reporting a change in accounting estimate, a change in reporting
entity, correction of an error and reporting accounting changes in interim
financial statements. The FASB decided to completely replace Opinion 20 and SFAS
3 rather than amending them in keeping to the goal of simplifying U.S. GAAP. The
provisions of SFAS No. 154 are not expected to have a material effect on the
Company's consolidated financial position or results of operation. The
provisions of SFAS No. 154 are not expected to have a material effect on the
Company's consolidated financial position or results of operation.


                                       30
<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

Included with this Annual Report on Form 10-KSB are our audited financial
statements for the years ended December 31, 2004 and 2003, including the
following:

1.    Report of Independent Registered Public Accounting Firm Vasquez and
      Company, LLC;

2.    Report of Independent Registered Public Accounting Firm BDO Dunwoody, LLP

3.    Consolidated Balance Sheets as at December 31, 2004 and December 31, 2003.

4.    Consolidated Statements of Operations for the years ended December 31,
      2004 and December 31, 2003.

5.    Consolidated Statements of Capital Deficit for the years ended December
      31, 2004 and December 31, 2003.

6.    Consolidated Statements of Cash Flows for the years ended December 31,
      2004 and December 31, 2003.

7.    Summary of Significant Accounting Policies.

8.    Notes to the Consolidated Financial Statements.


                                       31
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003


                                      F-1
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

                                                                        CONTENTS
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -
VASQUEZ & COMPANY, LLP                                                       F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -
BDO DUNWOODY, LLP                                                            F-4

CONSOLIDATED FINANCIAL STATEMENTS

     Balance Sheets                                                          F-5

     Statements of Operations                                                F-6

     Statements of Capital Deficit                                           F-7

     Statements of Cash Flows                                                F-8

     Summary of Significant Accounting Policies                              F-9

     Notes to the Financial Statements                                      F-15


                                      F-2
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
Turbodyne Technologies, Inc.

We have audited the accompanying consolidated balance sheet of Turbodyne
Technologies, Inc. and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, capital deficit, and cash flows for the
year ended December 31, 2004. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Turbodyne Technologies, Inc.
and subsidiaries as of December 31, 2004, and the results of its operations and
its cash flows for the year ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As more fully discussed in Note 1
to the consolidated financial statements, the Company has incurred significant
losses in recent years, has an accumulated deficit of $127,567,083 and a total
capital deficit of $8,734,403 at December 31, 2004. It has used all of its
available cash in its operating activities in recent years, has a significant
working capital deficiency and is subject to lawsuits brought against it by
other parties. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in these regards are also
discussed in Note 1 to the consolidated financial statements. The aforementioned
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.


Los Angeles, California
January 16, 2006


                                      F-3
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the Consolidated Balance Sheet of Turbodyne Technologies, Inc.
and subsidiaries as at December 31, 2003 and the related Consolidated Statements
of Operations, Capital Deficit and Cash Flows for the year 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 audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Turbodyne
Technologies, Inc. and subsidiaries as at December 31, 2003 and the results of
its operations and its cash flows for the year 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 the
second paragraph of 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 all of its available cash in its operating activities in recent years,
has a significant working capital deficiency and is subject to lawsuits brought
against it by other parties. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in these
regards are also discussed in Note 1 to the consolidated financial statements.
The aforementioned consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.


Chartered Accountants
Vancouver, Canada
April 6, 2004


                                      F-4
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31                                                                    2004             2003
----------------------------------------------------------------------------------------------------
<S>                                                                   <C>              <C>
ASSETS
CURRENT
     Cash                                                             $       1,615    $       2,145
     Prepaid expenses and other current assets                               50,055           28,840
                                                                      ------------------------------
          TOTAL CURRENT ASSETS                                               51,670           30,985

PROPERTY AND EQUIPMENT (NOTE 2)                                              45,002          110,867
CERTIFICATE OF DEPOSIT (NOTE 4, 13)                                         240,000               --
                                                                      ------------------------------
TOTAL ASSETS                                                          $     336,672    $     141,852
====================================================================================================

LIABILITIES AND CAPITAL DEFICIT

LIABILITIES

CURRENT
     Current portion of long-term debt (Note 3)                               6,460           76,082
     Accounts payable (Note 4)                                            2,226,102        3,791,191
     Accrued liabilities                                                    285,935        3,068,259
     Provision for lawsuit settlements (Notes 7, 11, 12, 13 and 14)       6,013,198        7,019,439
     Loans payable (Note 5)                                                 148,600          767,578
                                                                      ------------------------------
          TOTAL CURRENT LIABILITIES                                       8,680,295       14,722,549

LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 3)                             27,054               --

DEFERRED LICENSING FEE                                                      363,726          385,950
                                                                      ------------------------------
          TOTAL LIABILITIES                                               9,071,075       15,108,499
                                                                      ------------------------------
CAPITAL DEFICIT
     Share Capital (Note 9)
         Authorized
             1,000,000 preferred shares, par value $0.001
             1,000,000,000 (150,000,000 - 2003) common
             shares, par value $0.001
         Issued
             52,175 preferred shares in 2004 (2003-97,175)                       52               97
             160,157,955 common shares in 2004 (2003-148,771,749)           160,158          148,772
     Treasury stock, at cost (378,580 shares)                            (1,907,612)      (1,907,612)

     Additional paid-in capital                                         120,544,963      117,233,800

     Other comprehensive income -
         Foreign exchange translation gain                                   35,119           35,119
     Accumulated deficit                                               (127,567,083)    (130,476,823)
                                                                      ------------------------------
          TOTAL CAPITAL DEFICIT                                          (8,734,403)     (14,966,647)
                                                                      ------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIT                                 $     336,672    $     141,852
====================================================================================================
</TABLE>

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


                                      F-5
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31                                              2004              2003
---------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>
LICENSING FEES                                                      $      22,224     $      14,050
                                                                    -------------------------------
EXPENSES
     Selling, general and administrative (Notes 7, 8 and 9)               592,241         2,701,491
     Research and developments costs (Notes 8 and 9)                    1,246,128         1,953,137
     Litigation expense (Notes 7, 11, 12, 13 and 14)                    1,554,431         1,334,686
     License impairment provision                                              --           624,000
     Depreciation and amortization                                        151,809           266,051
                                                                    -------------------------------
         TOTAL EXPENSES                                                 3,544,609         6,879,365
                                                                    -------------------------------
LOSS FROM OPERATIONS                                                   (3,522,385)       (6,865,315)

OTHER INCOME (EXPENSE)
     Settlement of litigation (Note 12)                                 6,375,000                --
     Interest expense                                                      (7,390)          (22,817)
     Interest Income                                                       14,477                --
     Gain on sale of assets                                                 6,678             3,415
     Gain on settlement of term debt (Note 3)                              43,360                --
                                                                    -------------------------------
NET INCOME (LOSS) FOR THE PERIOD                                    $   2,909,740     $  (6,884,717)
===================================================================================================
INCOME (LOSS) PER COMMON SHARE - BASIC                              $        0.02     $       (0.05)
===================================================================================================
INCOME (LOSS) PER COMMON SHARE - DILUTED                            $        0.02     $       (0.05)
===================================================================================================
WEIGHTED AVERAGE SHARES USED FOR BASIC INCOME (LOSS) PER SHARE        149,420,194       138,005,331
===================================================================================================
WEIGHTED AVERAGE SHARES USED FOR DILUTED INCOME (LOSS) PER SHARE      180,654,013       138,005,331
===================================================================================================
</TABLE>

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


                                      F-6
<PAGE>

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

<TABLE>
<CAPTION>
                                                       Preferred Stock           Common Stock                Treasury Stock
                                                 ------------------------------------------------------------------------------
                                                      Shares     Amount          Shares       Amount       Shares        Amount
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>         <C>            <C>            <C>       <C>
Balance, January 1, 2003                                  --    $    --     115,620,517    $ 115,621      378,580   $(1,907,612)
Issuance of Series X preferred shares
(Note 9(e))                                          122,175        122              --           --           --            --
Exercise of stock options                                 --         --      10,294,000       10,294           --            --
Private placements of common stock                        --         --      12,511,820       12,512           --            --
Issuance of stock for services                            --         --       4,845,412        4,845           --            --
Issuance of stock for settlement of lawsuit               --         --       3,000,000        3,000           --            --
Conversion of preferred Series X shares              (25,000)       (25)      2,500,000        2,500           --            --
Issuance of stock options to non-employees
for services (Note 8)                                     --         --              --           --           --            --
Liability for settlement of equity instruments            --         --              --           --           --            --
Net loss for the year                                     --         --              --           --           --            --
                                                 ------------------------------------------------------------------------------
Balance, December 31, 2003                            97,175         97     148,771,749      148,772      378,580    (1,907,612)
Private placement of common stock (Note 9 (d))            --         --       1,000,000        1,000           --            --
Reversal of liability for settlement of equity
instruments from prior periods (Note 9 (a))               --         --              --           --           --            --
Exercise of stock options (Note 9 (d))                    --         --       2,935,000        2,935           --            --
Issuance of stock for services (Note 9 (b))               --         --         332,500          332           --            --
Issuance of stock for settlement of debt
(Note 9 (d))                                              --         --       2,589,036        2,589           --            --
Issuance of stock for settlement of legal
action (Note 9 (d))                                       --         --       4,179,670        4,180           --            --
Issuance of stock options to non-employees
for services (Note 8)                                     --         --              --           --           --            --
Issuance of stock options to employees
(Note 8)                                                  --         --              --           --           --            --
Issuance of warrants to non-employees
(Note 9 (g))
Escrow shares returned to treasury
(Note 9 (e))                                              --         --      (4,150,000)      (4,150)          --            --
Conversion of Preferred Series X shares
(Note 9(e))                                          (45,000)       (45)      4,500,000        4,500           --            --
Net incomefor the year                                    --         --              --           --           --            --
                                                 ------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004                            52,175    $    52     160,157,955    $ 160,158      378,580   $(1,907,612)
===============================================================================================================================

<CAPTION>
                                                   Additional           Other
                                                      Paid-in   Comprehensive      Accumulated         Capital
                                                      Capital          Income          Deficit         Deficit
--------------------------------------------------------------------------------------------------------------
<S>                                              <C>                 <C>         <C>              <C>
Balance, January 1, 2003                         $113,445,516        $ 35,119    $(123,592,106)   $(11,903,462)
Issuance of Series X preferred shares
(Note 9(e))                                         1,613,378              --               --       1,613,500
Exercise of stock options                             567,026              --               --         577,320
Private placements of common stock                   .654,158              --               --         666,670
Issuance of stock for services                        597,245              --               --         602,090
Issuance of stock for settlement of lawsuit         1,047,000              --               --       1,050,000
Conversion of preferred Series X shares                (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     (1,818,574)             --               --      (1,818,574)
Net loss for the year                                      --              --       (6,884,717)     (6,884,717)
                                                 -------------------------------------------------------------
Balance, December 31, 2003                        117,233,800          35,119     (130,476,823)    (14,966,647)
Private placement of common stock (Note 9 (d))         48,678              --               --          49,678
Reversal of liability for settlement of equity
instruments from prior periods (Note 9 (a))         2,134,322              --               --       2,134,322
Exercise of stock options (Note 9 (d))                103,989              --               --         106,924
Issuance of stock for services (Note 9 (b))            26,067              --               --          26,399
Issuance of stock for settlement of debt
(Note 9 (d))                                          209,963              --               --         212,552
Issuance of stock for settlement of legal
action (Note 9 (d))                                   288,173              --               --         292,353
Issuance of stock options to non-employees
for services (Note 8)                                 268,192              --               --         268,192
Issuance of stock options to employees
(Note 8)                                              172,343              --               --         172,343
Issuance of warrants to non-employees
(Note 9 (g))                                           59,741                                           59,741
Escrow shares returned to treasury
(Note 9 (e))                                            4,150              --               --              --
Conversion of Preferred Series X shares
(Note 9(e))                                            (4,455)             --               --              --
Net incomefor the year                                     --              --        2,909,740       2,909,740
                                                 -------------------------------------------------------------
BALANCE, DECEMBER 31, 2004                       $120,544,963        $ 35,119    $(127,567,083)   $ (8,734,403)
==============================================================================================================
</TABLE>

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


                                      F-7
<PAGE>

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

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31                                                          2004            2003
-------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>             <C>
CASH PROVIDED BY (USED IN)

OPERATING ACTIVITIES
      Net income (loss) for the year                                             $  2,909,740    $ (6,884,717)
      Adjustments to reconcile net income (loss) to net
      cash provided by (used in) operating activities:
         Amortization of deferred licensing fees                                      (22,224)        (14,050)
         Depreciation and amortization                                                151,809         266,051
         Gain on settlement of debt                                                   (43,360)             --
         License impairment  provision                                                     --         624,000
         Gain on sale of asset                                                         (6,678)             --
         Recovery on lawsuit reserve from TST share sales (Note 7(b))                 (23,345)             --
         Stock option compensation (Note 8)                                           440,535       1,130,526
         Stock issued for services (Note 8)                                            26,399         602,090
         Stock issued for settlement of lawsuit (Note 9(d))                           292,353       1,050,000
         Issuance of note payable for consulting fees (Note 5)                             --         270,886
         Liability in connection with settlement of equity instrument                (581,000)        539,530
         Extension of warrants  (Note 9 (g))                                          122,635              --
      Increase in operating assets                                                         --
          Prepaid expenses and other current assets                                   (21,215)        (14,646)
      Increase (decrease) in operating liabilities
          Accounts payable                                                         (1,432,102)        498,650
          Accrued liabilities and provision for lawsuit settlements                (1,036,715)        (28,330)
         Deferred licensing fees                                                           --         250,000
                                                                                 ----------------------------
                                                                                      776,832      (1,710,010)
                                                                                 ----------------------------
INVESTING ACTIVITY
      Purchase of property and equipment                                             (123,137)             --
      Sale of capital assets                                                           11,149              --
      Purchase certificate of deposit                                                (240,000)             --
                                                                                 ----------------------------
                                                                                     (351,988)             --
                                                                                 ----------------------------
FINANCING ACTIVITIES
      Net proceeds term debt                                                           33,514           3,011
      Loans payable                                                                  (565,812)        327,637
      Issuance of common stock and stock subscriptions                                106,924         666,670
      Proceeds from exercise of stock options                                              --         577,320
                                                                                 ----------------------------
                                                                                     (425,374)      1,574,638
                                                                                 ----------------------------

NET DECREASE IN CASH                                                                     (530)       (135,372)

CASH, beginning of year                                                                 2,145         137,517
                                                                                 ----------------------------
CASH, end of year                                                                $      1,615    $      2,145
=============================================================================================================

SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
      Cash paid during the year
          Interest                                                               $      2,946    $         --
          Income taxes                                                           $      7,200    $         --

SUPPLEMENTARY DISCLOSURE OF NON-CASH
 INVESTING AND FINANCING ACTIVITIES:
      Accounts payable transferred to loans payable                              $    159,386    $         --
      Stock issued for settlement of loans payable (Note 9)                      $    212,552              --
      Preferred stock issued on settlement of accrued liabilities (Note 9)       $         --    $  1,613,500
      Return of asset to settle term debts                                       $     76,082    $         --
      Liability in connection with settlement of equity instruments (Note 9)     $    581,000    $  2,715,322
      Reversal of liability in connection with settlement of equity instrument   $  2,134,322    $         --
      Reduction in accounts payable as partial settlement of licensing fees      $         --    $    150,000
=============================================================================================================
</TABLE>

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


                                      F-8
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DECEMBER 31, 2004 AND 2003

NATURE OF BUSINESS                  Turbodyne Technologies, Inc., a Nevada
                                    corporation, and its subsidiaries (the
                                    "Company") engineer, develop and market
                                    products designed to enhance performance and
                                    reduce emissions of internal combustion
                                    engines.

                                    The Company had suspended business
                                    operations in 2003 due to a lack of
                                    financing. The Company received funds by
                                    entering into a settlement agreement and
                                    general release with Honeywell (Note 12),
                                    which enabled the Company to resume
                                    operations and reduce its working capital
                                    deficiency.

                                    The Company suspended operations in April
                                    2005 due to a lack of financing. The Company
                                    continued to seek funding and in September
                                    2005 entered into a merger agreement. New
                                    management is seeking financing.

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-9
<PAGE>

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 2004 and 2003.


                                      F-10
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DECEMBER 31, 2004 AND 2003

RECOGNITION OF REVENUE              License fee revenue is recognized over the
                                    term of the license agreement. During the
                                    year ended December 31, 2003, $400,000 in
                                    license fees were deferred and are being
                                    amortized over 18 years. As a result, for
                                    the year ended December 31, 2004 $22,224
                                    ($14,050 - 2003) of licensing fees was
                                    recognized as income.

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

                                    For the year ended December 31, 2004, 52,175
                                    (2003 - 97,175) preferred shares convertible
                                    into 5,217,500 shares (2003 - 9,717,500) of
                                    common stock, options and warrants to
                                    purchase 14,928,666 (2003 - 4,899,666) and
                                    15,084,922 (2003 - 21,634,809) shares of
                                    common stock were outstanding during the
                                    year. The weighted average dilutive
                                    cumulative equivalent shares of 31,233,819
                                    were included in the denominator for 2004
                                    computation of diluted "Earnings (loss) per
                                    share" but were not included for 2003
                                    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            In December 2004, SFAS No. 123R,
                                    "Share-based Payment" was issued and
                                    replaces SFAS No. 123, "Accounting for
                                    Stock-Based Compensation" and supersedes
                                    Accounting Principles Board Opinion ("APB")
                                    No. 25, "Accounting for Stock Issued to
                                    Employees." SFAS 123R requires the
                                    measurement of all employee share-based
                                    payments, including grants of employee stock
                                    options, using a fair-value based model.
                                    Deferred compensation calculated under the
                                    fair value method would then be amortized
                                    into income over the respective vesting
                                    period of the stock option. The accounting
                                    provisions of SFAS 123R are effective for
                                    reporting periods beginning after June 15,
                                    2005.


                                      F-11
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DECEMBER 31, 2004 AND 2003

STOCK-BASED COMPENSATION -          The Company continues to use SFAS No. 123,
CONTINUED                           "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.

                                    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
                                                           2004         2003
                                                       ------------------------
             Net income (loss), as reported            $2,909,740   $(6,884,717)

             Add: Stock based employee compensation
               expense included in reported net
               income, net of related tax effects         172,343            --

             Deduct: Total Stock-based employee
               compensation expense determined under
               fair-value based method for all awards
               not included in net income (loss)         (856,467)      (89,900)
                                                       ------------------------
             Pro-forma net income (loss)               $2,225,616   $(6,974,617)
                                                       ========================
             Income (loss) per share:
               Basic - as reported                     $     0.02   $     (0.05)
               Diluted - as reported                   $     0.02   $     (0.05)
               Basic and diluted - pro-forma           $     0.01   $     (0.05)

RESEARCH AND DEVELOPMENT            Research and development costs related to
                                    present and future products are charged to
                                    operations in the year incurred. The sale of
                                    prototypes is offset against research and
                                    development costs.


                                      F-12
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DECEMBER 31, 2004 AND 2003

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

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

COMPREHENSIVE INCOME                The Company has adopted SFAS No. 130,
                                    "Reporting Comprehensive Income". SFAS No.
                                    130 establishes standards to measure all
                                    changes in equity that result from
                                    transactions and other economic events other
                                    than transactions with owners. Comprehensive
                                    income is the total of net earnings (loss)
                                    and all other non-owner changes in equity.
                                    Except for net earnings (loss) and foreign
                                    currency translation adjustments, the
                                    Company does not have any transactions and
                                    other economic events that qualify as
                                    comprehensive income as defined under SFAS
                                    No. 130. As foreign currency translation
                                    adjustments were immaterial to the Company's
                                    consolidated financial statements, net
                                    earnings (loss) approximated comprehensive
                                    income for the years ended December 31, 2004
                                    and 2003.

LEGAL FEES                          The Company expenses legal fees in
                                    connection with litigation as incurred.


                                      F-13
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DECEMBER 31, 2004 AND 2003

NEW ACCOUNTING PRONOUNCEMENTS       In December 2004, SFAS No. 123R,
                                    "Share-based Payment" was issued and
                                    replaces SFAS No. 123, "Accounting for
                                    Stock-Based Compensation" and supersedes
                                    Accounting Principles Board Opinion ("APB")
                                    No. 25, "Accounting for Stock Issued to
                                    Employees." SFAS 123R requires the
                                    measurement of all employee share-based
                                    payments, including grants of employee stock
                                    options, using a fair-value based model.
                                    Deferred employee compensation calculated
                                    under the fair value method would then be
                                    amortized into income over the respective
                                    vesting period of the stock option. The
                                    accounting provisions of SFAS 123R are
                                    effective for reporting periods beginning
                                    after June 15, 2005. The Company is still
                                    accessing the impact of SFAS 123R.

                                    In December 2004, FASB issued SFAS No. 153,
                                    Exchanges of Nonmonetary Assets an amendment
                                    of APB Opinion No. 29. SFAS 153 addresses
                                    the measurement of exchanges of nonmonetary
                                    assets. It eliminates the exception from
                                    fair value measurement for nonmonetary
                                    exchanges of similar productive assets in
                                    paragraph 21(b) of APB Opinion No. 29,
                                    Accounting for Nonmonetary Transactions, and
                                    replaces it with an exception for exchanges
                                    that do not have commercial substance. This
                                    Statement specifies that a nonmonetary
                                    exchange has commercial substance if the
                                    future cash flows of the entity are expected
                                    to change significantly as a result of the
                                    exchange. SFAS 153 is effective for monetary
                                    asset exchanges occurring in fiscal periods
                                    beginning after June 15, 2005. The Company
                                    is considering the provisions of SFAS No.
                                    153 and its effect on nonmonetary exchanges
                                    in the future.

                                    In May 2005, FASB issued SFAS No. 154,
                                    Accounting Changes and Error Corrections, a
                                    replacement of APB Opinion No. 20 and FASB
                                    Statement No. 3. SFAS 154 applies to all
                                    voluntary accounting principle changes as
                                    well as the accounting for and reporting of
                                    such changes. SFAS 154 is effective for
                                    accounting changes and corrections of errors
                                    made in fiscal years beginning after
                                    December 15, 2005.


                                      F-14
<PAGE>

                  TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DECEMBER 31, 2004 AND 2003

NEW ACCOUNTING PRONOUNCEMENTS -     SFAS 154 requires voluntary changes in
CONTINUED                           accounting principle be retrospectively
                                    applied to financial statements from
                                    previous periods unless such application is
                                    impracticable. Changes in depreciation,
                                    amortization, or depletion for long-lived,
                                    non-financial assets are accounted for as a
                                    change in accounting estimate that is
                                    affected by a change in accounting
                                    principle, under the newly issued standard.

                                    SFAS 154 replaces APB Opinion No. 20 and
                                    SFAS 3. SFAS 154 carries forward many
                                    provisions of Opinion 20 and SFAS 3 without
                                    change including those provisions related to
                                    reporting a change in accounting estimate, a
                                    change in reporting entity, correction of an
                                    error and reporting accounting changes in
                                    interim financial statements. The FASB
                                    decided to completely replace Opinion 20 and
                                    SFAS 3 rather than amending them in keeping
                                    to the goal of simplifying U.S. GAAP. The
                                    provisions of SFAS No. 154 are not expected
                                    to have a material effect on the Company's
                                    consolidated financial position or results
                                    of operation. The provisions of SFAS No. 154
                                    are not expected to have a material effect
                                    on the Company's consolidated financial
                                    position or results of operation.


RECLASSIFICATION                    Certain comparative amounts have been
                                    reclassified to conform to the current
                                    year's presentation.


                                      F-15
<PAGE>

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

DECEMBER 31, 2004 AND 2003

1.    ABILITY TO CONTINUE AS A GOING CONCERN

      Turbodyne Technologies, Inc., a Nevada corporation, and its subsidiaries
      (the "Company") engineer, develop and market products designed to enhance
      performance and reduce emissions of internal combustion engines.

      The Company had suspended business operations in 2003 due to a lack of
      financing. It has used most of its available cash in its operating
      activities in recent years, has a significant working capital deficiency
      as at 2003 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 received funds by entering into a settlement agreement and
      general release with Honeywell in 2004 (Note 12), which enabled the
      Company to resume operations and reduce its working capital deficiency.

      The Company entered a merger agreement in September 2005 which resulted in
      new management which 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. There is substantial doubt
      that the Company will be able to raise the equity capital needed. 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:

                                                               2004         2003
                                                         -----------------------
      Machinery and equipment                            $1,637,484   $2,068,014
      Transportation equipment                               35,766      135,991
      Furniture and fixtures                                142,999      165,723
      Leasehold improvements                                 97,948      116,304
                                                         -----------------------
                                                          1,914,197    2,486,032
      Less: accumulated depreciation, amortization and
             provision for impairment of assets           1,869,195    2,375,165
                                                         -----------------------
      Net property and equipment                         $   45,002   $  110,867
                                                         =======================


                                      F-16
<PAGE>

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

DECEMBER 31, 2004 AND 2003

3.    LONG-TERM DEBT

      Term debts at December 31, 2004 and 2003 consist of the following:

                                                     2004        2003
                                                 --------------------
      Notes Payable                              $ 33,514    $ 76,082

      Less current portion                          6,460      76,082
                                                 --------------------
      Long-term debt - net of current portion    $ 27,054    $     --
                                                 ====================

      During 2004, the Company returned an asset that was not in use as a
      settlement of the 2003 outstanding note payable and recorded a gain on the
      debt settlement of $43,360.

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

      Principal repayments for the term of the loan are as follows:

                              2005        $  6,460
                              2006           6,923
                              2007           7,387
                              2008           7,892
                              2009           4,852
                                          --------
                                          $ 33,514
                                          ========

      Subsequent to December 31, 2004 the Company was unable to make the
      payments so the bank repossessed the automobile and sold it at auction.
      The Company owes the difference between the note payable and the sales
      price

4.    ACCOUNTS PAYABLE

      For the year ended December 31, 2003, accounts payable included $361,485
      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 in 2004.


                                      F-17
<PAGE>

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

DECEMBER 31, 2004 AND 2003

5.    LOANS PAYABLE

                                                                 2004       2003
                                                             -------------------
      Unsecured, non-interest bearing loan payable,
      due on demand from stockholders and other parties      $148,600   $348,765

      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 12).*          --    147,927

      Note payable issued for settlement of consulting fees,
      unsecured, bearing interest at 7% per annum and
      payable on demand                                            --    270,886
                                                             -------------------
                                                             $148,600   $767,578
                                                             ===================

      *     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-18
<PAGE>

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

DECEMBER 31, 2004 AND 2003

6.    INCOME TAXES

      Income tax expense is comprised of the following for the years ended
      December 31, 2004 and 2003:

                                                         2004            2003
                                                 ----------------------------
      Current
        State                                    $      7,291    $         --
                                                 ============================

      Total income tax expense for the years ended December 31, 2004 and 2003
      differed from the amounts computed by applying the statutory Federal
      income tax rate to earnings before income taxes as a result of the
      following:

                                                         2004            2003
                                                 ----------------------------

      Computed "expected" income tax benefit     $         --    $ (2,753,887)
      Non-deductible stock option compensation        165,677         452,210
      Non-deductible expenses                       2,309,322         293,612
      Non-deductible stock for services                86,140
      Non-deductible stock for settlement             504,905
      Change in valuation allowance                (3,066,044)      2,008,065
                                                 ----------------------------
                                                 $         --    $         --
                                                 ============================

      The tax effects of temporary differences that give rise to the deferred
      tax assets and liabilities at December 31, 2004 and 2003 are as follows:

                                                         2004            2003
                                                 ----------------------------
      Deferred tax assets
         Accrued liabilities                     $    114,374    $  1,227,304
         Reserve for lawsuit settlements            2,405,279       2,794,776
         Property and equipment                       186,504         216,958
         Alternative minimum tax credit                55,000          55,000
         Net operating loss carryover              27,543,324      29,076,488
                                                 ----------------------------
            Gross deferred tax assets              30,304,481      33,370,526

      Less valuation allowance                    (30,304,481)    (33,370,526)
                                                 ----------------------------
      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, 2004 or 2003. Accordingly, a valuation allowance has been
      provided for the total net deferred tax assets.


                                      F-19
<PAGE>

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

DECEMBER 31, 2004 AND 2003

6.    INCOME TAXES - CONTINUED

      At December 31, 2004, the Company had net operating loss carryforwards of
      approximately $67,000,000 ($72,000,000 - 2003) 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)    Leases

            The Company leases certain factory and office premises in California
            under a non-cancelable operating lease expiring January 2005. Rental
            expense for 2004 and 2003 was approximately $370,000 and $360,000,
            respectively. At December 31, 2004 the Company owed $77,252 in rent,
            which is included in accounts payable. In March 2005 the Company
            moved out of the premises and relinquished the majority of the fixed
            assets to the landlord to sell and offset against rent payable.

            Minimum future rental commitments under the operating leases as of
            December 31, 2004 are:

                  Year ending December 31
                  2005                                      $ 28,840
                                                            --------
                  Total future minimum lease payments       $ 28,840
                                                            ========

      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;

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


                                      F-20
<PAGE>

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

DECEMBER 31, 2004 AND 2003

7.    COMMITMENTS AND CONTINGENCIES - CONTINUED

      iv)   any proceeds received by TST or its president from the sale of the
            issued shares will be automatically applied as a credit against the
            amount of the judgement against the Company in favour of TST. As of
            December 31, 2004, 147,000 (Nil - 2003) shares issued in connection
            with the TST settlement had been sold which has reduced the
            provision for lawsuit settlement by $23,345.

            At December 31, 2004, the Company has included $4,766,656
            ($4,803,000 - 2003) in regard to this matter in provision for
            lawsuit settlements. 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 for lawsuit
            settlements.

      c)    Other

            The Company is currently involved in various collection claims and
            other legal actions. (Notes 11, 13 and 14). It is not possible at
            this time to predict the outcome of some of the legal actions.

      d)    Royalties

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

8.    STOCK OPTIONS

      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, 2004 and 2003, the
      number of unoptioned shares available for granting of options under the
      plan was 7,197,759 and 9,786,795 respectively.

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


                                      F-21
<PAGE>

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

DECEMBER 31, 2004 AND 2003

8.    STOCK OPTIONS - CONTINUED

      Subsequent to December 31, 2004 the Company established the 2005 Stock
      Incentive Plan.

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

      The following summarizes information relating to stock options during 2004
      and 2003:

<TABLE>
<CAPTION>
                                                                          2004

                                              NON-EMPLOYEES      EMPLOYEES & DIRECTORS           TOTAL
                                          --------------------------------------------------------------------
                                                      WEIGHTED                WEIGHTED                WEIGHTED
                                                       AVERAGE                 AVERAGE                 AVERAGE
                                                      EXERCISE                EXERCISE                EXERCISE
                                             OPTIONS     PRICE       OPTIONS     PRICE       OPTIONS     PRICE
                                          --------------------------------------------------------------------
<S>                                       <C>           <C>       <C>           <C>       <C>           <C>
      Outstanding at beginning of year     2,851,666    $ 0.15     2,048,000    $ 0.16     4,899,666    $ 0.15
      Granted                              2,857,500    $ 0.08    10,439,000    $ 0.08    13,296,500    $ 0.08
      Exercised                           (1,057,500)   $ 0.06    (2,210,000)   $ 0.05    (3,267,500)   $ 0.04
                                          ----------              ----------              ----------
      Expired                                     --    $   --            --    $   --            --    $   --
      Options outstanding and
      exercisable at end of year           4,651,666    $ 0.11    10,277,000      0.11    14,928,666      0.11
                                          ====================================================================
      Weighted average fair value of
       options granted during the year            --    $ 0.09            --    $ 0.09            --    $ 0.09
                                          ====================================================================

<CAPTION>
                                                                          2003

                                              NON-EMPLOYEES      EMPLOYEES & DIRECTORS           TOTAL
                                          --------------------------------------------------------------------
                                                      WEIGHTED                WEIGHTED                WEIGHTED
                                                       AVERAGE                 AVERAGE                 AVERAGE
                                                      EXERCISE                EXERCISE                EXERCISE
                                             OPTIONS     PRICE       OPTIONS     PRICE       OPTIONS     PRICE
                                          --------------------------------------------------------------------
<S>                                       <C>           <C>       <C>           <C>       <C>           <C>
      Outstanding at beginning of year     1,131,715    $ 1.28     2,291,700    $ 0.55     3,423,415    $ 0.79
      Granted                             14,065,666    $ 0.07     1,523,000    $ 0.09    15,588,666    $ 0.07
      Exercised                          (10,294,000)   $ 0.06            --    $   --   (10,294,000)   $ 0.06
      Expired                             (2,051,715)   $ 0.73    (1,766,700)   $ 0.57    (3,818,415)   $  .66
                                          ----------              ----------              ----------
      Options outstanding and
      exercisable at end of  year          2,851,666    $ 0.15     2,048,000    $ 0.16     4,899,666    $ 0.15
                                          ====================================================================
      Weighted average fair value of
       options granted during the year            --    $ 0.08            --    $ 0.06            --    $ 0.07
                                          ====================================================================
</TABLE>


                                      F-22
<PAGE>

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

DECEMBER 31, 2004 AND 2003

8.    STOCK OPTIONS - CONTINUED

      At December 31, 2004, 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          2,385,000                  4.61             $0.05
        0.09 -  0.16         10,563,666                  6.79              0.10
        0.20 -  0.35          1,980,000                  0.41              0.25
                             --------------------------------------------------
                             14,928,666                  4.98             $0.11
                             ==================================================

      During 2004 the Company waived the termination clause and extended the
      term for 9,824,000 Director, consultant and employee options outstanding
      by approximately five years to the option plan termination date as
      follows:

                                                 Original                   New
      Exercise Price         Number       Expiration Date       Expiration Date
      -------------------------------------------------------------------------
              $0.040      1,000,000       August 26, 2008       August 12, 2013
              $0.095      1,650,000          May 10, 2009        March 31, 2014
              $0.100      7,174,000          July 9, 2009        March 31, 2014
      -------------------------------------------------------------------------
                          9,824,000
      =========================================================================

      Subsequent to December 31, 2004 the Company waived the termination clause
      for 7,000,000 Director and employee options issued in 2005.

      Issuance of Stock Options to Non-employees for Services

      The Company has recorded in general and administrative expenses, $268,192
      and $1,130,526 of compensation expense in 2004 and 2003, 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
      2004 and 2003 was $0.09 and $0.08, respectively, on the date of grant
      using the Black-Scholes option-pricing model with the following weighted
      average assumptions: 2004 and 2003 expected dividend yield 0%; expected
      volatility of 135% in 2004 (2003 - 139%) 2004 risk-free interest rate of
      3.63% (2003 - 2.56%) and expected life equal to 5 years (2003 - 1.89
      years).


                                      F-23
<PAGE>

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

DECEMBER 31, 2004 AND 2003

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. In 2004 the Company recognized $172,343 (Nil -
      2003) of compensation costs in connection with options granted to
      employees. 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 2004 and 2003 was $0.09 and $0.06, respectively,
      calculated on the date of grant using the Black-Scholes option pricing
      model with the following weighted average assumptions: 2004 and 2003
      expected dividend yield 0%; expected volatility of 135% in 2004 (2003 -
      152%), risk-free interest rate of 3.25% (2003 - 1.68%); and an expected
      life of 3 year (2003 - 1 years).

9.    SHARE CAPITAL

      a)    Authorized Capital

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

            At the Annual General Meeting held on June 30, 2004, the
            shareholders approved an increase of authorized capital to
            1,000,000,000 common shares. Prior to this increase in authorized
            capital, the Company's potentially diluted common shares exceeded
            the authorized shares. Immediately prior to the increase in
            authorized capital, the Company had recorded $2,134,322 (December
            31, 2003 - $2,715,322) in accrued liabilities to account for the
            potential cash settlement of these financial instruments. As at June
            30, 2004, the Company has reversed the $2,134,322 accrued
            liabilities since the potentially diluted common shares no longer
            exceeded authorized capital.

      b)    During 2004, the Company issued 332,500 (2003 - 4,845,412) shares to
            consultants in consideration for services, at ascribed values
            ranging between $0.08 and $0.10 (2003 - between $0.07 and $0.20) per
            share (based on the trading price of the Company's common stock on
            the agreement date).

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


                                      F-24
<PAGE>

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

DECEMBER 31, 2004 AND 2003

9.    SHARE CAPITAL - CONTINUED

      d)    During 2004, the Company issued 15,536,206 shares of common stock
            and 4,150,000 shares were returned from escrow. The 15,536,206
            included, 1,000,000 shares were issued in connection with private
            placements for net proceeds of $49,678, 4,500,000 were issued for
            conversion of preferred shares, 2,589,036 shares were issued for
            payment of $212,552 of debt, 4,179,670 shares were issued for
            payment of $292,353 of legal settlements, 2,935,000 shares were
            issued upon exercise of options with a weighted average exercise
            price of $0.05 and 332,500 shares were issued for services with an
            ascribed value of $26,399 (based on the trading price of the
            Company's common stock on the dates service agreements were entered
            into), which were issued under the 2004 stock option plan. The
            Company issued 1,000,000 (1,809,237 - 2003) warrants in connection
            with the above-mentioned private placements, which entitle the
            holder to purchase one common share at $0.10 ($0.12 to $0.38 - 2003)
            for each warrant for a three-year period.

            During 2003, the Company issued 3,000,000 shares in accordance with
            the settlement agreement with TST (Note 7). The fair value of the
            shares was $1,050,000 based on the market value of the Company's
            common shares at the date the settlement and release agreement was
            signed and was recorded as litigation expense in the 2003
            Consolidated Statement of Operations.

      e)    In 2003, the Company also issued 122,175 Series X preferred shares,
            of which 41,500 shares were exchanged for 4,150,000 common shares
            held in escrow by a former director and a former officer, 45,000
            shares were issued to a former director in settlement of
            administrative expenses and the remaining 35,675 shares were issued
            to a former officer in connection with the settlement of outstanding
            litigation. The transactions were recorded based on amounts settled
            in agreements and resulted in 2003 charges of $180,000, $720,000 and
            $713,500 to selling, general and administrative, research and
            development and litigation expenses, respectively. During 2004,
            45,000 (25,000 - 2003) Series X preferred shares were converted into
            4,500,000 (2,500,000 - 2003) common shares.

            The 4,150,000 escrow shares were returned to treasury in December
            2004.

      f)    During 2003, the Company entered into three private placement
            agreements for the issuance of 2,600,000 shares for gross proceeds
            of $139,678, which was received during the year and recorded as
            loans payable.

      g)    Stock Purchase Warrants

            At December 31, 2004 and 2003, the Company had 15,084,922 and
            21,634,809 stock purchase warrants outstanding, respectively. These
            warrants were issued in connection with private placements and other
            means of financing. The holders of these warrants are entitled to
            receive one share of common stock of the Company for one warrant
            exercised. The warrants have exercise prices ranging from $0.10 to
            $0.74 per share with a weighted average exercise price of $0.30 per
            share and expiration dates between 2005 and 2007.


                                      F-25
<PAGE>

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

DECEMBER 31, 2004 AND 2003

9.    SHARE CAPITAL - CONTINUED

      Details of share purchase warrants issued and expired are as follows:

                                                                    Weighted
                                                                     Average
                                                                    Exercise
                                                       Warrants        Price
                                                  --------------------------
      Outstanding at January 1, 2003                 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
        Issued                                        1,000,000         0.10
        Expired                                      (7,549,887)        0.39
                                                  --------------------------
      Outstanding at December 31, 2004               15,084,922       $ 0.30
                                                  ==========================

      At December 31, 2004, 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
      ------------------------------------------------------------------------
      $0.10 - $0.15                2,500,000               2.32          $0.12
       0.20 -  0.22                5,554,273               1.05           0.21
       0.24 -  0.26                1,593,363               0.70           0.26
       0.30 -  0.38                  952,641               0.56           0.32
       0.40 -  0.48                2,722,777               0.19           0.42
       0.50 -  0.56                  120,923               0.08           0.51
       0.60 -  1.74                1,640,945               0.19           0.65
                                ----------------------------------------------
                                  15,084,922               0.94          $0.30
                                ==============================================

      During 2004, in connection with financing completed during the period, the
      Company granted 1,000,000 warrants to an investor at $0.10 exercisable for
      a three-year term. The warrants were issued for services rendered to the
      Company and were valued at $59,741 using the Black-Scholes option-pricing
      model with the following weighted average assumptions in 2004: expected
      dividend yield Nil%; expected volatility of 135%; risk-free interest rate
      of 2.80% and expected life equal to 3 years. The full amount of the value
      recorded for the warrants was included in general and administrative
      expenses.

      During 2004 the Company extended the term for 3,564,273 warrants
      outstanding by one year previously expiring as follows:

                           Exercise Price         Number      Expiration Date
                           --------------------------------------------------
                                    $0.12      1,100,000       April 11, 2006
                                    $0.22        464,273         July 2, 2005
                                    $0.22      2,000,000        June 24, 2005
                           --------------------------------------------------
                                               3,564,273
                           ==================================================


                                      F-26
<PAGE>

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

DECEMBER 31, 2004 AND 2003

9.    SHARE CAPITAL - CONTINUED

      The warrants were extended for a financing fee provided to the Company in
      prior periods and were valued at $122,635 using the Black-Scholes
      option-pricing model with the following assumptions in 2004: expected
      dividend yield Nil%; expected volatility of 117%; risk-free interest rate
      of 2.18% and an expected life of one year. The full amount of the value
      was recorded, for the warrants, and included in accrued liabilities as at
      December 31, 2004.

      h)    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, 2004 and
            2003.

10.   RELATED PARTY TRANSACTIONS

      The Company made payments to related parties not disclosed elsewhere in
      these financial statements, as follows:

                                                          2004          2003
                                                      --------      --------
      Rent                                            $370,000      $360,000
                                                      ========      ========

      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.


                                      F-27
<PAGE>

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

DECEMBER 31, 2004 AND 2003

11.   PACIFIC BAJA BANKRUPTCY - CONTINUED

      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

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

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

      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 judgment against the Company,
      which was included in the legal liability reserve. In 2004, 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. Under its
      agreements with Honeywell, the Company assigned to Honeywell its patent
      and trademark portfolio (including both the Dynacharger(TM) and the
      Turbopac(TM)) 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(TM) and the
      Turbopac(TM), the Company 40% and Honeywell 60%. The Company retains the
      sole worldwide rights to manufacture, market and sell all motors,
      generators, electronic controls and light metals for the Dynacharger(TM)
      and Turbopac(TM), and Honeywell holds the sole worldwide rights to
      manufacture, market and sell the Dynacharger(TM) and Turbopac(TM) product
      lines. The Company was to receive from Honeywell royalties of 3.7%
      (subject to adjustment) of the net sales of the Dynacharger(TM) and
      Turbopac(TM) 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-28
<PAGE>

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

DECEMBER 31, 2004 AND 2003

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.

      On January 23, 2004, 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 above, settled on the
      ownership of certain patent interests and resolved the disputes that were
      subject to the arbitration proceedings.

      The receipt of the above-noted funds enabled the Company to commence
      settlement of certain amounts owed to creditors, to pay employee and
      director bonuses of $1,290,000 and to resume its business operations in
      February 2004.

13.   FORMER OFFICER

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

      During 2004 the Company issued the 4,000,000 shares and the former officer
      sold 2,000,000 shares and released $75,000 of the Certificate of Deposit.
      Subsequent to December 31, 2004 the officer sold an additional 600,000
      shares and claimed the remaining $210,496 in the Certificate of Deposit.
      The remaining 1,400,000 shares are to be returned to the Company.

14.   FORMER DIRECTOR

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


                                      F-29
<PAGE>

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

DECEMBER 31, 2004 AND 2003

14.   FORMER DIRECTOR - CONTINUED

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

      The Plaintiff's attorney, Claus Schmidt, also filed similar suits on
      behalf of Frank Walter and Herbert Taeuber. The German courts are
      indicating that all three suits need to be filed in the United States not
      Germany. Presently the suits have not been filed in the United States. We
      vigorously dispute this claim and have retained German counsel to defend
      it and seek its dismissal. At December 31, 2004, the Company has included
      $405,785 in regard to this matter in the provision for lawsuit
      settlements.

15.   SUBSEQUENT EVENTS

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

      Subsequent to year-end, the Company entered into a stipulation for entry
      of judgment and assignment in the Pacific Baja bankruptcy proceedings. The
      Company vigorously contested the Complaint until April 22, 2005 when the
      Company settled the bankruptcy proceedings for $500,000 to be issued in
      common stock or cash or a combination. Additionally the Company assigned
      to the bankruptcy Trust the rights to $9,500,000 claims under any
      applicable directors and officers liability insurance policies. The
      bankruptcy Trust also agreed to a covenant not to execute against the
      Company regardless of the outcome of the insurance claims. (Note 11)

      Subsequent to December 31, 2004 the former officer (Note 13) sold an
      additional 600,000 shares and claimed the remaining $210,496 in the
      Certificate of Deposit. The remaining 1,400,000 shares are to be returned
      to the Company.

      Subsequent to year-end, the Court in Frankfurt dismissed the Erwin Kramer
      claim. The Plaintiff filed an appeal against this judgment with the Higher
      Regional Court in Frankfurt. We vigorously dispute this claim and have
      retained German counsel to defend it and seek its dismissal.


                                      F-30
<PAGE>

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

There were no changes in 2004. On November 7, 2005, BDO Dunwoody LLP ("BDO")
resigned as the Company's independent public accountants. The BDO report of
independent registered public accounting firm on the financial statements of the
Company for the years ended December 31, 2002 and December 31, 2003 did not
contain any adverse opinion or disclaimer of opinion, and was not qualified or
modified as to uncertainty (other than an explanatory paragraph regarding
substantial doubt on the Company's ability to continue as a going concern
relating to the report for these years), audit scope, or accounting principles.
On November 7, 2005, the Company retained Vasquez and Company, LLP as its
principal independent accountants for 2004. There were no disagreements with
"BDO". The decision to retain Vasquez and Company, LLP was approved by the
Company's Board of Directors acting as its audit committee. Prior to its
engagement, the Company has not consulted with Vasquez and Company, LLP on any
matter as described in Item 304 (a)(2)(i).

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, 2004, 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 were then effective in timely alerting
management to material information relating to us required to be included in our
periodic SEC filings. There had been no significant changes in our internal
controls or in other factors that could significantly affect internal controls
in the fourth quarter of the Company's last fiscal year.

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, 2004, Mr. Martyn-Smith determined that
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:


                                       32
<PAGE>

      (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.

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, 2005
are as follows:

DIRECTORS:

NAME OF DIRECTOR        AGE
Eugene O'Hagan          66
Andrew Martyn-Smith     55

OFFICERS:

NAME OF OFFICER         AGE       OFFICE HELD
Andrew Martyn-Smith     55        President, Chief Executive Officer, Chief
                                  Financial Officer, Treasurer, and Secretary

Set forth below is a brief description of the background and business experience
of our executive officer and directors in 2004 that remained in office for part
of 2005:


                                       33
<PAGE>

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-SMITH has 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.

On February 26, 2005 Ms. Debi Kokinos resigned as secretary and David Willet
resigned as Chief Operations Officer. All of the above have resigned as officers
by September 30, 2005. Messrs. Albert Case, Jason Myers and Ms. Kokinos are now
our officers.

Set forth below is a brief description of the background and business experience
of our executive officer and directors as of June 1, 2006:

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

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

Debi Kokinos age 52, Chief Financial Officer and Corporate Secretary since
October 6, 2005. Ms. Kokinos has been with the company since May 2003. Ms.
Kokinos has been a Certified Public Accountant since 1984 and has extensive
experience in accounting, management, taxation and computer consulting.

COMMITTEES OF THE BOARD OF DIRECTORS

Presently we have no separate audit committee. The Board acts as the audit
committee and engages 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. Our board of directors has adopted an audit committee charter, a copy
of which is attached to our Annual Report on Form 10-KSB for the year ended
December 31, 2002.

We presently do not have any other committees of the Board of Directors.


                                       34
<PAGE>

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.

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:

      o     Class I directors--terms expire at the annual meeting of
            stockholders in 2007;

      o     Class II directors--terms expire at the annual meeting of
            stockholders in 2005; and

      o     Class III directors--terms expire at the annual meeting of
            stockholders in 2006.

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

      Name of Director              Class             Expiry of Term
      ----------------              -----             --------------

      ANDREW MARTYN-SMITH           Class I           2007 AGM
      EUGENE O'HAGAN                Class II          2005 AGM

Each director serves until the end of his term and until his successor has been
elected and qualified. Each of the above persons has resigned as a director.

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

COMPENSATION OF DIRECTORS

As of December 31, 2004, our directors were reimbursed for reasonable
out-of-pocket expenses in connection with attendance at board of director and
committee meetings, and were 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.


                                       35
<PAGE>

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, 2004
all such filing requirements applicable to our officers and directors were
complied with exception that reports were filed late by Andrew Martyn-Smith,
Eugene O'Hagan and Marsha Chandler.


                                       36
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth certain compensation information as to the
following individuals (our "named executive officers") for 2004 and in the case
of our chief executive officers for the years 2004, 2003 and 2002:

(i)   Each person who acted as our chief executive officer; and
(ii)  our most highly compensated executive officer receiving in excess of
      $100,000.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                    SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------------
                                                             ANNUAL COMPENSATION                  LONG TERM COMPENSATION
                                                        ------------------------------  -------------------------------------------
                                                                                                AWARDS            PAYOUTS
                                                                                        ------------------------  -------
                                                                               Other                                         All
                                                                               Annual   Restricted                  LTIP    Other
                                                                               Compen-     Stock     Options/      payout   Compen-
Name              Title                       Year       Salary      Bonus     sation     Awarded    SARs (#)        ($)    sation
-----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>                         <C>       <C>        <C>         <C>          <C>     <C>              <C>     <C>
Andrew            President, Chief            2004      $72,000     $340,000      0          0      2,640,000         0       0
Martyn-Smith(1)   Executive Officer, Chief    2003         0       $26,970(2)  $1,000        0        500,000         0       0
                  Financial Officer and       2002         0            0         0          0        175,000         0       0
                  Treasurer
-----------------------------------------------------------------------------------------------------------------------------------
Daniel Black(1)   Former President and        2004      $83,100      $85,000      0          0        695,000         0       0
                  Chief Executive Offer       2003      $45,800         0         0          0        223,000         0       0
                                              2002      $75,000         0         0          0         75,000         0       0

-----------------------------------------------------------------------------------------------------------------------------------
David Willett(3)  Former Chief Operating      2004      $180,000        0         0          0      3,424,000(4)      0       0
                  Officer
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTES:

      (1)   Mr. Martyn-Smith was appointed as our president, chief executive
            officer, chief financial officer and treasurer on March 26, 2004 and
            Secretary as of February 26, 2005. Dan Black served as our Chief
            Executive prior to March 2004.

      (2)   Mr. Martyn-Smith received a bonus payment of $26,970 upon settlement
            of our claims against Sheppard, Mullin and $340,000 upon the
            Honeywell settlement.

      (3)   We made substantial payments, including a bonus out of proceeds of
            the Honeywell settlement, to a consulting firm owned by Mr. Willett.
            See Item 12 - Certain Relationships and Related Transactions.

      (4)   A portion of these options were granted to settle prior claims of
            Mr. Willett.


                                       37
<PAGE>

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, 2004:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                         (INDIVIDUAL GRANTS)
---------------------------------------------------------------------------------------------------
                        Number of Securities      % of Total        Exercise
                             Underlying         Options Granted       Price
Name                      Options Granted        To Employees      (per Share)     Expiration Date
---------------------------------------------------------------------------------------------------
<S>                          <C>                     <C>             <C>           <C>
Andrew Martyn-Smith          2,175,000               23.5            $0.1000        March 31, 2014
                               565,000                6.1            $0.0425       December 2, 2009
---------------------------------------------------------------------------------------------------
Dan Black                     200,000                 2.2             $0.095        March 31, 2014
                              200,000                 2.2             $0.100        March 31, 2014
                              295,000                 3.2            $0.0425       December 2, 2009
---------------------------------------------------------------------------------------------------
David Willett                 700,000                 7.6             $0.095        March 31, 2014
                             2,074,000               22.4             $0.100        March 31, 2014
                              650,000                 7.0            $0.0425       December 2, 2009
---------------------------------------------------------------------------------------------------
</TABLE>


                                       38
<PAGE>

              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, 2004:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                            AGGREGATED OPTION/SAR EXERCISES DURING THE LAST

                      FINANCIAL YEAR END AND FINANCIAL YEAR-END OPTION/SAR VALUES
------------------------------------------------------------------------------------------------------
                                                                                 Value of Unexercised
                                                                                     In-The-Money
                                                       Unexercised Options at       Options/SARs at
                        Common Shares                  Financial Year-End (#)   Financial Year-End ($)
                         Acquired on        Value          exercisable /             exercisable /
Name (#)                Exercise ($)    Realized ($)       unexercisable             unexercisable
------------------------------------------------------------------------------------------------------
<S>                        <C>             <C>               <C>                        <C>
Andrew Martyn-Smith        715,000         $24,988           2,700,000                  NIL/NA
------------------------------------------------------------------------------------------------------
David Willett              372,000         $13,052           4,202,000                  NIL/NA
------------------------------------------------------------------------------------------------------
Dan Black                  193,000          $6,190            725,000                   NIL/NA
------------------------------------------------------------------------------------------------------
</TABLE>

COMPENSATION ARRANGEMENTS

MANAGEMENT AGREEMENTS

We had entered into at will arrangements with prior executives which provided
for compensation but no fixed term of employment. Subsequent to December 31,
2004 all these arrangements have terminated.


                                       39
<PAGE>

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

The following table sets forth certain information concerning the number of
shares of our common stock owned beneficially as of May 2, 2005 by: (i) each of
our then 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 at such
time. Unless otherwise indicated, the shareholders listed possess sole voting
and investment power with respect to the shares shown. THE FOREGOING DOES NOT
REFLECT SUBSEQUENT CHANGES IN 2005. ALL OF THE PERSONS LISTED IN THE TABLE HAVE
RESIGNED FROM THEIR POSITIONS.

--------------------------------------------------------------------------------
                                   Amount and Nature of          Percentage of
Name and Address                   Beneficial Ownership         Common Stock(1)
of Beneficial Owner                        (2)
--------------------------------------------------------------------------------
Eugene O'Hagan                         1,675,000(2)                  1.05%
                                         Indirect
--------------------------------------------------------------------------------
Andrew Martyn-Smith                    4,525,000(2)                  2.83%
                                         Indirect
--------------------------------------------------------------------------------
David Willett                          5,410,000(2)                  3.38%
                                         Indirect
--------------------------------------------------------------------------------
All Officers and Directors as          11,610,000(2)                 7.25%
a Group (3 persons)                      Indirect
--------------------------------------------------------------------------------

      (1)   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)   The above ownership in each case consists of shares that may be
            acquired upon the exercise of stock options within 60 days of May 5,
            2005.


                                       40
<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

In 2004 we had 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, our 2003 Stock
Incentive Plan, our 2004 Stock Incentive Plan and our 2005 Stock Incentive Plan.
In May 2004 there were 4,424,666 options subject to plans established prior to
2004. We do not intend to issue options under these Plans in the future.

On March 31, 2004, we established our 2004 Nevada stock incentive plan (the
"2004 Plan") and on January 27, 2005 established our 2005 Nevada stock incentive
plan (the "2005 Plan"). Under both plans, we may grant common stock to our
directors, officers, employees and consultants. The 2004 Plan calls for up to
15,000,000 shares while the 2005 Plan provides for 20,000,000. The maximum term
of each Plan is ten years. Our board of directors will determine the terms and
matters of any awards under the Plans 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 May 20, 2005 the number of
options available for granting of options under the 2004 plan was 2,122,200 and
none were available under the 2005 plan.

The following summary information is presented for our Plans. For a more
detailed discussion, please refer to Note 8 of our financial statements included
in this annual report.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                                   Number of Securities
                                                                                                  Remaining Available for
                                                                                               Future Issuance Under Equity
                                  Number of Securities to be      Weighted-Average Exercise         Compensation Plans
                                    Issued Upon Exercise of     Price of Outstanding Options       (Excluding Securities
                                      Outstanding Options                                        Reflected in column (a))
----------------------------------------------------------------------------------------------------------------------------
Plan Category                                 (a)                            (b)                            (c)
----------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                             <C>                                <C>
Equity Compensation Plans              3,944,666 Shares           $0.17 per Share of Common          2,122,200 Shares
Approved By Security Holders            of Common Stock                     Stock
----------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans Not     10,984,000 Shares of Common     $0.09 per Share of Common          27,197,759 Shares
Approved By Security Holders                 Stock                          Stock
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       41
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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 remained a guarantor of our new lease for these
premises. This lease has been terminated pursuant to an agreement with the
landlord.

We had 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 45,000 shares of our Series X Preferred Stock issued to a private
company under his control at a deemed price of $20 per share, for aggregate
consideration of $900,000. We also exchanged 3,250,000 shares of common stock
held by this private company into 32,500 shares of Series X Preferred Stock or
an aggregate of 77,500 shares of Series X Preferred Stock. 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. 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 brothers and both are former directors of
Turbodyne. We issued 3,500,000 shares of our common stock to Lars Neujeffski,
for which proper consideration was not received. Despite demand that these
shares be returned, Mr. Neujeffski pledged these shares to a third party bank.
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 also privately sold 3,142,048 shares to Mr. Dieter Neujeffski, between
October 2000 and June 2001 at various prices ranging from $0.14 per share to
$0.284 per share for total proceeds of $509,739. The prices of the stock issued
were based on a discount to the market price of our common stock at the date of
sale.

                                       42
<PAGE>

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 $152,078. Mr. Lars Neujeffski agreed to return his
3,500,000 shares registered in his name, subject to release by a third party
bank to which 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 affected 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.

DAVID WILLETT

During 2004 we paid Enertran Systems, Inc., a consulting firm controlled by
David Willet, our then Chief Operating Officer over $490,000. The amount
includes a $340,000 bonus, paid out of the Honeywell settlement, as well as
$165,000 for consulting fees for 2003 and 2004 as well as other charges.

We also paid Mr. Willett for a previously settled lawsuit brought by Mr. Willet
for unpaid wages. The settlement was for cash, stock options and forgiveness of
a $50,000 loan. In 2004 Mr. Willet received $26,000 and 10 year options to
purchase 120,000 shares of our common stock at our exercise price of $0.10. We
also purchased equipment from Enertran and Mr. Willett totaling approximately
$11,400.


                                       43
<PAGE>

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)

  4.4          Agreement and Plan of Merger.(9)

  10.1         Sub-Lease between Turbodyne Systems, Inc. and John E. King and
               Carole D. King dated July 1, 2001.(3)

  10.2         Exclusive License Agreement between the Registrant, Turbodyne
               Systems, Inc. and David St. James dated October 15, 2001.(3)

  10.3         Licensing and Joint Development Agreement Between the Registrant
               and Ishikawajima-Harima Heavy Industries Co., Ltd.(1)

  10.4         Settlement Agreement dated January 29, 2003 between the
               Registrant, Turbodyne Systems Inc., Leon E. Nowek and L.N. Family
               Holdings Inc.(4)

  10.5         Settlement Agreement dated January 29, 2003 between the
               Registrant, Turbodyne Systems Inc., Edward M. Halimi and March
               Technologies Inc.(4)

  10.6         Settlement Agreement dated effective January 24, 2004 among the
               Registrant, Turbodyne Systems, Inc. and Honeywell International
               Inc.(5)

  10.7         Employment Agreement dated effective February 1, 2004 between the
               Registrant and Marsha Chandler. (6)

  10.8         Employment Agreement dated effective February 1, 2004 between the
               Registrant and Andrew Martyn-Smith. (6)

  10.9         Employment Agreement dated effective February 1, 2004 between the
               Registrant and David T. Willett. (6)

  10.10        2004 Stock Incentive Plan. (6)

  10.11        Consulting Agreement dated October 4, 2004 between the Registrant
               and Marsha Chandler.(8)

  10.12        Stipulation and Settlement Order dated October 27, 2004 between
               the Registrant and Peter Hofbauer.(8)

  10.13        Settlement and Release Agreement dated September 14, 2004 among
               the Registrant and John King.(8)

  14.1         Code of Ethics.(5)

  21.1         List of Subsidiaries.(5)

  23.1         Consent of BDO Dunwoody LLP.

  23.2         Consent of Vasquez & Company, LLP

  31.1         Certification of Chief Executive Officer and Chief Financial
               Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
               2002.

  32.2         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)   Filed with the Securities and Exchange Commission as an exhibit to Form
      10-K for the year ended December 31, 1999.
(3)   Filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2001.
(4)   Filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2002.
(5)   Filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2003.
(6)   Filed as an exhibit to our Quarterly Report on Form 10-QSB for the fiscal
      quarter ended March 31, 2004.
(7)   Filed as an exhibit to our Current Report on Form 8-K filed with the SEC
      on July 9, 2004.
(8)   Filed as an exhibit to our Quarterly Report on Form 10-QSB for the fiscal
      quarter ended September 30, 2004.
(9)   Filed as an exhibit to our Current Report on Form 8-K filed with the SEC
      on October 25, 2005.


                                       44
<PAGE>

(B) CURRENT REPORTS ON FORM 8-K.

During the quarterly period ended December 31, 2004 we filed the following Form
8-K:

DATE OF FORM 8-K     DATE OF FILING WITH THE SEC    DESCRIPTION OF THE FORM 8-K
----------------     ---------------------------    ---------------------------
October 4, 2004            October 20, 2004                Press Release

The following reports on Form 8-K were filed since the last quarter of our
fiscal year ended December 31, 2004:

DATE OF FORM 8-K     DATE OF FILING WITH THE SEC    DESCRIPTION OF THE FORM 8-K
----------------     ---------------------------    ---------------------------

December 17, 2004          January 4, 2005          Director resignation
September 1, 2005          October 25, 2005         Agreement and Plan of Merger
November 7, 2005           November 10, 2005        Change in Certified Public
                                                    Accountant


                                       45
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

AUDIT FEES

We have appointed a new auditor for the fiscal years ended 2004 and 2005 and no
amounts were billed to us for any matter by this new firm for the two most
recently completed fiscal years ended December 31, 2004 The aggregate fees
billed for the two most recently completed fiscal years ended December 31, 2004
for professional services rendered by the principal accountant for 2003 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               YEAR ENDED
                               DECEMBER 31, 2004        DECEMBER 31, 2003
     --------------------------------------------------------------------
     Audit Related Fees             $214,022                 $102,000
     --------------------------------------------------------------------
     Tax Fees                       $  8,478                 $  7,000
     --------------------------------------------------------------------
     All Other Fees                 $ 20,000                 $     --
     --------------------------------------------------------------------
     Total                          $242,500                 $109,000
     --------------------------------------------------------------------

The total of $241,500 included $80,000 for our new auditors and $162,500 for our
prior auditors. Our audit committee pre-approves all non-audit services to be
performed by our principal accountant in accordance with our audit committee
charter.


                                       46
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                                    Turbodyne Technologies, Inc.


Dated: July 6, 2006                                 By: /s/ Albert F. Case, Jr.
                                                    ---------------------------
                                                    Albert F. Case, Jr,
                                                    Chief Executive Officer

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

Signature                        Title                               Date
---------                        -----                               ----


/s/ Albert F. Case, Jr           Chief Executive Officer,         July 6, 2006
---------------------------      Director
Albert F. Case, Jr


/s/ Andrew Martyn-Smith          Former Chief Executive Officer   July 6, 2006
---------------------------      Chief Financial Officer
Andrew Martyn-Smith              and Chief Accounting Officer



/s/ Debi Kokinos                 Chief Financial Officer          July 6, 2006
---------------------------      and Chief Accounting Officer
Debi Kokinos


/s/ Jason M. Meyers              Director                         July 6, 2006
---------------------------
Jason M. Meyers