10-Q 1 t305389.txt TURBODYNE UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended MARCH 31, 2009 [ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period to ---------------- ------------------- Commission File Number 000-21391 TURBODYNE TECHNOLOGIES, INC. (Exact name of small business issuer as specified in its charter) NEVADA 95-4699061 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 888 SEVENTH AVENUE, 17TH FLOOR, NEW YORK, NY 10106 --------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (805) 512-9511 -------------- NOT APPLICABLE -------------- (Former name, former address and former fiscal year end, if changed since last report) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [ ] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer' and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ? Accelerated filer ? Non -accelerated filer ? (do not check if a smaller Smaller reporting company [X ] reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) [ ] Yes [ X ] No State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 549,513,491 shares of common stock issued and outstanding as of MAY 14, 2009. TURBODYNE TECHNOLOGIES, INC. INDEX TO FORM 10-Q MARCH 31, 2009 PAGE NUMBER PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008 4 Consolidated Statements of Operations for the three month periods ended March 31, 2009 and March 31, 2008 5 Consolidated Statements of Cash Flows for the three month periods ended March 31, 2009 and March 31, 2008 6 Notes to the Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of Operations 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk NA Item 4. Controls and Procedures 31 PART II - OTHER INFORMATION Item 1. Legal Proceedings 32 Item 1A. Risk Factors NA Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32 Item 3. Defaults Upon Senior Securities NA Item 4. Submission of Matters to a Vote of Security Holders NA Item 5. Other Information NA Item 6. Exhibits 33 SIGNATURES 34 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED - EXPRESSED IN US DOLLARS)

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-6- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited - Expressed in US Dollars) MARCH 31, 2009 AND 2008 -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Turbodyne Technologies, Inc., a Nevada corporation, and its subsidiaries (the "Company") engineer, develop and market products designed to enhance performance and reduce emissions of internal combustion engines. The Company's operations have been financed principally through a combination of private and public sales of equity and debt securities. If the Company is unable to raise equity capital or generate revenue to meet its working capital needs, it may have to cease operating and seek relief under appropriate statutes. These consolidated financial statements have been prepared on the basis that the Company will be able to continue as a going concern and realize its assets and satisfy its liabilities and commitments in the normal course of business and do not reflect any adjustment which would be necessary if the Company is unable to continue as a going concern. GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered net operating losses in recent periods, has an accumulated deficit of $135,045,614 at March 31, 2009 and a total capital deficit of $8,518,940 at March 31, 2009. It has used most of its available cash in its operating activities in recent years, has a significant working capital deficiency and is subject to lawsuits brought against it by other parties. These matters raise substantial doubt about the Company's ability to continue as a going concern. BASIS OF PRESENTATION The interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and with the instruction to Form 10 and Rule 8-03 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the audited financial statements of the Company for the years ended December 31, 2008 and 2007 included in the Company's 10-K Annual Report. The Company follows the same accounting policies in the preparation of interim reports. Results of operations for the interim periods are not indicative of annual results. -7- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements, stated in United States dollars, include the accounts of Turbodyne Technologies, Inc. and its wholly-owned subsidiaries, Turbodyne Systems, Inc., Turbodyne Germany Ltd., Electronic Boosting Systems, Inc. and Pacific Baja Light Metals Corp. ("Pacific Baja"). All intercompany accounts and transactions have been eliminated on consolidation. DEPRECIATION AND AMORTIZATION Depreciation and amortization of property and equipment is computed using the straight-line method over estimated useful lives as follows: Computers and measurement equipment - 3 years Machinery and equipment - 7 to 15 years Furniture and fixtures - 5 to 10 years 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 2009 and 2008. FAIR VALUE MEASUREMENTS In January 1, 2008, SFAS No. 157 (SFAS 157), FAIR VALUE MEASUREMENTS became effective for the Company. SFAS 157 relates to financial assets and financial liabilities. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, EFFECTIVE DATE OF FASB STATEMENT NO. 157, which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. -8- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED FAIR VALUE MEASUREMENTS - CONTINUED SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. FSP FAS 157-1 amends SFAS 157 to exclude from the scope of SFAS 157 certain leasing transactions accounted for under Statement of Financial Accounting Standards No. 13, "Accounting for Leases." FSP FAS 157-2 amends SFAS 157 to defer the effective date of SFAS 157 for all non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years beginning after November 15, 2008. In addition, effective for the third quarter of 2008, the Company adopted FASB Staff Position 157-3 "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" ("FSP FAS 157-3"). FSP FAS 157-3 clarifies the application of SFAS 157 to financial instruments in an inactive market. The adoption of SFAS 157 and FSP FAS 157-3 did not have an impact on the Company's financial statements. Effective January 1, 2008, Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The adoption of SFAS 159 did not have an impact on the Company's financial statements. 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 quarter ended March 31, 2009 $5,556 ($5,556 in 2008) of licensing fees was recognized as income. EARNINGS (LOSS) PER SHARE Earnings (loss) per share is computed in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings (loss) per share is calculated by dividing the net income (loss) available to common stockholders by the weighted average number of shares outstanding during the year. Diluted earnings per share reflect 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. -9- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED EARNINGS (LOSS) PER SHARE - CONTINUED For the quarter ended March 31, 2009, 12,675 preferred shares convertible into 1,267,500 shares of common stock and options and warrants to purchase 17,799,000 and 45,294,988 shares of common stock, convertible notes to purchase 28,155,158 shares of common stock were outstanding during the quarter. The weighted average cumulative equivalent shares of 549,513,491 were included in the denominator for 2009 computation of diluted earnings (loss) per share. No other adjustments were made for purposes of per share calculations. 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. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation under the fair value method in accordance with Statement of Financial Accounting Standards No.123 (revised 2004), "Share Based Payment" "SFAS 123(R)". SFAS No. 123R requires the Company to establish assumptions and estimates of the weighted-average fair value of stock options granted, as well as using a valuation model to calculate the fair value of stock-based awards. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. RESEARCH AND DEVELOPMENT Research and development costs related to present and future products are charged to operations in the period incurred. Previously, research prototypes were sold and proceeds reflected by reductions in our research and development costs. As new technology pre-production manufacturing units are produced and related non-recurring engineer services are delivered we will recognize the sales proceeds as revenue. -10- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. LEGAL FEES The Company expenses legal fees in connection with litigation as incurred. COMPREHENSIVE INCOME The Company has adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards to measure all changes in equity that result from transactions and other economic events other than transactions with owners. Comprehensive income is the total of net earnings (loss) and all other non-owner changes in equity. Except for net earnings (loss) and foreign currency translation adjustments, the Company does not have any transactions and other economic events that qualify as comprehensive income as defined under SFAS No. 130. As foreign currency translation adjustments were immaterial to the Company's consolidated financial statements, net earnings (loss) approximated comprehensive income for the quarter ended March 31, 2009 and 2008. -11- ------------------------------------------------------------------------------ TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 ------------------------------------------------------------------------------ 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED NEW ACCOUNTING PRONOUNCEMENTS In December 2007, the FASB issued Statement No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R revises the principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree, and the goodwill acquired in a business combination or gain from a bargain purchase. SFAS 141R also revises the principles and requirements for how the acquirer determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective for the Company beginning January 1, 2009 and has no impact on its financial statements. In December 2007, the FASB issued Statement No. 160, "Non controlling Interest in Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for the Company beginning January 1, 2009 and has no impact on its financial statements. In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. This statement is effective for the Company beginning January 1, 2009 and has no impact on its financial statements. In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments. The FSP amends SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" to require an entity to provide disclosures about fair value of financial instruments in interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company will include the required disclosures in its quarter ending June 30, 2009 -12- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED NEW ACCOUNTING PRONOUNCEMENTS In April 2009, the FASB issued FSP FAS 141(R)-1, ACCOUNTING FOR ASSETS ACQUIRED AND LIABILITIES ASSUMED IN A BUSINESS COMBINATION THAT ARISE FROM CONTINGENCIES. This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5, "Accounting for Contingencies" and FASB Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss". Further, the FASB removed the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS No. 141(R). The requirements of this FSP carry forward without significant revision the guidance on contingencies of SFAS No. 141, "Business Combinations", which was superseded by SFAS No. 141(R) (see previous paragraph). The FSP also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by SFAS No. 5. This FSP was adopted effective January 1, 2009. There was no impact upon adoption, and its effects on future periods will depend on the nature and significance of business combinations subject to this statement. In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. The FSP states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the Company's financial statements. -13- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 -------------------------------------------------------------------------------- 2. SHARE CAPITAL Transactions not disclosed elsewhere in these consolidated interim financial statements are as follows: a) Authorized Capital 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. 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. As of March 31, 2009, 12,675 of Series X preferred shares convertible into 1,267,500 common shares are outstanding. In addition to outstanding shares of common stock, options and warrants described in these notes; additional shares are issuable in connection with the change of control transaction in September 2005 in the event the Company issues any securities directly or indirectly related to pre-merger events. b) During the three months ended March 31, 2009 the Company did not issue any shares. During the three months ended March 31, 2008 the Company issued 54,123,194 shares of common stock, 48,123,194 for conversion of notes and interest payable and 6,000,000 for payment of services. c) Stock Options The determination of fair value of share-based payment awards to employees, directors and non-employees on the date of grant using the Black-Scholes model is affected by the Company's stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviours. Management has used historical data to estimate forfeitures. The risk-free rate is based on U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of the Company's stock price. -14- ------------------------------------------------------------------------------ TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 ------------------------------------------------------------------------------ 2. SHARE CAPITAL - CONTINUED c) Stock Options - Continued GRANT OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES During 2006 and 2007, we granted warrants to purchase 78,200,000 shares of our common stock to various consultants that we deemed essential to our operations. Details of the consultant warrants for the quarter ended March 31, 2009 are as follows: Total consultant warrants granted 78,200,000 Vested prior to January 1, 2009 (22,805,549) Vested January through March 31, 2009 (1,369,439) Cancelled January through December 2008 (22,044,436) ------------- Warrants not vested 31,980,576 ============= During the three months ended March 31, 2009 the Company using the Black-Scholes model recorded $7,688 ($54,600 in 2008) of compensation expense, relating to the vesting of stock warrants previously issued to non-employees for services. The non cash warrant expense is allocated with $5,880 ($35,181 in 2008) to general and administrative expenses and $1,808 ($18,484 in 2008) to research and development. The estimated fair value of warrants issued to non-employees during the three months ended March 31, 2009 ranged from $0.0032 to $0.0062. Assumptions used to value the warrants: expected dividend yield Nil%; expected volatility of 113.23% and 125.53%; risk-free interest rate of 2.27%, 2.28% and 2.69% and an expected life of 7 years. d) Stock Purchase Warrants At March 31, 2009 the Company had 45,294,988 share purchase warrants outstanding and exercisable. These warrants were issued in connection with private placements, non-employee compensation and other means of financing. The holders of these warrants are entitled to receive one share of common stock of the Company for one warrant exercised. The warrants have exercise prices ranging from $0.0117 to $0.04 per share with a weighted average exercise price of $0.016 per share and expiration dates between 2011 and 2016. Details of share purchase warrants for the quarter ended March 31, 2009 are as follows: -15- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 -------------------------------------------------------------------------------- 2. SHARE CAPITAL - CONTINUED

At March 31, 2009, the following is a summary of share purchase warrants outstanding and exercisable: Weighted- Average Weighted Remaining Average Contractual Exercise Exercise Price Number Life (Years) Price ---------------------------------------------------------------------- $0.01 23,341,660 5.43 $0.01 $0.025 - 0.04 21,953,328 3.46 0.02 ------------ 45,294,988 4.47 $0.02 ============ -------------------------------------------------------------------------------- 3. LOANS PAYABLE March 31, December 31, 2009 2008 -------------------------- Unsecured, non-interest bearing loan payable, due on demand from stockholders and other parties $138,600 $138,600 Note payable, 5% per annum (see note 5) 51,479 50,905 Convertible notes payable 328,785 318,722 -------------------------- Total Loans Payable $518,864 $508,227 ========================== -16-

-17- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 -------------------------------------------------------------------------------- 3. LOANS PAYABLE - CONTINUED For the quarter ended March 31, 2009 the Company did not issue any new convertible notes. For the years ended December 31, 2008, 2007 and 2006, the Company issued $300,000, $691,000 and $660,000, respectively, of convertible notes. All of the convertible notes were issued with detachable warrants to purchase 6,000,000, 13,820,000, and 13,200,000 shares of the Company's common stock, respectively. In recording the transaction, the Company allocated the value of the proceeds to the convertible notes and the warrants based on their relative fair values. Fair value of the warrants was determined using the Black-Scholes valuation model. It was also determined that the convertible notes contained a beneficial conversion feature since the fair market value of the common stock issuable upon the conversion of the notes exceeded the value allocated to the notes. The value of the beneficial conversion feature and the value of the warrants have been recorded as a discount to convertible notes and are being amortized over the term of the notes using the straight-line method. For the years ended December 31, 2008 and 2007, amortization of the discount was $447,728 and $864,485, respectively. As of December 31, 2008 and 2007, the remaining balance of the beneficial conversion feature was $-0- and $199,726, and detachable warrants was $-0- and $53,501, respectively. In September 2006, the Company offered to decrease the note conversion price to $0.005 per share if the note holders exercised their warrants at the reduced exercise price of $0.010 by September 30, 2006. 11,900,000 of the warrants were exercised. In consideration for the reduction of conversion price, the maturity of the notes extended for another year. The modification of conversion terms was substantial such that it was considered an extinguishment of debt. Accordingly, the unamortized discount on convertible notes was written off and included in total amortization for 2006. Conversion of notes in 2008 and 2007 also resulted in the write off of the corresponding unamortized discount. In addition, as a result of the inducement to exercise the warrants and to convert the notes, the Company recognized an expense of $1,247,657 and $988,686 for the years ended December 31, 2008 and 2007, respectively, with a corresponding increase in additional paid in capital. In February 2007, the Company changed the per share conversion price from $0.005 to $0.020 for new lenders. The notes, issued prior to September 1, 2007, bear interest at 5% and mature within one year from date of issuance. The notes, issued after September 1, 2007, bear interest at 18% and mature within six months from date of issuance. The warrants are to purchase the Company's common stock at $0.025 per share expiring in five years. ------ -------------------------------------------------------------------------------- -18- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2006 -------------------------------------------------------------------------------- 4. COMMITMENTS AND CONTINGENCIES The Company is party to various legal claims and lawsuits that have arisen in the normal course of business. There have been no material changes in the status of these matters since the issuance of the most recent audited annual financial statements. LITIGATION a) TST, Inc. In March 2000, TST, Inc. ("TST"), a vendor to a subsidiary of Pacific Baja (Note 4(b)) 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. 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 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; and TST cannot execute on its judgment until Turbodyne either: (a) files a voluntary bankruptcy case; (b) is the subject of an involuntary case; or (c) effects an assignment for the benefit of creditors. Any proceeds received by TST or its president from the sale of the issued shares will be automatically applied as a credit against the amount of the judgment against the Company in favor of TST. Prior to March 31, 2004, 147,000 shares issued in connection with the TST settlement had been sold which have reduced the provision for lawsuit settlement by $23,345. At March 31, 2009, the Company has included $4,039,836 ($3,943,328 in 2008) in regard to this matter in provision for lawsuit settlements. It was determined that TST received payment in preference to other creditors before Pacific Baja filed its Chapter 11 petition in bankruptcy. TST and Pacific Baja settled the preference payment issue with TST paying $20,000 to Pacific Baja and TST relinquishing the right to receive $63,000 therefore; $83,000 has also been included in the provision for lawsuit settlements. ------------------- ---------------------- March 31, 2009 December 31, 2008 ------------------- ---------------------- Settlement amount $2,068,079 $2,068,079 1,912,102 $1,815,594 Interest $83,000 $83,000 Preference payment ($23,345) ($23,345) Proceeds of stock sale ------------------- ---------------------- Total $4,039,836 $3,943,328 -------------------------------------------------------------------------------- -19- ------------------------------------------------------------------------------ TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2008 ------------------------------------------------------------------------------ 4. COMMITMENTS AND CONTINGENCIES - LITIGATION CONTINUED b) Pacific Baja Bankruptcy In July 1999, a major creditor of the Company's wholly-owned major subsidiary, Pacific Baja, began collection activities against Pacific Baja which threatened Pacific Baja's banking relationship with, and source of financing from, Wells Fargo Bank. As a result, Pacific Baja and its subsidiaries commenced Chapter 11 bankruptcy proceedings on September 30, 1999. In September 2001, the Pacific Baja Liquidating Trust (the "Trust") commenced action against us in the aforesaid Bankruptcy Court. The Trust was established under the Pacific Baja bankruptcy proceedings for the benefit of the unsecured creditors of Pacific Baja. The Company vigorously contested the Complaint until April 22, 2005 when the Company entered into a stipulation for entry of judgment and assignment in the Pacific Baja bankruptcy proceedings for $500,000 to be issued in common stock or cash or a combination. Additionally the Company assigned to the bankruptcy Trust the rights to $9,500,000 claims under any applicable directors and officers liability insurance policies. The bankruptcy Trust also agreed to a covenant not to execute against the Company regardless of the outcome of the insurance claims. The Company has completed the assignment of its insurance claims, but has not completed the cash/stock payment that was to be paid to the Trust by December 9, 2005. We are negotiating with the Trustee regarding this default. c) 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. 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 March 31, 2009, the Company has included $405,785 in regard to this matter in the provision for lawsuit settlements. -20- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2006 -------------------------------------------------------------------------------- 4. COMMITMENTS AND CONTINGENCIES - CONTINUED d) Crescent Fund, LLC A former consultant brought an action against the Company in the Supreme Court of the State of New York for the County of New York for an action entitled CRESCENT FUND, LLC v TURBODYNE TECHNOLOGIES, INC. The action sought $300,000 damages based upon claims for alleged breaches of contract and covenants of good faith and fair dealing allegedly arising because the Company failed to give plaintiff an opinion to sell the 5,000,000 shares of the Company's common stock received for services. The Company in the action sought the return of such shares and damages based upon plaintiff's breach and fraud based upon the failure to perform any of the duties and obligations required of it under the aforesaid contract which was fraudulently induced. The Company did not anticipate any liability and therefore did not include an amount in the provision for lawsuit settlements. The action has been settled pursuant to which the plaintiff retained a majority of the shares and released the Company from all liability with any payments. e) Other The Company is currently involved in various collection claims and other legal actions. It is not possible at this time to predict the outcome of the legal actions. 5. RELATED PARTY TRANSACTIONS Aspatuck Holdings Ltd. and another entity affiliated with Jason Meyers have advanced an aggregate of $ 46,000 to the Company plus related interest expense of $5,479 for 2009 and $4,904 for 2008. The advances are repayable on demand and bear interest at 5 % per annum. See Note 3 Loan Payable. As of March 31, 2009 and December 31, 2008 the Company also owes Aspatuck Holdings Ltd consulting fees of $375,227 and $344,827, respectively, for the services of Jason Meyers. The Company has included these consulting fees in accounts payable in the balance sheet. The Company has included $30,000 of consulting compensation in the general and administrative expense for the quarters ended March 31, 2009 and 2008. The Company also included $4,523 and $21,988 of non cash warrant expense for the quarter ended March 31, 2009 and 2008 respectively. John Adams, co-CEO has advanced an aggregate of $35,000 in convertible notes as a private investor. The notes were due in November 2006 and July 2007 but remain unpaid as of March 31, 2009 and December 31, 2008, with total outstanding balance of $40,543 and $40,106, respectively, which includes accrued interest of $5,543 and $5,106, respectively. The Company recorded $2,000 and $8,667 general and administrative expense for the stock compensation to be issued to John Adams for the quarter ended March 31, 2009 and 2008, respectively. -21- -------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED - EXPRESSED IN US DOLLARS) MARCH 31, 2009 AND 2006 -------------------------------------------------------------------------------- 5. RELATED PARTY TRANSACTIONS - CONTINUED As of March 31, 2009 and December 31, 2008 the Company owes Debi Kokinos, CFO consulting fees of $61,210 and $41,830, respectively. The Company has included these consulting fees in accounts payable in the balance sheet. The Company has included $19,380 of consulting compensation in the general and administrative expense for the quarters ended March 31, 2009 and 2008. The company also included $1,357 and $6,597of non cash warrant expense for the quarter ended March 31, 2009 and 2008 respectively. 6. SUBSEQUENT EVENTS Subsequent to March 31, 2009, the Board of Directors approved additional convertible notes at a purchase price of $100,000 per unit with detachable warrants to purchase 2,000,000 shares of the Company's common stock. The Convertible Notes have a two year maturity with 12% annual interest rate payable at maturity or at the time of conversion. The Note may be converted at any time after issuance until the note is paid in full. The conversion price is at a price equal to $.01 ("Conversion Price"); provided that Conversion shall be subject to a minimum conversion amount of $10,000, or if less, the remaining Outstanding Obligation. The warrants will have an exercise price of $.01 and a 5 year expiration date. Subsequent to March 31, 2009, the Company issued a $100,000 convertible note with the above terms. The convertible note was issued with detachable warrants to purchase 2,000,000 shares of the Company's common stock. -22- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FORWARD LOOKING STATEMENTS The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding the Company's capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined in the Risk Factors section below, and, from time to time, in other reports the Company files with the SEC. These factors may cause the Company's actual results to differ materially from any forward-looking statement. The Company disclaims any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As used in this Quarterly Report on Form 10-Q, the terms "we", "us", "our", "Turbodyne" and "our company" mean Turbodyne Technologies, Inc., unless otherwise indicated. All dollar amounts in this Quarterly Report on Form 10-Q are in U.S. dollars unless otherwise stated. We are an engineering Company and have been engaged, for over ten years, in the design and development of forced-air induction (air-charging) technologies that improve the performance of gas and diesel internal combustion engines. Optimum performance of an internal combustion engine requires a proper ratio of fuel to air. Power available from the engine is reduced when a portion of the fuel is not used. In a wide range of gas and diesel engines additional air is needed to achieve an optimal result. Traditional engineered solutions for this problem use belts or exhaust gas (superchargers or turbochargers) to supply additional air to an engine. Turbodyne, instead, uses electric motors to supply additional air. Because an electric motor can be engaged more quickly, compared to the mechanical delays inherent in a belt or exhaust gas device, Turbodyne's products under development are designed to 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. -23- RESULTS OF OPERATIONS ------------------------------------------- First Quarter Ended March 31 ------------------------------------------- Percentage 2009 2008 Increase (Decrease) ------------------------------------------- Total Revenue $ 5,556 $ 5,556 Nil Operating Expenses ($ 221,916) ($ 449,361) (51%) Net Loss from Operations ($ 216,360) ($ 443,805) (51%) Other expense and income tax ($ 10,900) ($ 690,681) (98%) =========== =========== =========== Net Loss ($ 227,260) ($1,134,486) (80%) =========== =========== =========== NET REVENUE ------------------------------------- First Quarter Ended March 31 ------------------------------------- Percentage 2009 2008 Increase ------------------------------------- License Fee $5,556 $5,556 Nil ====== ====== === We had no revenue in 2009 other than recognition of amortized license fees. During the year ended December 31, 2003, $400,000 in license fees were deferred and amortized over 18 years. As a result, for each of the quarters ended March 31, 2009 and 2008, $5,556 of licensing fees was recognized as income. Our continued net losses from operations reflect our continued operating expenses and our inability to generate revenues. We believe that we will not be able to generate any significant revenues from TurboPac(TM)/TurboFlow(TM) until we complete our production models and enter into commercial arrangements. COST OF SALES We had no sales in 2009 and 2008; therefore we did not have any costs of sales during any portion of these years -24- OPERATING EXPENSES Due to a lack of funds we reduced our operations in the first quarter of 2009 so that operating expenses decreased from the comparable period in 2008 by 51%. The primary components of our operating expenses are outlined in the table below: First Quarter Ended March 31 -------------------------------------- Percentage 2009 2008 Increase (Decrease) General and Administrative Expenses $98,098 $255,848 (62%) Research and Development Expenses $25,808 $110,558 (77%) Litigation Expenses $96,508 $82,065 18% GENERAL AND ADMINISTRATIVE EXPENSES General and administrative costs included management compensation and overhead and included non cash warrant and stock compensation expense amount of $5,880 and $2,000 ($35,795 and $8,667 in 2008) respectively. (Financial Statement Note 2) RESEARCH AND DEVELOPMENT The decrease in research and development costs in 2008 is due to decreased spending for limited development operations due to a lack of funding and the decrease in the non cash warrant expense amount of $1,808 compared to $18,805 in 2008 as a result of the termination of certain consulting agreements and the decrease in the per share price of the Company's common stock. (Financial Statement Note 2). 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 2009 are associated with the development of our TurboPac. LITIGATION EXPENSE The litigation expense is the accrued interest relating to the TST, Inc. settlement as discussed in Financial Statement Note 4. -25- COMPENSATION EXPENSE GRANT OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES During 2006 and 2007, we granted warrants to purchase 78,200,000 shares of our common stock to various consultants that we deemed essential to our operations. Details of the consultant warrants for the year ended December 31, 2008 are as follows: Total consultant warrants granted 78,200,000 Vested prior to January 1, 2009 (22,805,549) Vested January through March 31, 2009 (1,369,439) Cancelled January through December 2008 (22,044,436) --------------- Warrants not vested 31,980,576 =============== During the three months ended March 31, 2009 the Company using the Black-Scholes model recorded $7,688 ($54,600 in 2008) of compensation expense, relating to the vesting of stock warrants previously issued to non-employees for services. The non cash warrant expense is allocated with $5,880 ($35,181 in 2008) to general and administrative expenses and $1,808 ($18,484 in 2008) to research and development. OTHER INCOME (EXPENSE) AND INCOME TAX ------------------------------------------- Quarter Ending March 31 ------------------------------------------- Percentage 2009 2008 Increase (Decrease) ------------------------------------------- Other Expenses Interest Expense ($9,300) ($22,030) (58%) Amortization of Discount on Convertible Notes $-0- ($240,194) (100%) Inducement Expense $-0- ($426,857) (100%) Income Tax ($1,600) ($1,600) Nil ------------------------------------------- Total Other Expenses ($10,900) ($690,681) (98%) =========================================== The Company continues to negotiate with our creditors and trade debt holders on settlement of accounts payable from periods prior to the current management assuming operation of the Company. When achieved, this is represented as a debt relief of accounts payable. The Company had other expenses for the quarter ending March 31, 2009 of $9,300 compared to $690,681 in 2008. As indicated above, the reduction resulted from a reduction in the amortization of discounts on convertible notes and value of detachable warrants and related debt conversion expenses (Financial Statement Note 3). -26- NET INCOME / LOSS Our net loss for the quarter ended March 31 2009 decreased to $227,260 from net loss of $1,134,486) for the quarter ended March 31, 2008, representing a decrease of 80%. The decrease is directly related limited activity due to a lack of funds and a significant decrease in expenses from the amortization of discounts on convertible notes and value of detachable warrants and for related debt conversion expenses. FINANCIAL CONDITION CASH AND WORKING CAPITAL

The increase to our working capital deficit was primarily attributable to an increase in accounts payable and an increase in provision for lawsuit settlements as discussed below. LIABILITIES

The increase in provision for lawsuits is due to accrued interest on outstanding judgments. Accounts payable increased due to a lack of funds to pay creditors. Short-term loans increased due to interest expense. 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 may also be conditional upon the forbearance of our creditors. Included in short-term loans at March 31, 2009 are unsecured, non-interest bearing advances of $138,600 that we anticipate will be converted into shares of our common stock. -27- CASH FLOWS ------------------------- At March 31, ------------------------- 2009 2008 ---- ---- Net Cash provided by (used in) Operating Activities ($48) ($126,232) Net Cash provided by (used in) Financing Activities - $123,500 Net Increase (Decrease) in Cash During Period ($48) ($2,732) CASH USED IN OPERATING ACTIVITIES The decrease in cash used in operating activities was due to the limited amount of funds available compared to 2008. FINANCING REQUIREMENTS We will require additional financing if we are to continue as a going concern and to finance our business operations. While we have obtained some financing in 2008 we need substantially more capital to complete development and continue our business. There is no assurance that we will be able to raise the required additional capital. 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. Accordingly, there is substantial doubt about our ability to continue as a going concern. We believe, however that recent technical developments provide the Company with potential for substantial growth but this will require investment. There is no assurance that we will obtain sufficient funding or otherwise be able to achieve our goals. -28- CRITICAL ACCOUNTING POLICIES STOCK BASED COMPENSATION The Company accounts for stock-based compensation under the fair value method in accordance with Statement of Financial Accounting Standards No.123 (revised 2004), "Share Based Payment" "SFAS 123(R)". SFAS No. 123R requires the Company to establish assumptions and estimates of the weighted-average fair value of stock options granted, as well as using a valuation model to calculate the fair value of stock-based awards. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. NEW ACCOUNTING PRONOUNCEMENTS In December 2007, the FASB issued Statement No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R revises the principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree, and the goodwill acquired in a business combination or gain from a bargain purchase. SFAS 141R also revises the principles and requirements for how the acquirer determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This pronouncement will be effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, that SFAS 141R will have on its financial position or results of operations. This statement is effective for the Company beginning January 1, 2009 and has no impact on its financial statements. In December 2007, the FASB issued Statement No. 160, "Non controlling Interest in Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This pronouncement will be effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, that SFAS 160 will have on its financial position or results of operations. This statement is effective for the Company beginning January 1, 2009 and has no impact on its financial statements. In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that SFAS 161 will have on our financial position or results of operations. This statement is effective for the Company beginning January 1, 2009 and has no impact on its financial statements. -29- In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments. The FSP amends SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" to require an entity to provide disclosures about fair value of financial instruments in interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company will include the required disclosures in its quarter ending June 30, 2009 In April 2009, the FASB issued FSP FAS 141(R)-1, ACCOUNTING FOR ASSETS ACQUIRED AND LIABILITIES ASSUMED IN A BUSINESS COMBINATION THAT ARISE FROM CONTINGENCIES. This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5, "Accounting for Contingencies" and FASB Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss". Further, the FASB removed the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS No. 141(R). The requirements of this FSP carry forward without significant revision the guidance on contingencies of SFAS No. 141, "Business Combinations", which was superseded by SFAS No. 141(R) (see previous paragraph). The FSP also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by SFAS No. 5. This FSP was adopted effective January 1, 2009. There was no impact upon adoption, and its effects on future periods will depend on the nature and significance of business combinations subject to this statement. In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. The FSP states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the Company's financial statements. -30- ITEM 4. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company's Chief Executive Officer and its Chief Financial Officer reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)).These controls are designed to ensure that material information the Company must disclose in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis. These officers have concluded, based on that evaluation, that as of such date, the Company's disclosure controls and procedures were effective at a reasonable assurance level for a Company with substantially no activities and no personnel. The Company believes it must devise new procedures as it increases its activity and its personnel. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). As required by Rule 13a-15 under the Exchange Act the Company's Chief Executive Officer and its Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making its assessment of internal control over financial reporting, management used the criteria described in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment management identified a material weaknesses in the Company's internal controls over financial reporting due in a significant part to the pervasive effect of the lack of resources, specifically the limited number of personnel involved in the financial reporting including the number of persons that are appropriately qualified in the areas of U.S. GAAP and SEC reporting. These limitations include an inability to segregate functions. Because of this weakness there is a possibility that a material misstatement of the annual financial statements would not have been prevented or detected. Nevertheless the Company's Chief Executive Officer and Chief Financial Officer believed that for the limited operations of the Company internal controls over financial reporting were adequate to provide reasonable assurance of the accuracy of the Company's financial statements at year end. The adverse effect of the material weakness over internal controls, however, will become magnified if the Company increases operations. Due to the complexity of the accounting for the convertible notes with detachable warrants, there were material additional adjustments made to our annual financial statements prior to their publication in this report as well as interim financial statements after filing. In management's view, this was not the result of a material weakness in internal control but due to the complexity of the accounting rules and their interpretations affecting transactions of this nature. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. -31- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS NONE ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. There were no securities issued in the quarter ended March 31, 2009 -32- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -------------------------------------------------------------------------------- -33- 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. Signature TITLE DATE ----- ---- /s/ Jason Meyers Co-Chief Executive Officer, May 15, 2009 ________________________ Director Jason Meyers /s/ Debi Kokinos Chief Financial Officer May 15, 2009 _________________________ and Chief Accounting Officer Debi Kokinos -34-

TURBODYNE TECHNOLOGIES, INC 10-Q