Turbo Power Systems Inc.
TSX : TPS
AIM : TPS

Turbo Power Systems Inc.

March 27, 2007 02:00 ET

Turbo Power Systems Inc. Announces Its Results for the Fourth Quarter and Year Ended 31 December 2006

CALGARY, ALBERTA--(CCNMatthews - March 27, 2007) - Turbo Power Systems Inc. (TSX:TPS) (AIM:TPS) -

Highlights

- Production and development income increased by 113 percent to Pounds Sterling 6.3 million

- Loss before tax reduced by 2 percent to Pounds Sterling 6.3 million

- Orders announced since January 2006 totalling US$58 million including:

-- Motor drive to be used in the new Boeing 787 dreamliner

-- Auxiliary power supplies to be used in rail cars for the Beijing Airport Link

-- Traction electronics for use in Union Pacific locomotives

-- Auxiliary power for subway cars for the Chicago Transit Authority

-- Auxiliary power systems for use in subway cars by the Toronto Transit Commission

- Placing of Pounds Sterling 6.0 million

- Convertible debt reduced by 84 percent to Pounds Sterling 1.8 million

- Move to trading on AIM

Commenting on the results, Michael Hunt, Chief Executive said,

"During 2006 we made strong progress both in continuing to build our order book and increasing our revenues. The orders won provide a platform for our future growth and a number of new programmes will move into production in 2007. The successful fundraising and debt restructuring that we completed in December was an endorsement of our recent progress and has strengthened our balance sheet significantly."

NOTES TO EDITORS

About Turbo Power Systems

Turbo Power Systems Inc. designs and manufactures innovative power solutions which provide local, high quality, controllable electrical power. The Group's products are sold into a number of markets but are all based on its core technologies of power electronics and high speed electrical machines.

The Group operates across the following market sectors:

- Direct Drive High-Speed Electrical Machines and Electronics

- Specialist Drives and Motor applications (Aerospace, Oil and Gas)

- High Voltage Power Supplies, Auxiliary Power Systems, Grid-Connected Inverters for Energy Recovery Systems and Renewable Technologies

Forward Looking statements

This news release contains forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance, and underlying assumptions and other statements that are other than statement of historical fact. These statements are subject to uncertainties and risks including, but not limited to, the ability to meet ongoing capital needs, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition, the need to protect proprietary rights to technology, government regulation, and other risks defined in this document and in statements filed from time to time with the applicable securities regulatory authorities.

In January 2005, the CICA released new Handbook Section 3855, Financial Instruments - Recognition and Measurement, effective for annual and interim periods beginning on or after October 1, 2006. This new section prescribes when a financial instrument is to be recognized on the balance sheet and at what amount, sometimes using fair value and at other times using cost-based measures. It also specifies how financial instrument gains and losses are to be presented and defines financial instruments to include accounts receivable and payable, loans, investments in debt and equity securities, and derivative contracts.

Management is currently reviewing the effects of this section on its financial statements.

In January 2005, the CICA released new Handbook Section 1530, Comprehensive Income, and Section 3251, Equity, effective for annual and interim periods beginning on or after October 1, 2006. Section 1530 establishes standards for reporting comprehensive income. The section does not address issues of recognition or measurement for comprehensive income and its components. Section 3251 establishes standards for the presentation of equity and changes in equity during the reporting period. The requirements in this section are in addition to Section 1530.

Management is currently reviewing the effects of this section on its financial statements.

OPERATIONAL REVIEW

Chairman's statement

I am pleased to report that in 2006 Turbo Power Systems (TPS) continued to demonstrate good growth in orders and turnover in our core areas of power electronics and high speed electrical machines. Combined production revenue and development income grew 113% to Pounds Sterling 6.3 million for 2006, and the Company has won orders valued at US$58 million in the period since January 2006.

In power electronics our activities in the rail sector continued to expand. Important strategic agreements and orders are now in place with the National Rail Equipment Company in the USA, and Bombardier Transportation in both Canada and Germany. Revenue from rail contracts more than doubled in 2006 and we were delighted to announce in January 2007 a US$14 million contract through Bombardier for the Chicago Transit Authority. This was followed in March 2007, by an US$8 million contract win through Bombardier for the Toronto Transport Commission. Successful delivery of these multi year contracts will create a solid base for future revenue growth.

One of the most significant developments of 2006 was the emergence of TPS as a fully qualified supplier of equipment in the aerospace sector. The Hamilton Sundstrand contract announced in July and valued at some US$25 million for motor drive hardware on the Boeing 787 followed the Eaton Aerospace contract announced in 2005 for another electronics drive unit on the same aircraft. The aircraft industry has recently seen a significant increase in new build programmes. We are demonstrating that we can meet the standards required to participate in these programmes and are confident that we can extend our future aerospace involvement into other international aircraft programmes.

In electrical machines the Company continues to make progress on our industrial motor and drive programmes. Electrical testing on the down-hole pump motor for the Artificial Lift Company is proceeding and testing of prototypes for our industrial motor and drive customer is underway ahead of field trials planned for the summer of 2007.

With respect to distributed generation the Company continued its policy during 2006 of limiting its own funded development to involvement in small scale pilot projects. It is hoped that in 2007 a number of commercial programmes in the renewable and energy efficiency sectors will produce specific product developments.

In terms of costs 2006 was a transition year where we saw our move into commercial development and production programmes reduce our level of R&D cash receipts and increase stock levels. The Group's loss before interest, tax, depreciation, amortisation and stock compensation reduced by 16% to Pounds Sterling 4.3 million.

The increase in the number of production programmes in 2006 highlighted the space constraints at our Gateshead site. The Company has reached agreement to lease new larger facilities close to the existing site and the move will take place in the second quarter of 2007.

In December, the Company confirmed the successful completion of a placing to raise Pounds Sterling 6.0 million, and move to trading on the AIM market. We also announced the redemption of a significant proportion of the 2003 and 2005 loan notes, a process that concluded on the 6th January 2007 whereby a total of Pounds Sterling 9.4 million were redeemed in exchange for either common shares or A-shares. This has significantly reduced our overall debt and associated interest costs.

The additional finance will provide working capital in support of our increasing production volumes and will also fund the expansion into the larger manufacturing facility in the North East of England.

The Group finished 2006 with cash of Pounds Sterling 8.2 million of which Pounds Sterling 1.5 million was reserved to cover performance bonds.

We are encouraged that we have started 2007 with the announcement of two significant orders that will allow us to continue to build our revenue base. Our growing reputation in our target sectors means that our pipeline of bids is growing and we are confident of continued order success.

The progress the Company has made in the last 15 months is down to the hard work of our management team and staff, and I would like to take this opportunity to thank them all.

Business of the Company

Turbo Power Systems designs and manufactures innovative power solutions which provide local, high quality, controllable electrical and motive power. The Group's products can be tailored for use in a wide range of industries and applications, but are all based on its core technologies of high speed electrical machines and power electronics.

The Group's site at Heathrow is the Head Office for UK operations and the design and manufacturing centre for Electrical Machines. The Group's site at Gateshead is the design and manufacturing centre for high performance power electronics.

Strategy

The Company's strategy is to build a high performance electric machines and power electronics business which can demonstrate strong and sustainable growth in all of its technology areas and is not dependent on any single market sector, product or operating unit.

Our sales strategy is to focus on developing long term relationships with strong partners in each of our target market sectors where our technology typically forms part of a larger product supplied to the end customer.

We will combine the skills of our two sites to match the requirements of our customers.

Review of operations

1) Direct Drive Industrial High Speed Motors and Drives

The Company designs and manufactures combined systems in the size range of 15kW to 1.5MW, which typically run at speeds in excess of 15,000 rpm.

Markets and Market Drivers

The key markets for the Company's direct drive systems are:

- HVAC and Refrigeration

- Air Compressors

- Natural Gas Compressors

- Laser Blowers

In all of the above applications, the TPS direct drive motor and electronics systems can contribute to reducing the end-users power costs significantly, by eliminating the need for mechanical gearboxes and by running much more efficiently across a wider range of operating conditions and load points. Typically systems which use gears are designed to work best at an optimum operating point and when the system needs to be "turned down" they become much less efficient.

The TPS direct drive products use a magnetic bearing technology which allows the central rotor section of the motor to "float" when rotating at high speed. These "frictionless" magnetic bearings do not wear like conventional contact bearings or require any additional lubrication, and as a result need less maintenance and have higher reliability. In addition, since the bearings do not require lubrication there is no possibility of contaminating the compressed liquids or gases.

The TPS high speed systems are also much smaller and lighter than conventional technology, simplifying equipment design and ease of installation. The Company is seeing growing interest in its technology as environmental regulations and rising fuel costs drive the requirement for more efficient systems.

Customers and Contracts

SKF

TPS has designed a range of integrated motor and drive systems for SKF between 15kW and 35kW, which are built into a compressor.

Production orders were received at the end of 2005 which were intended to ramp up slowly through 2006 and 2007. TPS delivered initial units during 2006 and the programme has now entered a field testing phase to gather more long term reliability data. This phase is expected to complete in mid 2007, at which point production volumes will commence.

Industrial Motor and Drive Agreement

In 2005 the Company announced that it had signed an agreement with an international capital equipment manufacturer to design and manufacture three sizes of motors and drives between 250kW and 465kW. Testing of the prototype systems is currently underway and, although later than planned, is making good progress. Orders for the beta test units have now been received and field trials are intended to be carried out in the summer of 2007.

2) Specialist Motors and Drives

In the process of developing its high speed electrical machines, TPS has accumulated key skills in designing hardware which uses complex high performance composite materials, operates in aggressive and high temperature environments, and is required to meet challenging electrical specifications. These core skills are now also being deployed across a broader range of custom motor and drive applications, some operating at lower speeds, where "standard" products from the established volume manufacturers cannot achieve the customer's performance requirements.

Markets and market drivers

The key markets for the Company's specialist motors and drives are:

- Aerospace

- Oil and Gas

- Hybrid Vehicles

In the aerospace sector the advent of "More Electric Aircraft" programmes such as the new Boeing 787 Dreamliner, where manufacturers are planning to replace hydraulic and pneumatic systems with smart lightweight electronics systems, has created the opportunity for TPS to offer innovative compact motors and electronics, which can contribute to the overall weight and fuel reduction targets.

The TPS involvement in the oil and gas sector is focused on the artificial lift market where pumps or compressors are needed to bring oil and gas reserves to the surface. Any improvement in the performance and ease of deployment of the lift technology can bring additional older wells back into revenue and can minimise production down time. The TPS collaboration with the Artificial Lift Company is specifically designed to meet this critical oil industry requirement.

Hybrid electric vehicles currently only represent a very small percentage of the total global car market. However sales are expected to increase significantly in response to both environmental lobbying and government intervention for low carbon emission technology. In particular commercial vehicles with delivery routes which combine motorway travel with urban deliveries are seen as being ideal candidates for hybrid technology.

Customers and Contracts

Eaton Aerospace

The contract from Eaton for high performance drives for the fuel transfer and jettison pumps on the Boeing 787 airliner is proceeding to plan, with flight hardware now being built in support of the aircraft trials scheduled to commence in 2007. Initial production will begin in late 2007.

Hamilton Sundstrand

Following the extensive capability and performance reviews by Boeing on the Eaton programme, the Company was awarded another motor drive electronics programme for the 787 aircraft in July 2006, this time from Hamilton Sundstrand. The equipment which drives a ram fan is an essential part of the aircraft electronics cooling system. The production contract (based on sales projections for the whole aircraft fleet) is estimated at US$25M with after market sales at some US$10M. Design and build of prototypes is underway and initial production again is scheduled for late 2007.

Artificial Lift Company (Oil and Gas)

The development contract placed for a small diameter modular down-hole pump motor for the oil and gas sector has, as expected, proved to be very technically challenging. However TPS has successfully produced operational prototypes which are now undergoing extensive testing in advance of their deployment first in a test well in the UK, and subsequently in an operational well in North America. The well testing will take place during 2007 and commercial interest from the major oil companies remains very strong. On completion of the field testing TPS expects to commence manufacture of the initial production units in 2008.

Lotus Engineering

Testing of the hybrid vehicle motor drive is currently underway, with vehicle trials expected to transfer from the UK to S E Asia early in 2007.

No firm timetable is available yet as to when the sponsoring car company will decide whether the programme will move on to the pre-production stage.

3) Rail and Industrial Power Electronics

TPS designs and manufactures rugged power electronics products for both rail and industrial applications, all of which require high reliability and availability in operation.

Markets and Market Drivers

The key markets for the Company's specialist motors and drives are:

- Rail and Industrial Electronics

-- Auxiliary Power Systems

-- Chargers and A/C Power

-- Traction Drives

- Industrial HV Power Supplies

The rail market is characterised by strong growth for new rolling stock in developing economies and steady replacement demand for older rail cars in the USA and Europe.

For TPS the increasing need for these new rail and subway cars to include technology designed to increase passenger comfort such as air-conditioning, entertainment and information systems and improved on-board catering facilities, increases the demand for our auxiliary power hardware which connects these new systems to the trains electrical network, converting 'dirty' power from the tracks to conditioned power for on board applications.

Customers and Contracts

Bombardier Transportation - Germany

TPS was selected in 2006 by Bombardier Berlin to supply a range of standard battery chargers for passenger trains in European and International markets. The agreement is for an initial period of three years and Bombardier's intention is to maximise the economies of scale by proposing these standard products in as many of their proposals as possible.

Bombardier Transportation-Canada

Beijing

In May 2006 TPS received a contract to design and manufacture 40 auxiliary power supplies for automatic rail cars to be used on the Beijing Airport link as part of an expansion programme linked to the Beijing Olympics. The contract is valued at US$1.5M and production deliveries will be made during 2007.

Chicago Transit Authority

In January 2007 TPS announced that it had received its largest rail order ever for the supply of auxiliary power units to be installed on 406 subway cars being built by Bombardier for the Chicago Transit Authority. The base contract is valued at some US$14M including production, spares and engineering services, with possible options for additional cars which could increase the value to more than US$20M.

Design is currently underway with prototypes scheduled for 2008 and full production to commence in 2009.

Toronto

In March 2007 the Company was able to announce the award of another major rail programme in North America, this time for a distributed power electronics system to be installed in subway cars being built by Bombardier for the Toronto Transit Commission. TPS will supply two units which will be installed in 234 subway cars. Design has commenced and prototypes are expected to be supplied early in 2008 with production to commence by the end of 2008.

The contract for the initial quantity of 234 cars is expected to exceed US$8M, with the potential for further option quantities to extend that to some US$14M.

Bombardier Transportation - UK

Production of the air-conditioning power supply for London Underground proceeded smoothly throughout 2006, and is continuing in 2007.

National Rail Equipment Co.

A number of orders for traction electronics for this US manufacturer of locomotives were received during 2006 and into 2007 as a result of NREC's success in marketing their innovative low emissions shunting locomotive which also reduces fuel consumption by in excess of 20%.

The largest individual order was placed by Union Pacific for 60 locomotives. As our first traction electronics product this programme represents a significant development in our rail product range.

Toronto Transit Commission

H6 Subway Programme

Production of the auxiliary power converters for installation by Toronto Transit as part of a subway car upgrade programme proceeded smoothly through 2006 and continues into 2007.

CLRV

Following their internal budget review in March 2007, the Toronto Transit Commission has decided not to proceed with the manufacturing phase of the CLRV tram refurbishment programme and to reallocate the funds to the purchase of a quantity of new tram vehicles instead. Our production programme for 100 vehicle sets of power electronic units, valued at Pounds Sterling 1.75M, was scheduled to begin in 2008 and then continue until 2012. Discussions on the cancellation costs will take place during April; however TTC will immediately return the contract performance bond releasing around Pounds Sterling 515,000 of restricted cash. The Toronto Transit Commission have also indicated that there will be an opportunity for TPS to be considered for the auxiliary power systems for the new vehicle programme.

PRC

Monthly demand for the high voltage pulsed power supplies supplied to PRC Corporation in the USA continued to increase during 2006 and is expected to strengthen further during 2007. The TPS equipment is now a standard item for all the PRC laser systems.

4) Direct Drive Generators and Inverters

TPS produces a range of high speed direct drive generators in the size range of 400kW to 1.2MW, designed to operate with a broad range of prime movers including gas and steam turbines, and heat and energy recovery systems. The associated power electronic inverters connect the generators to the central utility grid and can also be used in conjunction with solar panels, fuel cells and wind turbines, meeting all the required interconnection standards.

Markets and Market Drivers

The key markets for the Company's generators and inverters are:

Markets

- Distributed Generation and Renewables

- Grid Connected Electronics

- Gas Turbine and Bio-fuel Generators

Market Drivers

- Increasing momentum for "Green Power" and more efficient energy technology

- National Targets for greater than 10% of electrical demand to be met from Renewable sources

- Embedded Renewable Power sources need electronics to connect to the grid.

- Solar, Wind, Low Head Hydro, Fuel Cells

Customers and Contracts

Discussions continued through 2006 with potential turbine partners for projects including:

- 100 kW Generator and Inverter

- 600 kW Generator and Inverter

- 5000 kW Generator and Inverter

Compact Power, with whom TPS has a product development agreement for the supply of a generator and inverter for use with the 600kW gas turbine designed into their Biomass Generation project, are well advanced in planning their pilot installation which is scheduled to commence in March 2007.

Renewable and Energy Saving Projects

TPS is continuing its strategy of participating in early "technology demonstrators" across a range of energy efficient and renewable projects, where 3rd party funding is available and existing TPS hardware can be adapted for use at the feasibility stage.

This is particularly directed towards expanding the potential for our grid connected inverter technology.

Consequently at present we have preliminary participation in the following areas:

- A demonstration Low-Head Hydro energy recovery scheme in the UK Midlands. TPS is providing generator and inverter hardware.

- An EU funded programme for an externally fired micro-turbine ( less than 10kW) system for domestic CHP. TPS will provide a high-speed generator and inverter.

- An EU funded programme examining inter-connection issues with the grid, in anticipation of an increasing proportion of the overall electrical demand being met from embedded renewable generation sources. TPS will be providing an inverter for this programme.

- A DTI funded programme investigating the potential for a grid connected battery storage scheme to offset peak and off peak demand, utilizing an innovative 3rd party patented battery design. TPS will be providing an inverter.

FINANCIAL PERFORMANCE

REVIEW OF YEAR TO 31 DECEMBER 2006

The financial year to 31 December 2006 saw a transformation in the company's financial position as increased turnover, an equity fundraising, and the redeeming of the great majority of the company's convertible debt combined to strengthen our balance sheet position and reduce our underlying cash burn rate.

The company continued its success in winning significant orders with OEM partners. Wins such as the Hamilton Sundstrand contract for Boeing in July 2006 and Bombardier contracts for the Chicago Transit Authority and Toronto Transit Commission, both announced in early 2007, mean that TPS has won total orders valued at US$58 million in the period since January 2006.

Production revenue increased 108% to Pounds Sterling 5.5 million as some of our new rail power electronics programmes moved into production. We expect rail power electronics to again be the largest component of our revenues in 2007 but as aerospace and motor programmes move into production in the second half of this year revenue will become more balanced across our target sectors.

Development income increased 65% to Pounds Sterling 0.8 million in 2006 driven by initial development receipts on our two Boeing Dreamliner programmes.

Staff numbers grew strongly in the production and development engineering areas during the year as resource was increased to staff new programmes. However, administration staff remained unchanged and total staff numbered 148 at the year end (2005: 101).

In terms of cost 2006 was a transitional year. Production and development costs increased to match growing programme commitments while administration costs before stock compensation were held at a similar level to 2005. The level of cost offset available from R&D tax credits reduced significantly to Pounds Sterling 0.4 million (2005: Pounds Sterling 0.7 million) as our development programmes moved into commercial agreements. The Group's loss before interest, tax, depreciation, amortisation and stock compensation reduced by 16% to Pounds Sterling 4.3 million.

Cash outflow before movements in working capital and interest reduced by 7% to Pounds Sterling 3.9 million. However, increases in net interest paid (2006: Pounds Sterling 0.3 million, 2005: Pounds Sterling 0.1 million) as well as stock and debtor increases associated with the strong growth in production mean that cash outflow from operating activities before tax increased by 11% to Pounds Sterling 5.1 million.

In December 2006 the company completed a Pounds Sterling 5.5 million net equity fundraising. At the same time it redeemed Pounds Sterling 4.86 million of convertible notes. A further Pounds Sterling 4.50 million of notes were redeemed in early January 2007. This overall reduction in debt of Pounds Sterling 9.36 million, combined with the funds raised has significantly strengthened the Company's balance sheet. The reduction in debt has also reduced the associated annual interest cost from Pounds Sterling 0.6 million to Pounds Sterling 0.1 million.

The Company finished the year with an unrestricted cash balance of Pounds Sterling 6.7 million and held further cash of Pounds Sterling 1.5 million associated with performance bonds.

Further detail of the Company's financial performance is shown below:



Revenue

Revenue in the year ended 31 December 2006 was Pounds Sterling 5.48
million compared with Pounds Sterling 2.64 million in 2005 and comprised

2006 2005
Pounds Sterling '000 Pounds Sterling '000

Power electronics 5,257 2,482
Electrical machines 225 154
------- -------
5,482 2,636
------- -------
------- -------


The Power Electronics division has seen strong turnover growth, both as a result of increased volumes on established programmes and the start of production runs on new contracts. Output volumes have grown significantly on the existing production contracts for Toronto Transit Commission H6, PRC laser power supplies, Bombardier London Underground and Lotus. In addition the contract with Trans Elektro for air conditioning power supplies, which entered production in the first quarter, made a significant contribution to revenue for the year. Production on the NREC programme began in the third quarter and continued through the fourth quarter.

Spares and service revenues were Pounds Sterling 0.98m for the year (2005:Pounds Sterling 0.52m).

In the Electrical Machines division revenue increased over 2005 as the SKF contract moved into production and initial revenues were received from ALC. Increased volumes were shipped on the SKF programme in the third quarter but volumes reduced in the fourth quarter while the end customer conducted field surveys.

Development income

Development income in the year was Pounds Sterling 0.79 million compared with Pounds Sterling 0.48 million in 2005 and included receipts from Eaton Aerospace and Hamilton Sundstrand on the Boeing 787 Dreamliner programmes.



2006 2005
Pounds Sterling '000 Pounds Sterling '000

Development income 794 481
------- -------
------- -------

Production costs

The cost of product revenues in the year amounted to Pounds Sterling 4.23
million (2005 : Pounds Sterling 2.08 million).

2006 2005
Pounds Sterling '000 Pounds Sterling '000

Power electronics 3,423 1,791
Electrical machines 804 290
------- -------
4,227 2,081
------- -------
------- -------


Production costs include certain fixed facilities costs attributable to the manufacturing operation.

Included in production costs for the year are stock compensation charges on options awarded of Pounds Sterling 51,000 (2005: nil).

Research and product development

Research and product development expenditure in the year was Pounds Sterling 3.32 million compared with Pounds Sterling 2.50 million in 2005, and comprised



2006 2005
Pounds Sterling '000 Pounds Sterling '000

Research and product
development expenditure 3,734 3,232
Accrued R&D tax credits (410) (736)
------- -------
Total expenditure 3,324 2,496
------- -------
------- -------


Product development costs increased in 2006 as work commenced on both the Eaton contract and the Hamilton Sundstrand contract for the Boeing 787 Dreamliner as well as the NREC rail programme.

Included in research and product development expenditure for the year are stock compensation charges on options awarded of Pounds Sterling 255,000 (2005: nil).

The level of R&D tax credits accrued in the year reduced as more of the Group's development resource moved on to commercial programmes.

General and administrative

General and administrative costs of Pounds Sterling 3.12 million (2005: Pounds Sterling 2.90 million) consist mainly of staff costs and facilities costs. Also included are costs of Pounds Sterling 50,000 associated with the Company's AIM admission and stock compensation charges on options awarded of Pounds Sterling 206,000 (2005: Pounds Sterling 133,000), and increased costs for additional sales and marketing personnel and promotional activities.

Amortisation

Amortisation was Pounds Sterling 1.09 million compared with Pounds Sterling 1.51 million in 2005. The reduction reflects a number of assets becoming fully written down during the year.

Interest income

Interest income for the twelve months was Pounds Sterling 0.23 million compared with Pounds Sterling 0.33 million in 2005 reflecting a lower average cash balance held in the year.

Interest expense and finance charges

Interest expense and finance charges arise from the issue of convertible bonds in July 2003 and March 2005 and comprised



2006 2005
Pounds Sterling '000 Pounds Sterling '000

Finance charges - 99
Interest payable 570 520
Amortisation of deferred
finance charges 92 137
Debt accretion 387 368
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1,049 1,124
------- -------
------- -------


On 28th December Pounds Sterling 4,860,000 of loan notes were redeemed as part of the fundraising and loan note redemption. Interest on the redeemed loan notes has been accrued from 1st July to 28th December and was paid over in January 2007.

Convertible bonds are considered to be compound financial instruments, and the liability component and the equity component must be presented separately, as determined at initial recognition. The Company has valued the equity component of these bonds using the residual value of equity component method, whereby the liability component is valued first using current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the bonds issued and the fair value of the liability is assigned to the equity component. The equity element of the March 2005 bond issue was estimated at Pounds Sterling 1.11 million. The equity element of the 2003 bond issue was estimated at Pounds Sterling 0.91 million. The carrying value of the debt element is increased over the term of the debt and this accretion expense is charged to the profit and loss account. During the twelve months this charge amounted to Pounds Sterling 0.39 million (2005: Pounds Sterling 0.37 million).

Finance charges for 2006 were Pounds Sterling nil (2005: Pounds Sterling 99,000) and were made up as below:

During the third quarter the company purchased U.S. dollar denominated currency contracts covering expected dollar income from programmes scheduled for 2006 and 2007. The premium cost for these options was Pounds Sterling 81,000 and has been charged to profit and loss in the year. This charge is offset by currency option receipts and the value of the option as at 31 December 2006, resulting in a net cost for the year of Pounds Sterling 19,000 (2005: Pounds Sterling nil).

During the fourth quarter the company redeemed 4,860,000 loan notes, resulting in a net charge of Pounds Sterling 190,000.

The transfer to the AIM market resulted in the release of the provision for financial costs on share issuance of Pounds Sterling 230,000.

During the year the Company recorded an impairment of Pounds Sterling 21,000 (2005: Pounds Sterling 45,000) against the investment in Altek Power Corporation.

CASH FLOWS FOR THE TWELVE MONTHS

Cash outflow from operating activities

Operating cash outflow before movements in working capital was Pounds Sterling 4.17 million for the period (2005: Pounds Sterling 4.28 million).

Movements in stocks, work in progress and debtors and creditors produced a net cash outflow of Pounds Sterling 0.97 million during the period (2005: Pounds Sterling 0.35 million) reflecting the increased turnover and manufacturing volume.

Tax credits

During the year the company received research and development tax credits of Pounds Sterling 0.10 million (2005: Pounds Sterling 1.00 million). The 2005 receipts included amounts related to the 2004 and 2003 tax years and the reduced 2006 amount reflects the reduction in non customer funded research and development as programmes moved into their commercial phase.

Investing activities

Purchases of long term tangible assets amounted to Pounds Sterling 0.22 million (2005: Pounds Sterling 0.02 million) and relate to production equipment.

Cash outflows related to financial instruments of Pounds Sterling 0.06 million (2005: nil) are the net premium costs of currency contracts.

Cash flow from financing activities

Cash inflow from financing in 2006 of Pounds Sterling 5.45 million during the twelve months relates to net funds received from the issue of shares in December 2006, when the Company completed a Pounds Sterling 6,000,000 (gross) financing agreement with institutional investors. The financing comprised placing of Common Shares and A -Ordinary shares in Turbo Power Systems Limited.

Cash inflow from financing in 2005 of Pounds Sterling 8.09 million during the year relates to the release of restricted cash funds of Pounds Sterling 0.38 million and Pounds Sterling 7.71 million net funds received from the issue of convertible notes in March 2005 when the Company completed an Pounds Sterling 8,000,000 (gross) financing agreement with institutional investors. The financing comprised unsecured Convertible Notes and Warrants. The Convertible Notes have a term of five years plus one day and bear interest at a rate of 6.5% per annum. They are convertible into an aggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of Pounds Sterling 0.12 per share. The Warrants have a term of five years and are convertible into an aggregate of 7,000,000 Common Shares in Turbo Power Systems Inc. at an exercise price of Pounds Sterling 0.15 per share.

Overall cash outflow for the twelve months

Overall the cash inflow for the period was Pounds Sterling 0.14 million. This compares with a cash inflow of Pounds Sterling 4.46 million in 2005.

REVIEW OF THREE MONTHS ENDED 31 DECEMBER 2006



Revenue

Revenue in the three months ended 31 December 2006 was Pounds Sterling
1.85 million compared with Pounds Sterling 0.87 million in 2005 and
comprised

2006 2005
Pounds Sterling '000 Pounds Sterling '000

Power electronics 1,798 815
Electrical machines 53 59
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1,851 874
------- -------
------- -------


Revenues from the Power electronics division increased as a result of production revenues from contracts with Toronto Transit Commission, Bombardier, NREC and Trans Elektro (which had not commenced in 2005), and an increase in spares business in line with the increasing sales volumes.

Revenue in the Electrical machines division relates primarily to the SKF contract.

Development income

Development income in the three months was higher in 2006 at Pounds Sterling 0.22 million compared with Pounds Sterling 0.10 million in 2005 and included receipts from Eaton Aerospace and Hamilton Sundstrand on the Boeing 787 Dreamliner programme.



2006 2005
Pounds Sterling '000 Pounds Sterling '000

Development income 217 95
------- -------
------- -------

Production costs

The cost of product revenues in the three months amounted to Pounds
Sterling 1.43 million (2005 : Pounds Sterling 0.53 million).

2006 2005
Pounds Sterling '000 Pounds Sterling '000

Power electronics 1,174 390
Electrical machines 251 144
------- -------
1,425 534
------- -------
------- -------


Production costs include certain facilities costs attributable to the manufacturing operation.

Included in production costs for the three months are stock compensation charges on options awarded of Pounds Sterling 16,500 (2005: nil).

Research and product development

Research and product development expenditure in the three months was Pounds Sterling 0.71 million compared with Pounds Sterling 0.15 million in 2005, and comprised



2006 2005
Pounds Sterling '000 Pounds Sterling '000


Research and product
development expenditure 1,074 887
Accrued R&D tax credits (360) (736)
------- -------
Total expenditure 714 151
------- -------
------- -------


Included in research and product development costs for the three months are stock compensation charges on options awarded of Pounds Sterling 67,000 (2005: nil).

General and administrative

General and administrative costs in the three months of Pounds Sterling 0.74 million (2005: Pounds Sterling 0.79 million) consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings. Included in general and administrative costs for the quarter are stock compensation charges on options awarded of Pounds Sterling 55,000 (2005: Pounds Sterling 90,000), costs for the transfer of the Company's listing to the AIM market of Pounds Sterling 50,000 (2005; Pounds Sterling nil) and costs for additional sales, marketing and management personnel and activities.

Amortisation

Amortisation was Pounds Sterling 0.19 million compared with Pounds Sterling 0.58 million in 2005.

Interest income

Interest income in the three months was Pounds Sterling 0.02 million compared with Pounds Sterling 0.10 million in 2005.

Interest expense and finance charges

Interest expense and finance charges arise from the issue of convertible bonds in July 2003 and March 2005 and comprised



2006 2005
Pounds Sterling '000 Pounds Sterling '000

Finance charges (66) 99
Interest payable 150 140
Amortisation of deferred
finance charges (29) (3)
Debt accretion 96 101
------- -------
151 337
------- -------
------- -------


Convertible bonds are considered to be compound financial instruments, and the liability component and the equity component must be presented separately, as determined at initial recognition. The Company has valued the equity component of these bonds using the residual value of equity component method, whereby the liability component is valued first using current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the bonds issued and the fair value of the liability is assigned to the equity component. The equity element of the March 2005 bond issue was estimated at Pounds Sterling 1.11 million. The equity element of the 2003 bond issue was estimated at Pounds Sterling 0.91 million. The carrying value of the debt element is increased over the term of the debt and this accretion expense is charged to the profit and loss account. During the period this charge amounted to Pounds Sterling 0.10 million (2005: Pounds Sterling 0.10 million).

During the quarter receipts on maturing options were received of Pounds Sterling 17,000 (2005: Pounds Sterling nil). The increase in the value of the 2007 option as at 31 December 2006 has been recognized during the quarter.

During the fourth quarter the company redeemed 4,860,000 loan notes, resulting in a net charge of Pounds Sterling 190,000.

The transfer to the AIM market resulted in the release of the provision for financial costs on share issuance of Pounds Sterling 230,000.

During the year the Company recorded an impairment of Pounds Sterling 21,000 (2005: Pounds Sterling 52,000) against the investment in Altek Power Corporation.

CASH FLOWS FOR THE THREE MONTHS ENDED 31 DECEMBER 2006

Cash outflow from operating activities

Operating cash outflow before movements in working capital was Pounds Sterling 0.67 million for the quarter (2005: Pounds Sterling 0.97 million).

Movements in stocks, work in progress and debtors and creditors produced a net cash outflow of Pounds Sterling 0.48 million during the quarter (2005: inflow of Pounds Sterling 0.27 million) reflecting increased turnover and manufacturing volume.

Tax credits

During the quarter the company received no research and development tax credits (2005: Pounds Sterling 1.0 million).

Investing activities

Cash outflows from capital investments in the three months were Pounds Sterling 0.11 million compared with Pounds Sterling 0.02 million in 2005. This spend was primarily on plant and software associated with the Hamilton Sundstrand programme.

Overall cash outflow for the period

Overall the cash inflow during the three months was Pounds Sterling 4.20 million. This compares with an overall cash inflow of Pounds Sterling 0.36 million for the fourth quarter of 2005.

BALANCE SHEET AS AT 31 DECEMBER 2006

The Company ended the period with an unrestricted cash balance of Pounds Sterling 6.67 million compared with Pounds Sterling 6.53 million at 31 December 2005. Substantially all of the Company's cash balances are denominated in Sterling.

In addition the Company had restricted cash amounts of Pounds Sterling 1.50 million relating to performance bonds entered into as part of contracts with the Toronto Transit Commission and Eaton (2005: Pounds Sterling 1.50 million).

Long term assets excluding restricted cash have decreased from Pounds Sterling 4.79 million at 31 December 2005 to Pounds Sterling 3.69 million at 31 December 2006, after depreciation charges of Pounds Sterling 1.09 million and deferred financing charges of Pounds Sterling 0.09 million.

Deferred finance charges relate to the fair value of warrants issued in 2003, and expenses in connection with the March 2005 convertible bond issue. These costs are amortised over the term of the convertible bonds and the warrants. The related amortisation charges are included in interest expense and finance charges.

Long term liabilities have decreased significantly to Pounds Sterling 6.06 million at 31 December 2006 compared to Pounds Sterling 10.21 million at 31 December 2005, reflecting the reduction in Loan Notes following the redemption of Pounds Sterling 4,860,000 notes in December 2006. A further Pounds Sterling 4,500,000 of Loan Notes were redeemed in January 2007.

Net working capital at 31 December 2006, excluding cash balances, was Pounds Sterling 0.85 million, compared with (Pounds Sterling 0.30) million as at 31 December 2005.

As at 31 December 2006, the Company had 273,944,592 common shares issued and outstanding. As at that date there were 21,567,281 outstanding share options and 7,000,000 outstanding warrants.

SUBSEQUENT EVENT

On 6 January the Company redeemed Pounds Sterling 4,500,000 Convertible Loan Notes.



TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT

Twelve months ended 31 December
2006 2005
Pounds Pounds
Sterling Sterling
Notes 000 000

Revenue 3,4 5,482 2,636
Development income 3 794 481

Expenses
Production costs 4,227 2,081
Research and product development 5 3,324 2,496
General and administrative 3,119 2,897
Amortisation 1,086 1,511
----------- ------------
11,576 8,985

Loss before interest and finance
charges (5,480) (5,868)

Other income - (168)
Interest income (226) (334)
Interest expense and finance
charges 6 1,049 1,124
Foreign exchange gains/(losses) 15 (37)
----------- ------------
838 585

Loss for the year (6,318) (6,453)

Deficit, beginning of period (44,718) (38,265)
Equity adjustment on issue of shares (2,600)
----------- ------------
Deficit, end of year (53,636) (44,718)
----------- ------------
----------- ------------

Loss per share - basic 8 (3.3) p (3.5) p
Loss per share - diluted 8 (3.3) p (3.5) p


CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT

Three months ended 31 December
2006 2005
Pounds Pounds
Sterling Sterling
Notes 000 000

Revenue 3,4 1,851 874
Development income 3 217 95

Expenses
Production costs 1,425 534
Research and product development 5 714 151
General and administrative 735 792
Amortisation 194 584
----------- ------------
3,068 2,061

Loss before interest and finance (1,000) (1,092)
charges

Interest income (20) (95)
Interest expense and finance
charges 6 151 337
Taxation - (18)
Foreign exchange gains (7) (67)
----------- ------------
124 157

Loss for the period (1,124) (1,249)

Loss per share - basic 8 (0.6) p (0.6) p
Loss per share - diluted 8 (0.6) p (0.6) p


CONSOLIDATED BALANCE SHEETS
As at As at
31 December 31 December
2006 2005
Pounds Pounds
Sterling Sterling
Notes 000 000
Current assets
Cash and cash equivalents 6,669 6,525
Restricted cash 9 765 -
Trade and other receivables 1,544 649
Stock and work in progress 1,230 541
Prepayments 419 253
Tax recoverable 718 190
----------- ------------
11,345 8,158
----------- ------------
Long-term assets
Restricted cash 9 731 1,496
Prepayments 254 254
Investments 10 31 59
Intangible assets 10 77 296
Goodwill 10 820 820
Deferred finance charges 10 145 355
Tangible assets 10 2,361 3,007
----------- ------------
4,419 6,287
----------- ------------
15,764 14,445
----------- ------------
----------- ------------
Liabilities and shareholders equity
Creditors: amounts falling due
within one year
Trade and other payables 3,109 1,968
Deferred income 206 215
----------- ------------
3,315 2,183
----------- ------------
Creditors: amounts falling due
after more than one year
Warranty provision 303 298
Convertible notes 5,827 9,913
----------- ------------
6,130 10,211
----------- ------------
Capital and reserves
Share capital and other equity
instruments 2,11 60,023 46,897
Currency exchange adjustments 2 (68) (128)
Loss deficit 2 (53,636) (44,718)
----------- ------------
Shareholders funds 6,319 2,051
----------- ------------
15,764 14,445
----------- ------------
----------- ------------


CONSOLIDATED STATEMENTS OF CASH FLOWS

Twelve months ended 31 December
2006 2005
Pounds Pounds
Sterling Sterling
Notes 000 000

Net loss from operations (6,318) (6,453)
Amortisation 1,178 1,648
Accretion of debt 387 368
Provision for impairment on
investment 28 90
Loss on sale of assets - 99
Stock compensation charges 511 133
Deferred finance movement (46) -
Restructuring payments - (203)
Foreign currency instrument loss 19 -
Unrealised foreign exchange
differences 15 (37)
Movement in net interest accrual 53 80
----------- ------------
Cash outflow before movements in (4,173) (4,275)
working capital
Decrease/(increase) in debtors (1,589) (637)
Decrease/(increase) in stock (689) (59)
Increase/(decrease) in creditors 1,309 346
----------- ------------
Net cash outflow from operating
activities before tax (5,142) (4,625)
----------- ------------
Tax credits 121 1,002
----------- ------------
Net cash outflow from operating
activities after tax (5,021) (3,623)
----------- ------------
Investing activities
Purchase of long-term assets (223) (55)
Proceeds from sale of investment - 49
Financial instruments (63) -
----------- ------------
Cash outflow from investing
activities (286) (6)
----------- ------------
Financing activities
Net proceeds from debt issue 12 - 7,707
Net proceeds from equity placing 12 5,451 -
Movements in restricted cash - 380
----------- ------------
Cash inflow from financing activities 5,451 8,087
----------- ------------
Increase/(decrease) in cash in the
period 144 4,458
----------- ------------
----------- ------------
Cash and cash equivalents:
Beginning of period 6,525 2,067
----------- ------------
End of period 6,669 6,525
----------- ------------
----------- ------------


CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended 31 December
2006 2005
Pounds Pounds
Sterling Sterling
Notes 000 000

Net loss from operations (1,124) (1,249)
Amortisation 165 (50)
Accretion of debt 96 101
Provision for impairment on
investment - -
(Gain)/Loss on sale of assets (12) 99
Stock compensation charges 138 90
Deferred finance movement (46) -
Restructuring payments - 46
Foreign currency instrument loss 39 -
Unrealised foreign exchange
differences (7) (67)
Movement in net interest accrual 82 62
----------- ------------
Cash outflow before movements in (669) (968)
working capital
Decrease/(increase) in debtors (711) (179)
Decrease/(increase) in stock (165) (14)
Increase/(decrease) in creditors 392 465
----------- ------------
Net cash outflow from operating
activities before tax (1,153) (696)
----------- ------------
Tax credits - 1,020
----------- ------------
Net cash outflow from operating
activities after tax (1,153) 324
----------- ------------
Investing activities
Purchase of long-term assets (106) (16)
Proceeds from sale of investment - 49
Financial instruments 18 -
----------- ------------
Cash outflow from investing
activities (88) 33
----------- ------------
Financing activities
Net proceeds from equity placing 12 5,451 -
----------- ------------
Cash inflow from financing
activities 5,451 -
----------- ------------
Increase/(decrease) in cash in the
period 4,210 357
----------- ------------
----------- ------------
Cash and cash equivalents:
Beginning of period 2,459 6,168
----------- ------------
End of period 6,669 6,525
----------- ------------
----------- ------------


TURBO POWER SYSTEMS INC.
TWELVE MONTHS ENDED 31 DECEMBER 2006
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1 Basis of preparation

The consolidated financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles. The policies adopted by the Company comply in all material aspects with International Financial Reporting Standards. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements have, in management's opinion, been properly prepared using careful judgement with reasonable limits of materiality and within the framework of the Company's accounting policies. The consolidated financial statements include the accounts of Turbo Power Systems Inc. ("the Company"), and the accounts of its wholly owned subsidiary company Turbo Power Systems Limited (collectively "the Group"). The significant accounting policies are consistent with prior years. Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for 2006.

Derivative financial instruments are used by the Company to manage a portion of its exposure to foreign exchange rate fluctuations. The Company does not utilise derivative financial instruments for trading or speculative purposes. The Company enters into foreign currency options denominated in U.S. Dollars, to manage foreign exchange rate fluctuation exposure on receipts from customers billed in U.S. Dollars. These derivative contracts, not accounted for as hedges, are marked to market, and any changes in the market value are recorded in income or expense when the changes occur. The fair value of these instruments is recorded as accounts receivable or payable.

Most of the Company's operations are conducted by its United Kingdom subsidiaries in Sterling. All numbers reported in these financial statements are stated in Sterling unless otherwise noted.



2 Movements in shareholders' funds

Common A Profit
Share Ordinary Other Exchange and
capital capital equity adjustments loss Total
Pounds Pounds Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling Sterling Sterling
'000 '000 '000 '000 '000 '000

Balance at 1
January 2005 42,932 - 1,027 (78) (38,265) 5,616
Loss for the
period (6,453) (6,453)
Exchange
(loss) (50) (50)
Stock
compensation 133 133
Equity
component of
financial 1,331 1,331
instrument
Conversion to
shares 1,786 (298) 1,488
Equity
adjustment 35 (49) (14)
--------- --------- --------- ------------ --------- ---------
Balance at 31
December
2005 44,753 - 2,144 (128) (44,718) 2,051
Loss for the
period (6,318) (6,318)
Exchange gain 60 60
Stock
compensation 511 511
Conversion to
shares 3,383 4,320 (674) (2,600) 4,429
Issue of
shares 4,059 2,000 6,059
Expiry of
warrants 117 117
--------- --------- --------- ------------ --------- ---------
Fundraising
costs (393) (197) (590)
--------- --------- --------- ------------ --------- ---------
--------- --------- --------- ------------ --------- ---------


3 Segmental analysis

The Group's two reportable segments are the power electronics segment, which is involved in the development and manufacture of electrical power supply and control systems and the electrical machines segment, which is involved in the development and commercialisation of high speed electrical machines.

Corporate charges relating to the financing of the group and other related management activities are allocated between the two reportable segments.

The power electronics and electrical machines segments both operate in the United Kingdom.



All amounts in Pounds Power Electrical
Sterling '000 electronics machines Total
2006 2005 2006 2005 2006 2005
Twelve months ended 31
December
Revenue 5,257 2,482 225 154 5,482 2,636
Development income 794 439 - 42 794 481
Interest income 142 171 84 163 226 334
Interest expense (658) (576) (390) (548) (1,048) (1,124)
Amortisation 133 181 953 1,330 1,086 1,511
Net loss (1,902) (2,156) (4,416) (4,297) (6,318) (6,453)
Capital expenditure 190 16 33 39 223 55

Three months ended 31
December
Revenue 1,798 815 53 59 1,851 874
Development income 217 95 - - 217 95
Interest income 12 50 8 45 20 95
Interest expense (93) (177) 58 160 (151) (337)
Amortisation 29 22 165 523 194 545
Net loss (351) (421) (819) (828) (1,170) (1,249)
Capital expenditure 103 - 3 16 106 16

As at Dec Dec Dec Dec Dec Dec
2006 2005 2006 2005 2006 2005
Total assets 3,868 4,468 11,896 9,977 15,764 14,445
Total liabilities 2,159 843 7,286 11,551 9,445 12,394


4 Significant Customers

During the twelve month period ended 31 December 2006, 41% of the Company's
revenue was from three customers ( 2005: 65% from four customers).

5 Research and product development

Research and product development expenditure incurred during the period
comprised:

Twelve months ended Three months ended
31 December 31 December

2006 2005 2006 2005
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Research and product development
cost 3,734 3,232 1,074 887
Accrued tax credits (410) (736) (360) (736)
--------- --------- --------- ---------
Total expenditure 3,324 2,496 714 151
--------- --------- --------- ---------
--------- --------- --------- ---------


Deferred research and product development expenditure, net of accrued tax credits, amortisation and provisions for impairment, at 31 December 2006 amounted to Pounds Sterling nil (31 December 2005 - Pounds Sterling 198,000). Deferred research and product development expenditure comprised materials, labour and allocated overheads.

Total accrued tax credits receivable at 31 December 2006, including those credited against deferred research and product development expenditure, amounted to Pounds Sterling 490,000 (31 December 2005- Pounds Sterling 190,000).



6 Interest expense and finance charges

Twelve months ended Three months ended
31 December 31 December

2006 2005 2006 2005
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Finance charges - 99 (66) 99
Interest payable 570 520 150 140
Amortisation of deferred finance
charges 92 137 (29) (3)
Debt accretion 387 368 96 101
--------- --------- --------- ---------
1,049 1,124 151 337
--------- --------- --------- ---------
--------- --------- --------- ---------


7 Financial Instruments

Certain of the Company's business transactions occur in currencies other than Sterling. The Company has entered into foreign exchange average rate option contracts during the twelve months ended 31 December 2006 ( 2005: nil ) to reduce exposure to fluctuations in foreign exchange rates on remittances from customers denominated in U.S. Dollars.

The Company purchased an average rate option over $1.965million U.S. Dollars at a strike rate of 1.90 U.S. Dollars, which expired on 27 December 2006, and an average rate option over $5.898million U.S. Dollars at a strike rate of 2.00 U.S. Dollars which expires on 27 December 2007.

During the year a purchase cost of Pounds Sterling 80,000 was recognised and a gain of Pounds Sterling 17,000 was realised on these options (2005 - Pounds Sterling nil).

As at 31 December 2006 the unrealised gain from the contract was Pounds Sterling 44,000 (2005 - Pounds Sterling nil).

8 Loss per share

Loss per common share has been calculated using the weighted average number of shares in issue during the relevant financial periods. The treasury stock method was used in determining the weighted average number of shares outstanding for each period.

The weighted average number of shares outstanding in the period was 191,827,517 (2005 - 184,946,854). No fully diluted earnings per share have been reported as the Company has made losses in both years and the effect would be anti-dilutive. The loss for the twelve months ended 31 December 2006 was Pounds Sterling 6,318,000 (2005 - Pounds Sterling 6,453,000).

Anti-dilutive potential securities outstanding not included in the loss per common share calculation at 31 December 2006 totalled 128,892,281 (2005 - 122,278,467)

9 Restricted cash

In 2004 the Company committed cash bonds in support of contracts placed by the Toronto Transit Commission for the CLRV and H6 programmes. The associated contracts required the bonds to remain in place until two years after all equipment is delivered. According to the current contract schedule that would result in the cash related to the H6 programme being under the performance bond restriction until 2010. In March 2007 the CLRV contract was cancelled and the cash bond of Pounds Sterling 515,000 in respect of this programme is expected to be released in 2007. In September 2005 the Company committed cash bonds of Pounds Sterling 250,000 in support of a development contract. The contract required the bonds to remain in place until completion of certain contract milestones. These milestones were completed in January 2007 when the bond was cancelled and the cash became unrestricted. At 31 December 2006 cash subject to restrictions totalled Pounds Sterling 1,496,000 (2005 - Pounds Sterling 1,496,000) and is secured over an equivalent cash balance.



10 Long - term assets

Net book
Cost Impairment Amortisation value
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
At 31 December 2006:
Investments 104 73 - 31
Intangible assets, goodwill &
deferred finance 5,411 1,706 2,663 1,042
Tangible assets 8,350 - 5,989 2,361
--------- ----------- ------------- ---------
Total long term assets 13,865 1,779 8,652 3,434
--------- ----------- ------------- ---------
--------- ----------- ------------- ---------
At 31 December 2005:
Investments 104 45 - 59
Intangible assets, goodwill &
deferred finance 5,527 1,706 2,350 1,471
Tangible assets 8,133 - 5,126 3,007
--------- ----------- ------------- ---------
Total long term assets 13,764 1,751 7,476 4,537
--------- ----------- ------------- ---------
--------- ----------- ------------- ---------


Following the annual review of asset values, the Company increased the
impairment provision on its investment in Altek Power Corporation by Pounds
Sterling 21,000 (2005: Pounds Sterling 52,000).

11 Share capital - issued shares

Common A Ordinary
Pounds Pounds
Sterling Sterling
Number '000 Number '000

At 1 January 2006 190,510,259 44,753 - -
Conversion of convertible
notes 541,665 65 - -
Redemption of convertible
notes 32,500,000 3,435 31,250,000 4,320
Issue of common shares, net of
share issue costs 50,442,668 3,666 25,000,000 1,803
------------- --------- ------------ ---------
At 31 December 2006 273,944,592 51,919 56,250,000 6,123
------------- --------- ------------ ---------
------------- --------- ------------ ---------

No options or warrants were exercised during the twelve months ended 31
December 2006.


12 Financing

On 11 July 2003 the Company completed an Pounds Sterling 5,000,000 financing agreement with institutional investors. The financing comprised unsecured Convertible Notes and Warrants. The Convertible Notes have a term of five years and bear interest at a rate of 3.5% per annum. They are convertible into an aggregate of 25,000,000 Common Shares in Turbo Power Systems Inc. at a conversion price of Pounds Sterling 0.20 per share. The Warrants had a term of three years and were convertible into an aggregate of 3,500,000 Common Shares in Turbo Power Systems Inc. at an exercise price of Pounds Sterling 0.15 per share.

On 11 March 2005 the Company completed an Pounds Sterling 8,000,000 (gross) financing agreement with institutional investors. The financing comprised unsecured Convertible Notes and Warrants. The Convertible Notes have a term of five years plus one day and bear interest at a rate of 6.5% per annum. They are convertible into an aggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of Pounds Sterling 0.12 per share. The Warrants have a term of five years and are convertible into an aggregate of 7,000,000 Common Shares in Turbo Power Systems Inc. at an exercise price of Pounds Sterling 0.15 per share.

On 28 December 2006 the Company completed a Pounds Sterling 6,000,000 (gross) financing agreement with institutional investors. The financing comprised 50,000,000 Common Shares in the company and 25,000,000 A-Ordinary shares in Turbo Power Systems Limited. The financing included the issue of 3,500,000 Warrants, having a term of three years and being convertible into an aggregate of 3,500,000 Common Shares in Turbo Power Systems Inc. at an exercise price of Pounds Sterling 0.15 per share. These warrants were issued on 6 January 2007 (see Note 13 ).

On 28 December 2006, per an agreement reached with the holders of the convertible notes, the Company redeemed Pounds Sterling 2,500,000 of the 2003 Convertible Loan Notes and Pounds Sterling 2,360,000 of the 2005 Convertible Loan Notes at a redemption price of Pounds Sterling 0.08. The redemption was dependant upon the Company's shares being approved for trading on the AIM exchange which occurred on 28 December 2006.

A further Pounds Sterling 2,500,000 of the 2003 Convertible Loan Notes and Pounds Sterling 2,000,000 of the 2005 Convertible Loan Notes were redeemed in January 2007.



13 Stock options, warrants and compensation expense

The number of options and warrants outstanding as at 31 December 2006, and
the movement during the twelve months then ended, are as follows:

Options Warrants
Number Number

Outstanding at 1 January 2006 34,995,134 10,500,000
Lapsed (23,610) (3,500,000)
Cancelled (19,466,243) -
Issued 6,062,000 -
------------ ------------
Outstanding at 31 December 2006 21,567,281 7,500,000
------------ ------------
------------ ------------


The stock based compensation expense for the twelve month period ended 31 December 2006, included in Production costs was Pounds Sterling 51,000 (2005: Pounds Sterling nil), in Research and product development was Pounds Sterling 255,000 (2005: Pounds Sterling nil), and in General and administrative costs was Pounds Sterling 206,000 (2005: Pounds Sterling 133,000).

On 6 January 2007 the Company issued 3,500,000 warrants as part of its financing agreement with institutional investors (see Note 12).



14 Selected quarterly information

The following table sets forth selected consolidated financial information
of the Company for the eight most recent quarters.

Revenue Net loss
Pounds Pounds (Loss) per
Sterling Sterling share UK
'000 '000 pence

March 2005 360 (1,939) (1.1)
June 2005 593 (1,681) (0.9)
September 2005 809 (1,584) (0.9)
December 2005 874 (1,249) (0.6)
March 2006 969 (1,859) (1.0)
June 2006 1,192 (1,712) (0.9)
September 2006 1,470 (1,624) (0.8)
December 2006 1,851 (1,124) (0.6)


Contact Information

  • Turbo Power Systems Inc.
    Michael Hunt
    Chief Executive Officer
    +44 (0)20 8564 4460
    or
    Turbo Power Systems Inc.
    Stephen Sadler
    Chief Financial Officer
    +44 (0)20 8564 4460
    Website: www.turbopowersystems.com
    or
    Gavin Anderson (PR)
    Ken Cronin
    +44 (0)20 7554 1400
    or
    Gavin Anderson (PR)
    Michael Turner
    +44 (0)20 7554 1400
    or
    KBC Peel Hunt
    Oliver Scott
    +44 (0)20 7418 8900