Turbo Power Systems Inc.
TSX : TPS
AIM : TPS

Turbo Power Systems Inc.

August 15, 2008 02:00 ET

Turbo Power Systems Inc. Announces Its Results for the Six Months and Quarter Ended 30 June 2008

CALGARY, ALBERTA--(Marketwire - Aug. 15, 2008) - Turbo Power Systems Inc. (TSX:TPS) (AIM:TPS):

Highlights

- Production and development income in the quarter of Pounds Sterling 2.0 million (2007: Pounds Sterling 2.4 million)

- Operating loss before financial charges of Pounds Sterling 2.2 million in the quarter (2007: Pounds Sterling 1.9 million)

- New order announced today for Bombardier Derby for battery chargers on Turbostar train platform worth Pounds Sterling 0.6 million

- Amendment to the terms of the existing Loan Note entered into by the Company on the 19th June 2008 to facilitate drawdown of remaining Pounds Sterling 1.5 million

Paul Summers, CEO, said:

"Q2 results have continued to be impacted by delays in transitioning a number of programmes from development into production, which is expected to commence in the second half of the year.

In addition to the cost reductions announced earlier in the year and the completion of a number of development programmes, further cost saving measures are being identified and implemented that are anticipated to impact overheads during the second half of the year. Business processes are also being strengthened to enable the better management of current and future bids and development programmes.

The Company has also today separately announced that the terms of the Loan Note that was entered on the 19th June 2008 have been amended in order to facilitate a further drawdown of Pounds Sterling 1.5 million, which is necessary to enable the Company to continue operating as a going concern. Having reviewed the financial position of the Company, the Directors are of the opinion that they require the additional Pounds Sterling 1.5 million in order to meet short term cash requirements and continue trading. Having considered other alternatives within the very limited time available, the Directors have agreed to accept these amendments to the Loan Notes. The Directors believe that with the benefit of the additional Pounds Sterling 1.5m and the deferral of interest and capital payments, the Company has sufficient cash resources to enable the business to achieve profitability and positive cashflow.

The Board's focus is on balancing the medium to long term growth opportunities with the key priority of achieving near term profitability and cash generation."

NOTES TO EDITORS

About Turbo Power Systems

Turbo Power Systems Inc (TSX:TPS) (AIM:TPS). is a leading UK based designer and manufacturer of innovative power solutions. The Group's products are all based on its core technologies of power electronics and high speed motors and generators and are sold into a number of market sectors including aerospace, rail, and various industrial sectors. The Company's products provide improved efficiency and reduced energy consumption compared to existing technologies.

Turbo Power System's existing customers include bluechip companies such as Hamilton Sundstrand, Bombardier, The National Rail Equipment Company, Eaton Aerospace and Lotus.

Forward looking statements

This press 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.

Definition of Non-GAAP financial measures

EBITDA is calculated as the net loss for the period less financial interest income and charges, foreign exchange gains and losses, tax charges and receipts, depreciation, amortisation, and stock compensation charges. The Company believes that EBITDA is useful supplemental information as it provides an indication of the operational results generated by its business activities prior to taking into account how those activities are financed and taxed and also prior to taking into consideration asset amortisation. EBITDA is not a recognised measure under GAAP and, accordingly, should not be construed as an alternative to operating income or net loss determined in accordance with GAAP as an indicator of financial performance or of liquidity and cash flows. EBITDA does not take into account the impact of working capital changes, capital expenditures and other sources and uses of cash which are disclosed in the consolidated statement of cash flows. The Company's method of calculating EBITDA may differ from other issuers and may not be comparable to similar measures provided by other companies.

CHAIRMAN'S STATEMENT

"The Q2 trading result reflects continuing engineering spend on programmes that will generate long-term revenues. Bringing the development process under control and improving our management of technical and commercial risk will have the highest priority as we move the business forward"

OPERATIONAL REVIEW

This MD&A has been prepared as at 13 August 2008.

Business of the Company

Turbo Power Systems

- Designs and manufactures high-speed permanent magnet based motors and generators for industrial, transport, power generation and military applications, where technical performance, energy efficiency and power density requirements cannot be met by conventional technology.

- Designs and manufactures power electronics products which include variable frequency drives and inverters, which combine with our electrical machines to create an integrated solution, and a range of rugged power conversion products for rail and industrial applications.

Q2 2008 Summary

During the first six months of 2008, TPS's existing core business sectors of rail and industrial power electronics have seen reduced production levels as existing production programmes concluded and new production programmes were delayed. Work on our new aerospace programmes has continued to consume more resources than was expected and in particular the Hamilton Sundstrand programme suffered additional cost overruns and delays in meeting development income milestones which have had a detrimental impact on EBITDA and cash flow. As a result, the company has reported increased EBITDA losses and cash outflows compared to 2007 in both the first and second quarter. Cash outflows before loan funding receipts in quarter two were Pounds Sterling 2.53 million as a result of reduced production shipments across our programmes and the delay in commencing production on the Bombardier Chicago and Toronto programmes, delayed development receipts, and additional software development costs on the Hamilton Sundstrand programme together with a reduction in credit terms provided by suppliers which resulted in increased cash outflow. The high level of payments made has resulted in a significant reduction in the cash balances held by the company and has required the Company to seek drawdown of additional funding of Pounds Sterling 1.5 million through the issue of the Loan Notes in the immediate future.

As part of the cost saving measures announced at the end of the last quarter, the Company completed a 10% reduction in manpower across both sites. In addition there has been significant activity in reviewing our supply chain in order to reduce material costs and stock levels across all of our existing product range. These cost saving measures are having an effect but in the short term have been offset by material costs in preparation for achieving early deliveries once the production phases on our current development programmes begin.

Business process improvements are being implemented with particular attention being placed on revitalizing the reviews of bids, current projects, order intake and cash collection. Through these improvements the business will be better able to:

- understand the commitments it is making prior to contract award

- deliver on its contracts and increase customer satisfaction

- appropriately scale itself to ensure it can be cash generative and profitable

Bidding activity is high across all sectors, in particular, the demand or our generators and motors is on the increase.

High Speed Electrical Machines

The optimal size range for electrical machines based on the Company's permanent magnet technology is between 15kW and 2MW.

Markets

The key markets for the Motor derivatives are:

- HVAC and Refrigeration

- Air and Gas Compression

- Turbo-Machinery

- Aerospace - Actuators, Pumps, Fans

- Ship Propulsion

- Rail Traction Motors

The key markets for Generator derivatives are:

- Distributed Generation (Gas Turbines)

- Micro-Generation

- Vehicle based auxiliary power generation

- Flywheel systems

Customers and Contracts

- 1MW high-speed generator for a US Defence Contractor

The 1MW high-speed generator contract announced in May is progressing from design into production of a demonstrator targeted for delivery in Q4. Follow-on systems beyond the initial development system contract are expected in due course.

- Industrial motor and drive agreement

The industrial motor drive system has now been incorporated into the initial beta site location and has commenced life cycle and field performance testing.

Procurement of materials in support of the US$2M production launch order is well underway, with all 75 systems programmed for manufacture and delivery before the end of 2008. Formal product launch in early 2009. Once launched, the drive system will be used in both new products and can also be supplied for retro-fit to reduce electrical consumption on existing installations world-wide.

The framework agreement anticipates sales of 500 systems over the first two years of production, and incorporates a manufacturing agreement with an initial term of 5 years.

TPS is continuing discussions with the customer regarding the scaling of these systems to cover a wider range of product sizes.

- US Process Gas Customer

This order for a high speed electrical machine and variable frequency drive is for a development project from a North American Industrial and Process Gas Company. The system has been successfully demonstrated and is expected to be delivered early in Q3. The products utilize our own permanent magnet and inverter technologies giving a high performance and high efficiency solution.

Once the customer has completed its systems development phase it is anticipated that further systems will be purchased.

- European Programme

This is an order from a European Research Organization, acting on behalf of a major international manufacturing company, for a high speed electrical machine and variable frequency drive. Discussions on follow on orders and for other size ranges are well advanced.

- SKF

Extended reliability trials on the 35kW -70,000 rpm high speed motor and drive system have now completed satisfactorily. However, there has been a delay in the customer's programme and discussions are currently underway with SKF regarding the timing and quantity of the likely production volumes.

- ALC

UK Testing of the complete down-hole pump system incorporating the TPS motors is still ongoing, with the final high temperature trials to be concluded prior to shipment to North America for full operational evaluation. This is expected to be completed in early 2009. Given the current oil price, customer interest remains high, both in this motor design and other motors for similar applications.

High Performance Power Electronics

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

Markets

The key markets for the electronics products are:

- Auxiliary Power Conversion for Rail and Light Transit

- Variable Frequency Drives to complement HSEMs

- Motor Drives for aerospace application

- Industrial Pulsed Power Supplies

- Grid Connected Inverters

Customers and Contracts

- Bombardier Transportation-Canada ("BT")

-- BT- Chicago Transit Authority

The initial prototype units have now been built and are undergoing functional testing at TPS. Modifications to address previously identified technical issues will be incorporated into the test units to allow formal qualification testing. It is expected that the initial planned quantities will be delivered during 2008 in support of the 2008 and 2009 train test programme.

The Chicago (and Toronto) designs incorporate a new generation of hardware and software microprocessor control system which the Company is investing in as a common modular platform for all future rail products.

The base CTA contract is valued at some US$14 million including production, spares and engineering services, which with possible options for additional cars, could increase the value to in excess of US$20 million.

-- BT- Toronto

The Toronto prototypes also require functional tests to be followed by the formal qualification programme. Production release is anticipated in Q3 with the first 11 units expected to ship by the end of 2008.

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

-- National Rail Equipment Co ("NREC").

Volume demand in Q2 2008 continued at a low run rate and is likely to remain at this lower level going forward as a result of the customer reducing its outsourcing.

Other Rail Products

- PT3000

Regular small orders for the PT3000 At-Seat power supply, currently in operation with many UK operators including Virgin and National Express, continue to be received, however there are a number of UK rolling stock refurbishment programmes currently under review where the potential quantities of PT3000s are considerably larger.

PRC Industrial Lasers

TPS continues to see strong ongoing demand from PRC Lasers who have now standardized on the TPS high voltage power supply for their complete range of industrial lasers. Recently TPS has developed a new "higher power" derivative which is now undergoing testing.

Aerospace

- Boeing 787

As reported previously our first steps in the commercial aerospace sector have represented a very steep learning curve, and undertaking two major programmes effectively in parallel gave us little opportunity to apply the lessons learned on Eaton into the HS programme. As a consequence the level and depth of engineering required on HS was underestimated and the resulting costs exceeded both our expectations and the customer's contractual funding. Additionally, programme delays have deferred contracted stage payments from 2007 to 2008.

Dedicated production and test facilities have been put in place, and aerospace product assembly staff have been trained to support the aggressive Boeing production ramp up this year going through into 2009.

Both the Eaton Aerospace programme (Override Jettison Pump Control Unit) and the Hamilton Sundstrand programme (Ram Fan Motor Controller) are now undergoing safety of flight tests) with equipment delivered from TPS. Preparation for completing the equipment qualification phase is well underway on both of these programmes.

The production delivery programme for both of these equipments is still being maintained despite the reported 787 delays from Boeing.

FINANCIAL PERFORMANCE

Overview of the six months ended 30 June 2008

Total revenues in the first half of 2008 fell to Pounds Sterling 4.06 million (2007: Pounds Sterling 4.75 million), including Development income of Pounds Sterling 0.39 million, primarily related to the high speed machine contract and Production income of Pounds Sterling 3.67 million (2007: Pounds Sterling 4.38 million. Delays in final qualification of the new Rail units, together with a reduced requirement on the NREC programme and completion of other rail contracts meant that overall production volumes decreased during the half year.

Administrative costs including amortisation were higher than the first six months of 2007 as a result of the increased charges in 2008 related to the new Gateshead facility that became operational during the second quarter of 2007.

The group's loss before interest, tax, depreciation, amortisation and stock compensation for the six months increased to Pounds Sterling 4.0 million (2007: Pounds Sterling 2.1 million) as a result of significantly higher development costs and reduced development income receipts.

Operating cash outflows before tax increased to Pounds Sterling 4.1 million (2007: Pounds Sterling 3.0 million) reflecting the increased development expenditure and reduced development income.

The Company finished the half year with an unrestricted cash balance of Pounds Sterling 1.3 million and held further cash of Pounds Sterling 1.3 million associated with performance bonds.

On 19 June 2008 the Company completed a Pounds Sterling 3,000,000 gross financing agreement with institutional investors. The financing comprised secured Convertible Notes and Warrants. The Convertible Notes bear interest at 15% per annum and are convertible into an aggregate of 75,000,000 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of Pounds Sterling 0.04 per share. The Convertible Notes are issuable upon drawdown of the loan, of which Pounds Sterling 1,500,000 were issued on 19 June 2008. The loan is repayable over three years by way of regular quarterly repayments, commencing March 2009. The Warrants have a term of ten years and are convertible into an aggregate of 12,857,142 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of Pounds Sterling 0.035 per share.

The Company has also today separately announced that the terms of the Loan Note that was entered on the 19th June 2008 have been amended in order to facilitate a further drawdown of Pounds Sterling 1.5 million, which is necessary to enable the Company to continue operating as a going concern. The new terms provide that if at any time, including once the Loan Note has been fully repaid, there is a change in control of TPS, or its subsidiaries or substantially all of its assets, the Loan Note Holders will be entitled to receive a risk premium, calculated according to the enterprise value ascribed to the Company under the transaction before deducting any balance of the Loan Notes and/or interest outstanding. This risk premium will be equal to an initial payment of Pounds Sterling 1.5m plus 75% of the next Pounds Sterling 6m of enterprise value and 50% of the remainder.

Other than the debt financing detailed above, the Company has had no transactions with related parties and there are no further proposed transactions to disclose.

The Critical Accounting Estimates included within these statements are assessed on an unchanged basis from that disclosed in the Company's Financial Statements for the year ended 31 December 2007.

These consolidated financial statements have been prepared on a going concern basis, which presumes that the Company will be able to realise its assets and discharge its liabilities in the normal course of operations for the foreseeable future. The Company has incurred cumulative losses including a loss of Pounds Sterling 4.56 million for the six months ended 30 June 2008 and has a cumulative deficit of Pounds Sterling 67.24 million as at 30 June 2008. The Company's ability to continue as a going concern depends on its ability to generate positive cash flow from operations or secure additional debt or equity financing.

Six months ended 30 June 2008

Production Revenue

Production revenue in the six months ended 30 June 2008 was Pounds Sterling 3.67 million compared with Pounds Sterling 4.38 million in 2007 and comprised



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Power electronics 3,563 4,239
Electrical machines 110 136
----------------- -----------------
3,673 4,375
----------------- -----------------
----------------- -----------------


The Power electronics division has seen a reduction in production volume as contracts on Bombardier Beijing, London Underground and Toronto Transit H6 rail programmes approached completion. Sales volumes on the NREC programme were lower during 2008 compared to the same period in 2007 which experienced a higher than normal demand rate.

Spares and service revenues within the Power electronics division were Pounds Sterling 0.39 million for the first six months (2007: Pounds Sterling 0.23 million).

In the Electrical machines division revenue was primarily from the Industrial Motor and Drive customer.

Development income

Development income in the six months was Pounds Sterling 0.39 million compared with Pounds Sterling 0.37 million in 2007 and was primarily related to the high speed generator contract.



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Development income 387 370
----------------- -----------------
----------------- -----------------


Production costs

The cost of product revenues in the six months amounted to Pounds Sterling 3.03 million (2007: Pounds Sterling 3.41 million).



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Power electronics 2,737 2,881
Electrical machines 296 527

----------------- -----------------
3,033 3,408
----------------- -----------------
----------------- -----------------


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

Included in production costs for the six months are stock compensation charges on options awarded of Pounds Sterling 0.04 million (2007: Pounds Sterling 0.05 million).

Research and product development

Research and product development expenditure in the six months was Pounds Sterling 3.06 million compared with Pounds Sterling 2.17 million in 2007, and comprised



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Research and product development
expenditure 3,105 2,166
Accrued R&D tax credits (44) -

----------------- -----------------
Total expenditure 3,061 2,166
----------------- -----------------
----------------- -----------------


R&D expenditure in the six months was greater than that incurred in 2007 as a result of the commencement of the high speed generator development programme and higher investment into the Hamilton Sundstrand Ram Fan Controller programme than in the previous year.

Included in research and product development expenditure for the six months are stock compensation charges on options awarded of Pounds Sterling 0.06 million (2007: Pounds Sterling 0.19 million).

General and administrative

General and administrative costs of Pounds Sterling 2.11 million (2007: Pounds Sterling 1.94 million) consist mainly of staff costs and facilities costs, which have increased following the relocation of the Gateshead operation to larger facilities. Also included is a credit to stock compensation charges on options awarded of Pounds Sterling 0.01 million (2007: charge of Pounds Sterling 0.13 million), which has arisen following the Company recognising the high likelihood that ex-employee's options may not vest.

Amortisation

Amortisation was Pounds Sterling 0.34 million compared with Pounds Sterling 0.44 million in 2007. The reduction reflects a number of assets becoming fully amortised.

Interest income

Interest income for the six months was Pounds Sterling 0.07 million compared with Pounds Sterling 0.16 million in 2007 reflecting a lower average cash balance.

Interest expense and finance charges

Interest expenses arise from the issue of convertible notes in July 2003, March 2005 and June 2008 and comprise



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Interest 58 58
Accretion of debt 30 52

----------------- -----------------
88 110
----------------- -----------------
----------------- -----------------


Convertible notes 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 notes issued and the fair value of the liability is assigned to the equity component. The debt component of the 19 June 2008 note issue was estimated at Pounds Sterling 1,01 million (Pounds Sterling 1.26 million less finance costs of Pounds Sterling 0.25 million). The March 2005 note issue was estimated at Pounds Sterling 1.11 million. The equity element of the 2003 note 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 six months this charge amounted to Pounds Sterling 0.03 million (2007: Pounds Sterling 0.05 million).

Finance charges for the six months were Pounds Sterling 0.04 million (2007: Pounds Sterling 0.12 million) and were principally the operational charges for maintenance of the Company's banking and performance bond facilities. During 2007 the Company recorded a charge of Pounds Sterling 0.08 million within finance charges related to the redemption of Convertible Loan Notes.

During the six months the Company recorded a fair value adjustment charge of Pounds Sterling 0.01 million (2007: gain of Pounds Sterling 0.01 million) against the investment in Altek Power Corporation.

Cash flows for the six months

Cash outflow from operating activities

Operating cash outflow before movements in working capital was Pounds Sterling 4.06 million for the year (2007: Pounds Sterling 2.56 million), as a result of higher incurred costs on development programmes in 2008.

Movements in stocks, work in progress and debtors and creditors resulted in a net cash outflow of Pounds Sterling 0.31 million during the six months (2007: outflow of Pounds Sterling 0.42 million).

Tax credits

During the six months the company received research and development tax credits of Pounds Sterling 0.04 million (2007: Pounds Sterling 0.31 million).

Investing activities

Purchases of long term tangible assets amounted to Pounds Sterling 0.15 million (2007: Pounds Sterling 0.47 million) and relate to production equipment and leasehold property improvements.

Cash flow from financing activities

Cash inflow from financing in 2008 of Pounds Sterling 1.50 million during the six months relates to net funds received from the issue of loan notes in June 2008, when the Company completed a Pounds Sterling 3.00 million (gross) financing agreement with institutional investors. Cash outflow related to costs of financing amounting to Pounds Sterling 0.25 million will be incurred in Quarter 3 of 2008. These costs are included in the book value of the debt at 30 June 2008, and are expensed to the Consolidated Statements of Loss using the effective interest method.

Cash inflow from financing in 2007 of Pounds Sterling 3.81 million during the six months relates to net funds received from the issue of shares in June 2007, when the Company completed a Pounds Sterling 4.00 million (gross) financing agreement with institutional investors. The financing comprised placing of Common Shares in Turbo Power Systems Inc.

Overall cash outflow for the six months

Overall the cash outflow for the period was Pounds Sterling 2.89 million. This compares with a cash inflow of Pounds Sterling 1.02 million in 2007. Cash outflow was significant due to the reduction in production volumes invoiced and collected, increased software development costs on the Hamilton Sundstrand programme and a reduction the credit terms made available by suppliers to the Company.

Summary of quarterly results

The following table sets forth selected quarterly consolidated financial information of the Company for the last eight quarters;



Research
All amounts in Pounds and product General and Loss per
Sterling '000 Revenue development administrative Net loss share

September 2006 1,470 917 814 (1,623) (0.8)
December 2006 1,851 714 735 (1,123) (0.6)
March 2007 2,033 1,015 841 (1,403) (0.5)
June 2007 2,342 1,151 1,102 (1,768) (0.6)
September 2007 2,700 1,736 1,083 (1,666) (0.5)
December 2007 2,750 1,580 831 (1,578) (0.5)
March 2008 1,962 1,591 1,059 (2,287) (0.7)
June 2008 1,711 1,470 1,049 (2,276) (0.7)


Quarterly revenue has decreased during 2008 reflecting the completion of several rail contracts and the reduction in demand from National Rail Equipment Company. Research and development expenditure has increased reflecting development activities on the new Bombardier Chicago and Toronto rail programmes, continuing development on the Eaton and Hamilton Sundstrand Boeing 787 contracts and the commencement of development on the High Speed Generator contract. General and administrative costs increased as the Gateshead facility relocated to larger premises in quarter two of 2007.

Diluted earnings per share figures have not been provided as the loss in each period would be anti-dilutive.

Review of the three months ended 30 June 2008

Production revenue

Production revenue in the three months ended 30 June 2008 was Pounds Sterling 1.71 million compared with Pounds Sterling 2.34 million in 2007 and comprised



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Power electronics 1,608 2,222
Electrical machines 103 120

----------------- -----------------
1,711 2,342
----------------- -----------------
----------------- -----------------


Revenues from the Power electronics division decreased as production contracts on Bombardier Beijing, London Underground and Toronto Transit H6 rail programmes approached completion. Sales volumes on the NREC programme were lower during 2008 compared to the same period in 2007 which experienced a higher than normal demand rate.

Revenue in the Electrical machines division relates primarily to the Industrial Motor and Drive contract.

Development income

Development income in the three months was higher in 2008 at Pounds Sterling 0.32 million compared with Pounds Sterling 0.03 million in 2007, and was principally related to the new High Speed Generator contract.



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Development income 317 29
----------------- -----------------
----------------- -----------------


Production costs

The cost of product revenues in the three months amounted to Pounds Sterling 1.53 million (2007 : Pounds Sterling 1.79 million).



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Power electronics 1,389 1,469
Electrical machines 144 323

----------------- -----------------
1,533 1,792
----------------- -----------------
----------------- -----------------


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 0.01 million (2007: Pounds Sterling 0.03 million).

Research and product development

Research and product development expenditure in the three months was Pounds Sterling 1.47 million compared with Pounds Sterling 1.15 million in 2007, and comprised



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Research and product development
expenditure 1,514 1,151
Accrued R&D tax credits (44) -

----------------- -----------------
Total expenditure 1,470 1,151
----------------- -----------------
----------------- -----------------


Included in research and product development costs for the three months are stock compensation charges on options awarded of Pounds Sterling 0.01 million (2007: Pounds Sterling 0.09 million).

General and administrative

General and administrative costs in the three months of Pounds Sterling 1.05 million (2007: Pounds Sterling 1.10 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 is a credit to stock compensation charges on options awarded of Pounds Sterling 0.03 million (2007: charge of Pounds Sterling 0.04 million), which has arisen following the Company recognising the high likelihood that ex-employee's options may not vest.

Amortisation

Amortisation was Pounds Sterling 0.15 million compared with Pounds Sterling 0.22 million in 2007.

Interest income

Interest income in the three months was Pounds Sterling 0.03 million compared with Pounds Sterling 0.08 million in 2007.

Interest expense and finance charges

Interest expenses arise from the issue of convertible bonds in July 2003, March 2005 and June 2008 and comprise



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Interest payable 29 22
Accretion of debt 15 37

----------------- -----------------
44 59
----------------- -----------------
----------------- -----------------


During the quarter the Company recorded an impairment of Pounds Sterling 0.01 million (2007: gain of Pounds Sterling 0.01 million) against the investment in Altek Power Corporation.

Cash flows for the three months ended 30 June 2008

Cash outflow from operating activities

Operating cash outflow before movements in working capital was Pounds Sterling 2.04 million for the quarter (2007: Pounds Sterling 1.49 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 (2007: outflow of Pounds Sterling 0.15 million).

Tax credits

During the quarter the company received research and development tax credits of Pounds Sterling 0.04 million (2007: Pounds Sterling nil).

Investing activities

Cash outflows from capital investments in the three months were Pounds Sterling 0.06 million compared with Pounds Sterling 0.30 million in 2007.

Cash flow from financing activities

Cash inflow from financing in 2008 of Pounds Sterling 1.50 million during the three months relates to net funds received from the issue of loan notes in June 2008, when the Company completed a Pounds Sterling 3.00 million (gross) financing agreement with institutional investors. Costs of financing amounting to Pounds Sterling 0.25 million will be incurred in Quarter 3 of 2008.

Cash inflow from financing in 2007 of Pounds Sterling 3.88 million during the three months relates to net funds received from the issue of shares in June 2007, when the Company completed a Pounds Sterling 4.00 million (gross) financing agreement with institutional investors. The financing comprised placing of Common Shares in Turbo Power Systems Inc.

Overall cash outflow for the period

Overall the cash outflow during the three months was Pounds Sterling 1.03 million. This compares with an overall cash inflow of Pounds Sterling 1.95 million for the second quarter of 2007 which had included significantly greater fundraising receipts. Before loan finance receipts, cash outflow in the quarter was Pounds Sterling 2.53 million, and was a result of reduced customer receipts due to the reduction in shipped production, increased expenditure on software development on the Hamilton Sundstrand programme and a reduction in credit terms by suppliers to the Company.

Balance sheet as at 30 June 2008

The Company ended the period with an unrestricted cash balance of Pounds Sterling 1.34 million compared with Pounds Sterling 4.24 million at 31 December 2007. Substantially all of the Company's cash balances are denominated in Sterling.

In addition the Company had restricted cash amounts of Pounds Sterling 1.28 million relating to performance bonds entered into as part of contracts with the Toronto Transit Commission and Bombardier (2007: Pounds Sterling 1.36 million).

Long term assets excluding restricted cash have decreased from Pounds Sterling 3.00 million at 31 December 2007 to Pounds Sterling 2.81 million at 30 June 2008, after depreciation charges of Pounds Sterling 0.34 million.

Long term liabilities have increased to Pounds Sterling 2.88 million at 30 June 2008 compared to Pounds Sterling 1.81 million at 31 December 2007, reflecting the increase in Loan Notes following the loan financing completed in June 2008.

Net working capital at 30 June 2008, excluding cash balances, was Pounds Sterling 1.61 million, compared with Pounds Sterling 1.62 million as at 31 December 2007.

As at 30 June 2008, the Company had 318,571,062 common shares issued and outstanding and 115,000,000 A ordinary shares issued and outstanding. As at that date there were 30,311,298 outstanding share options and 23,357,142 outstanding warrants.



----------------------------------------------------------------------------
Payments Due by Period
Contractual Obligations -------------------------------------------------
Pounds Sterling '000 Less than 1 - 3 4 -5 After
at 30 June 2008 Total 1 year years years 5 years
----------------------------------------------------------------------------
Convertible notes 3,289 300 2,989 - -
----------------------------------------------------------------------------
Operating leases 4,731 519 1,583 858 1,771
----------------------------------------------------------------------------
Total contractual
obligations 8.020 819 4,572 858 1,771
----------------------------------------------------------------------------


Liquidity

Cash, cash equivalents and short-term investments at 30 June 2008 were Pounds Sterling 1.36 million, compared with Pounds Sterling 4.26 million at 31 December 2007.

Restricted cash at 30 June 2008 was Pounds Sterling 1.28 million, compared with Pounds Sterling 1.36 million at 31 December 2007.

The Company incurred a loss in the six months of Pounds Sterling 4.56 million and has a cumulative deficit of Pounds Sterling 67.24 million. The Company's ability to continue as a going concern depends on its ability to generate positive cash flows from operations or secure additional debt or equity financing.

There have been no significant changes to the US Dollar options held by the Company, and the Company has not changed its approach to Currency risk and Interest rate risk management from that disclosed in the annual statements at 31 December 2007.

Convertible bonds

On 11 March 2005 the Company completed a Pounds Sterling 8.00 million (gross) financing agreement with institutional investors. The financing comprised 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 Convertible notes are unsecured. 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 2,360,000 Convertible Notes were redeemed. On 6 January 2007 a further 2,000,000 Convertible Notes were redeemed. At 31 December 2007 there were 1,789,000 Convertible Notes outstanding.

On 11 July 2003, the Company completed a Pounds Sterling 5.00 million financing agreement with Island Investment (Securities) Ltd. and Argun Investments Limited. The financing comprised Convertible Notes and Warrants. The Convertible Notes have a term of five years, bear an annual interest rate of 3.5% and are convertible into an aggregate of 25 million Common Shares of 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 3.5 million Common Shares of Turbo Power Systems Inc. at an exercise price of Pounds Sterling 0.15 per share. These warrants expired on 11 July 2007. On 28 December 2006 2,500,000 Convertible Notes were redeemed. The remaining 2,500,000 Convertible Notes were redeemed on 6 January 2007.

On 19 June 2008 the Company completed a Pounds Sterling 3.00 million (gross) financing agreement with institutional investors. The financing comprised secured Convertible Notes and Warrants. These Convertible Notes are secured over the assets of the Company. The Convertible Notes bear interest at 15% per annum and are convertible into an aggregate of 75,000,000 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of Pounds Sterling 0.04 per share. The Convertible Notes are issuable upon drawdown of the loan, of which Pounds Sterling 1,500,000 were issued on 19 June 2008. The loan is repayable over three years by way of regular quarterly repayments, commencing March 2009. The Warrants have a term of ten years and are convertible into an aggregate of 12,857,142 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of Pounds Sterling 0.035 per share.

Subsequent to the balance sheet date the Company has amended the terms of the 19 June 2008 loan agreement in order to permit a second drawdown of Pounds Sterling 1,500,000. The new terms will result in the interest and capital being repaid by way of a single terminal repayment in June 2012, and provide that if at any time, including once the Loan Note has been fully repaid, there is a change in control of TPS, or its subsidiaries or substantially all of its assets, the Loan Note Holders will be entitled to receive a risk premium, calculated according to the enterprise value ascribed to the Company under the transaction before deducting any balance of the Loan Notes and/or interest outstanding. This risk premium will be equal to an initial payment of Pounds Sterling 1.5m plus 75% of the next Pounds Sterling 6m of enterprise value and 50% of the remainder. The drawdown of this second drawdown is subject to shareholder EGM approval, which is to be held on 15 August 2008.

Financial instruments

There has been no change in the classifications adopted by the Company regarding its financial instruments and full analysis is provided in the Company's financial statements for the year ended 31 December 2007.

CHANGES IN ACCOUNTING POLICY AND RECENT ACCOUNTING PRONOUNCEMENTS

(i) Changes in accounting policy

On January 1 2008 the Company adopted the new recommendations of Canadian Institute of Chartered Accountants (CICA) Handbook Section 1535, Capital Disclosures. This new handbook section establishes disclosure requirements about an entity's capital and how it is managed. It requires the disclosure of information about an entity's objectives, policies and processes for managing capital.

On January 1 2008 the Company adopted the new recommendations of CICA Handbook Section 3862 Financial Instruments - Disclosures and Section 3863 Financial Instruments - Presentation which replaces Section 3861 Financial Instruments - Disclosure and Presentation, revising and enhancing disclosure requirements while carrying forward its presentation requirements. Section 3862 requires entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments on the entity's financial position and its performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equities, the classification of related interest, dividends, losses and gains, and circumstances in which financial assets and financial liabilities are offset. These new sections place increased emphasis on disclosure about the nature and extent of risks arising from financial instruments and how the entity manages those risks.

The adoption of these standards has resulted in increased note disclosures in the Company's consolidated financial statements.

On January 1 2008 the Company adopted the new recommendations of CICA Handbook Section 3031, Inventories, which requires inventory to be measured at the lower of cost or net realisable value and provides guidance on the methodology used to assign costs to inventory, it disallows the use of the last-in first-out inventory costing methodology and requires that, when circumstances which previously caused inventories to be written down below cost no longer exist, the amount of the write down is to be reversed. The adoption of this standard has not affected the Company's existing policies.

(ii) Recent accounting pronouncements

New or updated CICA Handbook sections that have been issued but are not yet effective, and have a potential implication for the Company, are as follows:

Section 3064 Goodwill and Intangible Assets

In February 2008 the CICA issued Handbook Section 3064 Goodwill and Intangible Assets, effective for interim and annual financial statements relating to fiscal years beginning on or after October 1 2008. Section 3064, which replaces Section 3062 Goodwill and Other Intangible Assets, and Section 3450 Research and Development Costs, establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. This new standard is effective for the Company's fiscal year commencing January 1 2009. The Company is currently assessing the impact of the new standard.

Harmonizing Of Canadian and International Standards

In February 2008, the Accounting Standards Board of the CICA confirmed its strategic plan which will abandon Canadian GAAP and affect a complete convergence to the International Financial Reporting Standards. These new standards will be effective for the Company's interim financial statements commencing January 1, 2011. The Company is closely monitoring changes arising from this convergence.

Internal Control over Financial Reporting

The management of the Company are responsible for establishing and maintaining adequate internal controls over financial reporting within the Company to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with Canadian GAAP. Further to the evaluation conducted at 31 December 2007, management has concluded that following the departure of Stephen Sadler, CFO, the Company faces an increased risk as a result of limited resources and a lack of segregation in duties within the finance department. The Company will look to recruit a replacement CFO and to further expand its current knowledgebase, together with utilization of external experts, in order to minimize this risk. The Company does not consider that this weakness in control environment has resulted in any material misstatements in the financial statements.



TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
UNAUDITED

Quarter ended 30 June Six months ended 30 June
2008 2007 2008 2007
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
restated restated
Notes (note 1) (note 1)
Revenue 2,3 1,711 2,342 3,673 4,375
Development income 2,3 317 29 387 370
-------- -------- -------- --------
2,028 2,371 4,060 4,745
Expenses
Production costs 1,533 1,792 3,033 3,408
Research and
product development 5 1,470 1,151 3,061 2,166
General and
administrative 1,048 1,102 2,107 1,943
Amortisation 147 219 335 442
-------- -------- -------- --------
4,198 4,264 8,536 7,959

Loss before
extraordinary items,
interest, finance
charges and foreign
exchange (2,170) (1,893) (4,476) (3,214)

Interest income 29 75 65 163
Interest expense 6 (44) (59) (88) (110)
Finance charge (38) (12) (42) (115)
Foreign exchange
(loss)/gain (53) 121 (22) 105
-------- -------- -------- --------
(106) 125 (87) 43
-------- -------- -------- --------
Net loss and
Comprehensive loss (2,276) (1,768) (4,563) (3,171)
-------- -------- -------- --------
-------- -------- -------- --------

Loss per share -
basic 8 (0.7) p (0.6) p (1.4) p (1.1) p
Loss per share -
diluted 8 (0.7) p (0.6) p (1.4) p (1.1) p

Weighted average
number of shares
outstanding 318,571,062 285,254,837 318,571,062 279,630,958


TURBO POWER SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED

As at 31
As at 30 June December
2008 2007
Pounds Pounds
Sterling Sterling
Notes '000 '000

Current assets

Cash and cash equivalents 1,341 4,235
Restricted cash 7 401 -
Trade and other receivables 2,064 2,871
Stock and work in progress 2,635 2,376
Prepayments 468 422
R&D tax credits receivable 212 208
-------- --------
7,121 10,112
-------- --------

Long-term assets
Restricted cash 7 879 1,362
Investments 18 25
Intangible assets 9 30 47
Goodwill 9 820 820
Property, plant and equipment 9 1,941 2,106
-------- --------
10,809 14,472
-------- --------
-------- --------

Liabilities and shareholders' equity
Creditors: amounts falling due within
one year
Trade and other payables 3,402 3,700
Deferred income 371 555
-------- --------
3,773 4,255
-------- --------

Creditors: amounts falling due after
more than one year
Warranty provision 151 151
Convertible notes 2,726 1,661
-------- --------
2,877 1,812
-------- --------

Capital and reserves
Common share capital 10 55,804 55,804
Class A Ordinary share capital 10 13,310 13,310
Contributed surplus 2,281 1,964
Deficit (67,236) (62,673)
---------- ----------
Shareholders' funds 4,159 8,405
--------- ---------
10,809 14,472
-------- --------
-------- --------


TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND DEFICIT
UNAUDITED

Common A Accumulated
Share Ordinary Contributed other Total
capital capital surplus income Deficit Equity
Pounds Pounds Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling Sterling Sterling
'000 '000 '000 '000 '000 '000
(restated) (restated)
(note 1) (note 1)
Balance at 1
January 2007
as previously
stated 51,919 6,123 1,981 (68) (53,636) 6,319
Prior year
adjustment
(note 1) 68 (68) -
--------------------------------------------------------------
Balance at 1
January 2007
as restated 51,919 6,123 1,981 - (53,704) 6,319
Net loss (6,415) (6,415)

Stock
compensation 699 699

Conversion to
shares 7,187 (716) (2,414) 4,057

Issue of
shares 4,017 4,017

Share issue
costs (132) (132)

Transitional
adjustment (140) (140)
--------------------------------------------------------------
Balance at 31
December
2007 55,804 13,310 1,964 - (62,673) 8,405

Net loss (4,563) (4,563)

Stock
compensation 81 81

Issue of
warrants
(note 11) 236 236
--------------------------------------------------------------

Balance at 30
June 2008 55,804 13,310 2,281 - (67,236) 4,159
--------------------------------------------------------------
--------------------------------------------------------------


TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

Quarter ended Six months ended
30 June 30 June
2008 2007 2008 2007
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
restated restated
(note 1) (note 1)
Net loss from operations (2,276) (1,768) (4,563) (3,171)
Amortisation 147 340 335 587
Accretion of debt 15 21 30 36
Adjustment to fair value of
investment 10 7
Stock compensation charges (17) 159 81 372
Foreign currency instrument loss - (5) - 16
Unrealised foreign exchange
(gain)/loss 53 (108) 22 (92)
Movement in net interest accrual 26 (126) 32 (307)
-------- -------- -------- --------
Cash outflow before movements in
working capital (2,042) (1,487) (4,056) (2,559)
Decrease/(increase) in debtors (17) (129) 757 (84)
Decrease/(increase) in stock 192 (483) (259) (945)
Increase/(decrease) in creditors (651) 467 (804) 610
-------- -------- -------- --------
Net cash outflow from operating
activities before tax (2,518) (1,632) (4,362) (2,978)
-------- -------- -------- --------
Tax credits 39 - 39 312
-------- -------- -------- --------
Net cash outflow from operating
activities after tax (2,479) (1,632) (4,323) (2,666)
-------- -------- -------- --------
Investing activities
Purchase of property, plant and
equipment (57) (298) (153) (473)
Movement in restricted funds 2 - 82 355
-------- -------- -------- --------
Cash outflow from investing
activities (55) (298) (71) (118)
-------- -------- -------- --------
Financing activities
Net proceeds from convertible notes 1,500 3,876 1,500 3,805
-------- -------- -------- --------
Cash inflow/(outflow) from
financing activities 1,500 3,876 1,500 3,805
-------- -------- -------- --------
Increase/(decrease) in cash in the
period (1,034) 1,946 (2,894) 1,021
-------- -------- -------- --------
-------- -------- -------- --------
Cash and cash equivalents:
Beginning of period 2,375 5,744 4,235 6,669
-------- -------- -------- --------
End of period 1,341 7,690 1,341 7,690
-------- -------- -------- --------
-------- -------- -------- --------
Supplemental cash flow information
Cash paid for interest 18 155 56 315
Cash received as interest 29 75 65 163

Convertible note issue costs of Pounds Sterling 250,000 are included within
accounts payable at 30 June 2008


TURBO POWER SYSTEMS INC.

SIX MONTHS ENDED 30 JUNE 2008

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

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 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 significant accounting policies summarised in the Company's financial statements for the year ended 31 December 2007, and the subsequent changes in accounting policies as detailed below. Certain comparative amounts have been reclassified to conform to the financial statement presentation adopted for 2008.

The Company's interim financial statements do not conform in all respects to the requirements of Canadian GAAP for annual financial statements. The Company's interim statements should be read in conjunction with the consolidated financial statements of the Company for the year ended 31 December 2007.

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.

The Company's functional and reporting currency is Pound Sterling.

Going concern

These consolidated financial statements have been prepared on a going concern basis, which presumes that the Company will be able to realise its assets and discharge its liabilities in the normal course of operations for the foreseeable future. The Company has incurred cumulative losses including a loss of Pounds Sterling 2.28 million for the three months ended 30 June 2008 and has a cumulative deficit of Pounds Sterling 67.24 million as at 30 June 2008. The Company's ability to continue as a going concern depends on its ability to generate positive cash flow from operations or secure additional debt or equity financing.

Prior period adjustment

The Company has previously translated the operations of the Canadian parent company using the current rate method. During the fourth quarter of 2007 it was identified that the functional currency of the Canadian holding company is Sterling, and as such the translation of the transactions should not have been recorded under the current rate method. Accordingly a correction has been made with retrospective restatement of the 2007 comparative financial statements.

The foreign exchange differences arising on consolidation have been reclassified and taken to the income statement. This has resulted in a prior year adjustment to cancel the Currency Adjustment Reserve and increase the loss brought forward at 1 January 2007 in retained earnings by Pounds Sterling 68,000.

The Consolidated Statements of Loss and Comprehensive Loss, the Consolidated Statement of Changes in Equity, and the Consolidated Statements of Cash Flows, together with the Segmental Analysis and Loss per Share notes have been restated for 2007 to take account of the decrease in reported net loss of Pounds Sterling 92,000 for the six months, and the change to opening equity reserves.

2 Changes in accounting policies and recent accounting pronouncements

(i) Changes in accounting policies

On January 1 2008 the Company adopted the new recommendations of Canadian Institute of Chartered Accountants (CICA) Handbook Section 1535, Capital Disclosures. This new handbook section establishes disclosure requirements about an entity's capital and how it is managed. It requires the disclosure of information about an entity's objectives, policies and processes for managing capital.

On January 1 2008 the Company adopted the new recommendations of CICA Handbook Section 3862 Financial Instruments - Disclosures and Section 3863 Financial Instruments - Presentation which replaces Section 3861 Financial Instruments - Disclosure and Presentation, revising and enhancing disclosure requirements while carrying forward its presentation requirements. Section 3862 requires entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments on the entity's financial position and its performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equities, the classification of related interest, dividends, losses and gains, and circumstances in which financial assets and financial liabilities are offset. These new sections place increased emphasis on disclosure about the nature and extent of risks arising from financial instruments and how the entity manages those risks.

The adoption of these standards has resulted in increased note disclosures in the Company's consolidated financial statements.

On January 1 2008 the Company adopted the new recommendations of CICA Handbook Section 3031, Inventories, which requires inventory to be measured at the lower of cost or net realisable value and provides guidance on the methodology used to assign costs to inventory, it disallows the use of the last-in first-out inventory costing methodology and requires that, when circumstances which previously caused inventories to be written down below cost no longer exist, the amount of the write down is to be reversed. The adoption of this standard has not affected the Company's existing policies.

(ii) Recent accounting pronouncements

In February 2008 the CICA issued Handbook Section 3064 Goodwill and Intangible Assets, effective for interim and annual financial statements relating to fiscal years beginning on or after October 1 2008. Section 3064, which replaces Section 3062 Goodwill and Other Intangible Assets, and Section 3450 Research and Development Costs, establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. This new standard is effective for the Company's fiscal year commencing January 1 2009. The Company is assessing the impact of this new standard on its consolidated financial statements.

In February 2008, the Accounting Standards Board of the CICA confirmed its strategic plan which will abandon Canadian GAAP and affect a complete convergence to the International Financial Reporting Standards. These new standards will be effective for the Company's interim financial statements commencing January 1, 2011. The Company is closely monitoring changes arising from this convergence.

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 Total
Sterling '000 electronics machines
2008 2007 2008 2007 2008 2007
Six months ended 30
June
Revenue 3,563 4,239 110 136 3,673 4,375
Development income 86 370 301 - 387 370
Amortisation (95) (70) (240) (372) (335) (442)
Interest income 32 81 33 82 65 163
Interest expense (44) (55) (44) (55) (88) (110)
Net loss (2,767) (877) (1,796) (2,294) (4,563) (3,171)
Capital expenditure 129 294 24 19 153 313

Three months ended
30 June
Revenue 1,608 2,222 103 120 1,711 2,342
Development income 38 29 279 - 317 29
Amortisation (48) (35) (99) (184) (147) (219)
Interest income 14 37 15 38 29 75
Interest expense (22) (30) (22) (29) (44) (59)
Net loss (1,607) (779) (669) (989) (2,276) (1,768)
Capital expenditure 57 210 0 10 57 220

As at 30 June
2008/31
December 2007
Capital assets 623 588 1,318 1,518 1,941 2,106
Goodwill 820 820 0 0 820 820
Total assets 5,160 6,800 5,649 7,672 10,809 14,472
Total liabilities 4,166 3,523 2,484 2,544 6,650 6,067

Total income Pounds
Sterling '000 Six months ended Quarter ended
30 June 30 June
2008 2007 2008 2007

UK 482 857 238 457
USA 2,412 2,839 1,175 1,414
Canada 1,105 842 560 419
Rest of world 61 207 55 81
--------- --------- --------- ---------
4,060 4,745 2,028 2,371
--------- --------- --------- ---------
--------- --------- --------- ---------


4 Significant Customers

During the six months ended 30 June 2008, 61% of the Company's sales were derived from three customers (2007: 54% from two customers). During the three months ended 30 June 2008, 66% of the Company's sales were derived from four customers (2007: 45% from one customer). One of the customers in the three months ended 30 June 2008 was a new customer.

5 Research and product development

Research and product development expenditure incurred during the period comprised:



Six months ended Quarter ended
30 June 30 June

2008 2007 2008 2007
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Research and product
development cost 3,105 2,166 1,514 1,151
Accrued tax credits (44) - (44) -
--------- ---------- ---------- ----------
3,061 2,166 1,470 1,151
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------

Total accrued tax credits receivable at 30 June 2008 amounted to Pounds
Sterling 212,000 (31 December 2007: Pounds Sterling 208,000).

6 Interest expense

Six months ended Quarter ended
30 June 30 June
2008 2007 2008 2007
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
Interest 58 74 29 38
Accretion of debt 30 36 15 21
--------- ---------- ---------- ----------
88 110 44 59
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------


7 Financial instruments

The following is a summary of the accounting classifications the Company has elected to apply to each of its significant categories of financial instruments outstanding as at 30 June 2008:



Cash and cash equivalents: held for trading
Restricted cash: held for trading
Trade receivables: loans and receivables
Investments: held for trading
Trade payables: other financial liabilities
Convertible notes: other financial liabilities
Currency option contracts: held for trading


Transaction costs incurred in arranging loan financing are deferred against the loan creditor balance, and expensed to the statement of loss and comprehensive loss over the life of the loan using the effective interest method.

Interest rate and currency of cash balances

Floating rate financial assets of Pounds Sterling 2,621,000 at 30 June 2008 (31 December 2007: Pounds Sterling 5,597,000) comprised Sterling interest bearing bank accounts, money market deposits and cash funds including restricted cash.

Fixed rate financial assets at 30 June 2008 amounted to Pounds Sterling 18,000 (31 December 2007: Pounds Sterling 25,000) and comprised an investment in a convertible debenture.

At 30 June 2008, the increase or decrease in net earnings for each 1% change in interest rates on net financial assets was approximately Pounds Sterling 26,000 per annum (31 December 2007: Pounds Sterling 55,000).

Currency exposure

The Group's currency exposure, being those exposures arising from transactions, the net currency gains and losses from which will be recognised in the profit and loss account, is shown below.



----------------------------------------------------------------------------
US dollar denominated Canadian dollar denominated
----------------------------------------------------------------------------
Pounds Sterling '000 Pounds Sterling '000
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Investments - 18
----------------------------------------------------------------------------
Monetary assets 533 13
----------------------------------------------------------------------------
Debtors 1,185 297
----------------------------------------------------------------------------
Creditors 4 49
----------------------------------------------------------------------------


The Company utilises US Dollar forward option agreements to reduce exposure to fluctuations in foreign exchange rates.

Included in net loss for the six months ended 30 June 2008 is approximately Pounds Sterling 5,000 of foreign exchange loss resulting from the translation of the financial statements of Turbo Power Systems Inc. (2007: loss of Pounds Sterling 15,000). The rates used to translate the assets and liabilities as at 30 June 2008 was USD $1.994:Pounds Sterling 1 and CDN $2.014:Pounds Sterling 1 (30 June 2007 USD $2.004:Pounds Sterling 1 and CDN $2.122:Pounds Sterling 1).

Derivative financial instruments

Certain of the Company's business transactions occur in currencies other than Sterling. The Company entered into foreign exchange average rate option contracts during the twelve months ended 31 December 2007 to reduce exposure to fluctuations in foreign exchange rates on remittances from customers denominated in U.S. Dollars.

During the six months no gain or loss was realized on these options (2007: loss of Pounds Sterling 16,000).

As at 30 June 2008 there was no unrealised gain from the contracts included within prepayments (2007: Pounds Sterling 28,000). The Company records unrealised gains or losses arising from these contracts in the statement of loss and comprehensive loss.

Maturity of financial liabilities

The maturity of the Group's borrowings at 30 June 2008 and 31December 2007 comprised:



2008 2007
Pounds Sterling Pounds Sterling
'000 '000

Convertible notes due 11 March, 2010 1,789 1,789
Convertible notes due in period to 30
June, 2011 1,500 -
----------------- -----------------
3,289 1,789
----------------- -----------------
----------------- -----------------


At 30 June 2008, the Group's borrowings were at fixed rates of 6.5% (2010 notes) and 15.0% (2011 notes).

The fair value of the loans at 30 June 2008 was Pounds Sterling 3,097,000 (31 December 2007: Pounds Sterling 1,845,000)

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 of Pounds Sterling 559,000 being under the performance bond restriction until 2010.

During March 2007 the Company committed cash bonds totalling USD$800,000 in support of contracts placed by Bombardier Transportation for the CTA and TTC programmes. The associated contracts require the bonds to remain in place until after development and the prototype equipment is delivered, which is expected to occur during 2008.

The Company has also provided a property lease guarantee bond which is held in escrow and totals Pounds Sterling 320,000.

At 30 June 2008 cash subject to restrictions totalled Pounds Sterling 1,280,000 (December 2007: Pounds Sterling 1,362,000).

Credit risks

As seen below, the Company, in the normal course of business, is exposed to credit risk from its global customers. The accounts receivable are subject to normal industry risks in each geographical region in which the Company operates. The Company attempts to manage these risks by dealing with creditworthy, large well-established customers; however, due to the limited number of potential customers in each market this is not always possible. In these cases the Company reduces its exposure by obtaining up-front payments from the end customer prior to delivery of goods.

Significant debtors at 30 June 2008 comprised Pounds Sterling 1,291,000 due from four customers, representing 70% of the outstanding balance (2007: Pounds Sterling 1,082,000 due from three customers, representing 58% of the outstanding balance). Consequently, the Company has concentrations of credit risk with respect to its accounts receivable.



Total accounts receivable of Pounds Sterling 1,847,000 are due as follows:

Not past due Pounds Sterling 1,647,000

Past due for over one day but not more that
30 days Pounds Sterling 78,000

Past due for over 30 days but not more than
60 days Pounds Sterling 40,000

Past due for over 60 days Pounds Sterling 82,000

Allowance for doubtful accounts Pounds Sterling nil


At 30 June 2008 and 31 December 2007 the allowance for doubtful accounts was Pounds Sterling nil.

Determination of fair value

The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of a financial instrument on initial recognition is the transaction price, which is the fair value of the consideration given or received. Subsequent to initial recognition, the fair values of financial instruments that are quoted in active markets are based on bid prices for financial assets held and offer prices for financial liabilities. When independent prices are not available, fair values are determined by using valuation techniques which refer to observable market data. These include comparisons with similar instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. For certain derivatives, fair values may be determined in whole or in part from valuation techniques using non-observable market data or transaction prices. A number of factors such as bid-offer spread, credit profile and model uncertainty are taken into account, as appropriate, when values are calculated using valuation techniques.

The fair value of short term financial assets and liabilities, including cash and cash equivalents, restricted cash, trade and other receivables, and trade and other payables as presented in the consolidated balance sheets approximate their carrying value due to the short term period to maturity of these financial instruments.

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 three months and six months ended 30 June 2008 was 318,571,062 (2007: 285,254,837 for the three months, 279,630,958 for the six months). The loss for the three months ended 30 June 2008 was Pounds Sterling 2,276,000 (2007: Pounds Sterling 1,768,000).

Anti-dilutive potential securities outstanding not included in the loss per common share calculation at 30 June 2008 total 221,076,773 (2007: 172,646,014).



9 Long - term assets

Cost Impairment Amortisation Net book
value
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
At 30 June 2008:
Intangible assets 4,078 1,663 2,385 30
Goodwill 863 43 - 820
Property, plant and equipment 8,935 - 6,994 1,941
-------- -------- -------- --------
Total long term assets 13,876 1,706 9,379 2,791
-------- -------- -------- --------
-------- -------- -------- --------

At 31 December 2007:
Intangible assets 4,078 1,663 2,368 47
Goodwill 863 43 - 820
Property, plant and equipment 8,782 - 6,676 2,106
-------- -------- -------- --------
Total long term assets 13,723 1,706 9,044 2,973
-------- -------- -------- --------
-------- -------- -------- --------


10 Share capital - issued shares

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

At 1 January 2007 273,944,592 51,919 56,250,000 6,123
Redemption of
convertible notes - - 58,750,000 7,187
Share based
compensation 176,470 17 - -
Shares issued, net
of share issue costs 44,450,000 3,868 - -
------------- -------- -------------- -------
At 31 December 2007
and 30 June 2008 318,571,062 55,804 115,000,000 13,310
------------- -------- -------------- --------
------------- -------- -------------- --------


11 Financing

On 11 July 2003 the Company completed a 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 were 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, and lapsed on 10 July 2006.

On 11 March 2005 the Company completed a 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 12).

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 at a redemption price of Pounds Sterling 0.08.

The Company has incorporated the guidance provided by the CICA's Emerging Issue Committee Abstract 96 "Accounting for the Early Extinguishment of Convertible Securities Through (1) Early Redemption or Repurchase and (2) Induced Early Conversion" (EIC96) in accounting for the early redemption of the convertible notes. EIC96 provides guidance on the treatment of the fair value of the conversion feature on the extinguishment of the convertible debenture. Redemption of the convertible debentures in January 2007 resulted in an increase in deficit of Pounds Sterling 82,000 (2006: Pounds Sterling 73,000) and an increase in retained deficit of Pounds Sterling 2,512,000 (2006: Pounds Sterling 2,600,000).

On 19 June 2008 the Company completed a Pounds Sterling 3,000,000 (gross) financing agreement with institutional investors. The financing comprised secured Convertible Notes and Warrants. The Convertible Notes bear interest at 15% per annum and are convertible into an aggregate of 75,000,000 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of Pounds Sterling 0.04 per share. The Convertible Notes are issuable upon drawdown of the loan, of which Pounds Sterling 1,500,000 were issued on 19 June 2008. The loan is repayable over three years by way of regular quarterly repayments, commencing March 2009. The Warrants have a term of ten years and are convertible into an aggregate of 12,857,142 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of Pounds Sterling 0.035 per share.

In accounting for the Convertible loan notes issued for Pounds Sterling 1,500,000 the Company has valued the debt and equity components by assigning the proceeds based on the fair values of the principal repayments, interest payments and the warrants issued compared to the proceeds. The warrants have been valued using the Black-Scholes method (see note 12), and have a value of Pounds Sterling 236,000. The debt component has been valued at Pounds Sterling 1,264,000 and no value has been assigned to the conversion feature. Transaction costs of Pounds Sterling 250,000 have been deferred against the current loan balance and will be expensed over the life of the loan using the effective interest method. The Convertible Notes are secured over the assets of the Company.

Subsequent to the balance sheet date the Company has amended the terms of the 19 June 2008 loan agreement in order to permit a second drawdown of Pounds Sterling 1,500,000. The new terms will result in all interest and capital repayments being deferred until maturity in June 2011, and provide that if at any time, including once the Loan Note has been fully repaid, there is a change in control of TPS, or its subsidiaries or substantially all of its assets, the Loan Note Holders will be entitled to receive a risk premium, calculated according to the enterprise value ascribed to the Company, under the transaction before deducting any balance of the Loan Notes and/or interest outstanding. This risk premium will be equal to an initial payment of Pounds Sterling 1.5m plus 75% of the next Pounds Sterling 6m of enterprise value and 50% of the remainder. The second drawdown is subject to shareholder EGM approval, which is to be held on 15 August 2008. If approved, the modification to the repayment terms of the Convertible Notes may result in a change to the loan value ascribed for both the first and second tranches, which would take effect in Quarter 3.

12 Stock options, warrants and compensation expense

The number of options and warrants outstanding as at 30 June 2008, and the movement during the six months then ended, are as follows:



Options Warrants
Number Number

Outstanding at 1 January 2008 30,847,250 10,500,000
Issued - 12,857,142
Cancelled (535,952) -
------------- ------------
Outstanding at 31 March 2008 30,311,298 23,357,142
------------- ------------
------------- ------------


The stock based compensation expense for the six months ended 30 June 2008, included in Production costs was Pounds Sterling 35,000 (2007: Pounds Sterling 52,000), in Research and product development was Pounds Sterling 57,000 (2007: Pounds Sterling 193,000), and in General and administrative costs was a credit of Pounds Sterling 11,000 (2007: charge of Pounds Sterling 127,000). The credit to stock compensation costs arises as a result of the Company assessing the high likelihood that options held by ex-employees will be forfeited before they vest, and accordingly the charge incurred to date is therefore released back.

On 19 June 2008 the Company issued 12,857,142 warrants as part of its financing agreement with institutional investors (note 11). The fair value of the warrants is calculated using the Black-Scholes option-pricing model. A dividend yield of Nil, expected volatility of 75%, a risk free interest rate of 6% and an expected life of 10 years have been assumed. The fair value of the warrants issued during the quarter ended 30 June 2008 was Pounds Sterling 0.03 per warrant.

Subsequent to the period end, on 9 July 2008 the Company issued certain directors with an aggregate of 4,600,000 stock options with an exercise price of 3.8p per share, which vest over a 1 to 3 year period, and may only be exercised once the Company share price has been not less than 12p per share for the seven consecutive trading days prior to giving notice of exercise.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected price volatility. The Company uses expected volatility rates, which are based on historical volatility rates trended into future years. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock options.

13 Capital management

The Company defines capital that it manages as the aggregate of its cash and cash equivalents, short term investments and equity comprising share capital, contributed surplus and deficit. Its objectives when managing capital are to ensure that the Company will continue as a going concern, so that it can provide services to its customers and returns to its shareholders.

The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company, upon approval from its Board of Directors, will make changes to its capital structure as deemed appropriate under the specific circumstances.

The Company is not subject to any externally imposed capital requirements and the Company's overall strategy with respect to management of capital remains unchanged from the year ended 31 December 2007.

14 Contingent loss

The Company is currently working on a contract with Hamilton Sundstrand which could result in future losses. Since discussions are ongoing on the contract in question a reliable estimate of any contingent liability cannot be made at this time and no amount has been accrued.

15 Related party transactions

On 19 June 2008 the Company completed a Pounds Sterling 3,000,000 (gross) financing agreement with institutional investors (note 11). Pounds Sterling 1,000,000 of this agreement has been placed with Impax Asset Management Limited, which currently holds 14.35% of the issued share capital of the Company. A further Pounds Sterling 1,000,000 has been placed with Gartmore Investment Limited, which currently holds 11.85% of the issued share capital of the Company. Both investors are considered to be insiders pursuant to Canadian securities law.

16 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

September 2006 1,470 (1,623) (0.8)
December 2006 1,851 (1,123) (0.6)
March 2007 2,033 (1,403) (0.5)
June 2007 2,342 (1,768) (0.6)
September 2007 2,700 (1,666) (0.5)
December 2007 2,750 (1,578) (0.5)
March 2008 1,962 (2,287) (0.7)
June 2008 1,711 (2,276) (0.7)


Contact Information

  • Turbo Power Systems
    Paul Summers
    Chief Executive Officer
    +44 (0)20 8564 4460
    or
    Turbo Power Systems
    Richard Bayliss
    Finance Director
    +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
    or
    KBC Peel Hunt
    Nicolas Marren
    +44 (0)20 7418 8900