Turbo Power Systems Inc.
TSX : TPS
AIM : TPS

Turbo Power Systems Inc.

November 13, 2007 02:00 ET

Turbo Power Systems Inc. Announces Its Results for the Third Quarter Ended 30 September 2007

CALGARY, ALBERTA--(Marketwire - Nov. 13, 2007) - Turbo Power Systems Inc. (TSX:TPS) (AIM:TPS):

Highlights

- Production and development income in the nine months ended 30 September 2007 increased by 92 percent to Pounds Sterling 8.1 million (2006: Pounds Sterling 4.2 million)

- Loss before tax in the nine months ended 30 September 2007 reduced by 7 percent to Pounds Sterling 4.8 million (2006: Pounds Sterling 5.2 million)

- Order received today from new US customer for a motor and drive evaluation system - approx US$200k

- Production order for 75 high-speed motor and drive systems worth approx US$2.0 million for delivery during 2008 expected to be signed before end of November

- New Chairman appointed to manage next phase of company's development and initiate cost review in Q4

Michael Hunt CEO, said: "We continue to make good progress in winning new contracts and growing our revenue. It has taken longer than we first envisaged to reach the qualification stages in our aerospace contracts and therefore we have had to incur extra cost throughout the second half of 2007. However, significant progress has now been made and both programmes are now moving into qualification testing."

Graham Thornton, Chairman, said: "In my short time as a director I have been impressed with the Company's technologies and its range of potential applications. The markets in which the company operates are growing, as are the company's revenues. We will initiate a review in the fourth quarter to ensure future costs are better aligned with these revenues."

NOTES TO EDITORS

About Turbo Power Systems

Turbo Power Systems Inc (AIM:TPS.L). 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 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.

Notice of no auditor review of interim financial statements

Under Canadian National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying un-audited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.

OPERATIONAL REVIEW

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 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

Our practical experience of operating in the new factory at Gateshead at full production output during the third quarter has reinforced the initial positive feedback from staff and customers. Manufacturing efficiency and production margins are improving and are expected to continue to do so as the more effective, lean manufacturing processes reduce build times and improve the control of materials and labour.

Overall revenues continued to grow significantly with the year to date total up by over 90% from the equivalent period in 2006. However, while our third quarter EBITDA losses have improved over the second quarter they did not reduce to the extent initially anticipated due to the resource required to complete key technical milestones on the aerospace programmes, deferring planned development income stage payments and increasing development costs.

Considerable progress has been made in addressing technical issues and plans are now in hand to complete formal product qualification early in Q1 2008. The core TPS technology is a very good fit for the sector and with the benefit of the experience on these launch programmes and the investment we have made in facilities, quality systems and engineering expertise, we remain confident that we have the infrastructure and resources to effectively manage future projects.

During the quarter the power electronics division continued to generate the major proportion of the revenues, however the receipt of a significant order announced today, coupled with the order for 75 high-speed motor and drive systems that is expected to be signed before the end of November, demonstrates that the business at Heathrow can anticipate real growth in the commercial acceptance of the high-speed electrical machines which are at the heart of the core intellectual property held by the Company.

The signed contract announced today is a development order for US$200k from an industrial equipment manufacturer in the United States for a motor drive system to be used as a new technology "commercial evaluation" demonstrator.

The Company can also confirm that it is in final stage talks regarding the launch order for 75 high-speed motor and drive systems worth US $2.0 million that falls within the Memorandum of Understanding signed in November 2005 with a major international capital equipment manufacturer. This contract is expected to be signed before the end of November 2007.

In the rail sector, the Company is focused on the two major development programmes with Bombardier for power distribution systems for new subway cars being supplied to the Chicago and Toronto Transit Authorities. Both systems will be prototype tested during the early part of 2008 with production deliveries scheduled to commence towards the end of the year, ramping up from 2009.

Outlook

Given the extra work on our aerospace programmes the company has incurred more significant costs in the second half than were planned. However, these engineering costs will fall significantly once the units are qualified.

Third quarter revenues were unusually high given high levels of shipments to NREC and we would expect fourth quarter revenues to be at slightly lower levels. The extended beta programme on our US Industrial motor and drive agreement, in conjunction with slightly reduced projected rail revenues, means that we expect 2008 revenues to be below previous management expectations but still show significant growth over 2007. The company is initiating a review in the near term to ensure the cost base for 2008 is better matched to these revenues.

Customers and contracts in more detail

TPS designs and manufactures motor/generator and power electronics technology across a range of sectors and applications but the Company's products all have in common the aim to provide improved efficiency and reduced energy consumption compared to existing technology.

1) Direct Drive Industrial High Speed Motors and Drives

The TPS direct drive technology is designed to provide significant performance improvements and operating cost reductions for a wide range of industrial compression and turbo-machinery applications. By eliminating the need for mechanical gearboxes and conventional low speed motors and by operating more efficiently across a wider range of load points, the customer's energy requirements and costs can be reduced.

SKF

TPS continues to build up the early volumes of the high-speed motor and drive systems for integration by SKF with their magnetic bearing technology into their compressor product. The current expectation is that we will ramp up the volumes to a running rate of approximately 50 systems per month within the next year.

US Industrial Motor and Drive Agreement

The recent review of Alpha unit testing at the customer's site has created a positive platform for the next steps in the programme announced today:

- An order for the supply of 5 Beta reliability testing systems has been received (at a value of approx US$220k) which will be used to carry out extensive field reliability testing over a period of 9-12 months. In order to maximize the effectiveness of the reliability testing programme the customer is making a significant investment in a number of mobile transportable systems which can be rapidly deployed at a number of "friendly" sites, testing a broad combination of operational and ambient temperature environments.

- The expected launch purchase order for 75 production systems is likely to be signed before the end of November (at a value of approximately US$2M) and will be deliverable between August and November 2008 subject to an initial reliability demonstration milestone in May 2008. This will be the first release against the Memorandum of Agreement previously announced with the global capital equipment manufacturer, which provides for the purchase of 500 systems in the first two years of production.

In previous reports, initial production was expected to have commenced earlier, however given the strategic importance to the customer of the new technology the customer has now decided to extend the range and depth of the pre-production release trials prior to the formal production launch.

New order for trial programme

TPS has received an order (approx. value US$200k) from a US industrial and process gas company planning to test the use of high speed permanent magnet motors, magnetic bearings, and related control and power electronics for turbo machinery in air separation processes.

This opportunity is expected to lead to future production contracts subject to successful systems trials and further widens the range of applications for the TPS technology. The system being offered is based on existing TPS product designs.

2) Specialist Motors and Drives

In addition to the long-term design investment that the Company has made in the high speed electrical machine technology, the Company has accumulated considerable expertise in motor and controller designs for aggressive and high performance environments This expertise is now providing the basis for a new range of products targeted at both the aerospace sector and the oil and gas markets.

Aerospace

On both the aerospace programmes development costs have exceeded the level of customer funded development income and in the case of Hamilton Sundstrand, which was initiated by the customer as a late programme nearly a year after Eaton, the cost overrun is expected to be significant.

Unit margins will be derived from the final design costs, and we are currently in discussion with both companies to finalise these.

TPS continues to see the sector as an excellent fit to both its electronics and electrical machines technologies and all new bids are now constructed to reflect our "learning curve" experience on these initial launch programmes.

Eaton

Pump motor drive units for the new Boeing 787 at Safety of Flight standard have been delivered to Aircraft One and Two in support of the Boeing flight test programme.

A significant amount of pre-qualification testing has already completed successfully. The timing of the final qualification program has been agreed with Eaton and Boeing and will commence in November and be completed in early 2008.

Hamilton Sundstrand

The HS 787 Ram Fan motor drive programme, which was placed with TPS late on in the 787 programme, has continued to require extra resource to complete the prototype development testing of the hardware and software elements. Considerable progress has now been made and the Company is planning to complete full qualification before the end of Q1 2008.

Artificial Lift Company (Oil and Gas)

Negotiations for a follow-up quantity of 7 motors are nearing conclusion.

Testing in Great Yarmouth with two existing motors is going well. ALC are now operating the two motors on a 24/7 continuous basis. On successful completion of the UK trials, six motor modules will be provided by TPS in support of the operational oil field testing in North America in the first half of 2008, where the systems will then undergo extended endurance testing under actual oil well conditions. Production, which is dependent on successful reliability demonstrations in North America, is expected to begin before the end of 2008.

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.

Bombardier Transportation-Canada

Beijing

Production of the auxiliary power systems for the unmanned rail transit cars for the Beijing airport subway extension is proceeding well, with all units expected to be delivered by the end of 2008 as scheduled. TPS engineers have participated in a number of commissioning trials in China in support of our customer Bombardier. The Company is supplying 40 car sets with a contract value of US$1.5M.

Chicago Transit Authority

The development programme is well underway, system mock up units have been evaluated by the end customer, and functional prototypes will be available for qualification testing in December. 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 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. Bombardier will be testing several subway cars on CTA tracks during 2008, with production volumes planned to commence at the end of 2008.

Toronto

Although placed some months later than CTA, the Toronto S1 programme has an aggressive schedule and also has a target prototype qualification testing date of the end of 2007. The initial production schedule for 2008 is 15 car sets, with the rate ramping up into 2009. 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.

National Rail Equipment Co.

NREC was once again the largest individual customer during the third quarter, and TPS has increased the capacity within the manufacturing cell layout to accommodate potential further increases in demand. In order to support the expanding field population of NREC locomotives additional TPS field service resources have been provided in North America, and a number of potential sites for a possible US service and maintenance centre are currently under review.

As part of expanding it's range of low emissions shunting locomotives NREC has contracted TPS to supply a variant of the existing traction electronics system design for a six-axle version, and initial hardware is currently in manufacture.

NREC will remain the major customer for rail and traction equipment until the Bombardier CTA and Toronto contracts enter production in the latter half of 2008. NREC marketing activities have extended to cover Europe and Australasia as well as North America.

Toronto Transit Commission - H6 Subway Programme

Production continues to proceed smoothly, with contract completion scheduled for early 2008.

PRC

Production demand from the customer for the pulsed laser power supply continues to be maintained at good monthly levels, with a high level of customer satisfaction in the equipment performance.

FINANCIAL PERFORMANCE

REVIEW OF NINE MONTHS TO 30 SEPTEMBER 2007

Overview

The first nine months of 2007 have seen continued production growth with turnover increasing strongly quarter on quarter. Development income has increased by 76% in the period as work continued on the aerospace programmes and began on the Chicago and Toronto rail programmes. Improvements in production efficiency and benefits from the new factory location have aided improving production margins. However, on the aerospace programmes we have experienced the dual effect of deferred milestone related development income and increasing development costs. As a result third quarter, and consequently year to date, EBITDA figures are worse than anticipated. Mitigating actions have been taken to ensure milestones are met in the near term, allowing the release of the related development income.

Turnover for the nine months of Pounds Sterling 7.1 million represents a 95% increase over the first nine months of 2006 as more of our programmes have moved into production. In particular, our contract with NREC for rail traction electronics has made a much stronger contribution as a result of this customer's increased sales and this programme was again our largest contributor to turnover in the third quarter. We expect fourth quarter turnover to again be at good levels although probably slightly lower than the third quarter. We have seen gross margins increasing throughout the period and this effect has been accelerated in the third quarter following our move into new premises in Gateshead.

Development income of Pounds Sterling 1.0 million includes receipts from Bombardier on the Toronto, Chicago and Beijing programmes as well as receipts from Eaton and Hamilton Sundstrand on the 787 programme.

Research and development costs of Pounds Sterling 3.9 million throughout the period comprise continued work on our aerospace and major rail development programmes as well as costs associated with a new microprocessor control system to be used for future rail and aerospace business. Increased costs in the third quarter reflect increased resource allocated to the aerospace programmes both in terms of personnel and test house costs as the programmes move towards flight qualification.

Administrative expenses for the nine months were Pounds Sterling 3.0 million. Included in this figure in the second quarter are expenses related to the relocation of our Gateshead factory totaling Pounds Sterling 0.2 million.

The loss before interest, tax, depreciation, amortisation and stock compensation for the nine month period was (Pounds Sterling 3.6) million. Third quarter EBITDA of (Pounds Sterling 1.2) million reflects in particular the increased net development cost associated with the Eaton and Hamilton Sundstrand programmes.

Cash outflows before movements in working capital of Pounds Sterling 3.7 million for the nine months included interest payments in January of Pounds Sterling 331,000 to convertible note holders relating to the period 1 July 2006 to 31 December 2006. The following convertible note interest payment, paid in July 2007, was significantly less at Pounds Sterling 56,000 following the redemption of Pounds Sterling 9.36 million of the convertible notes in late December 2006 and early January 2007. Also included in cash outflows before movements in working capital are Gateshead relocation costs not capitalized of Pounds Sterling 0.2 million.

Continuing production growth and the purchase of long lead time items led to significant stock increases in the period of Pounds Sterling 1.0 million.

Tax credits received in the period of Pounds Sterling 312,000 comprise research and development tax credit claims for the year to 31 December 2006.

Long term assets purchased of Pounds Sterling 0.6 million principally represent the investment in fixed assets at the company's new production facilities in Gateshead. The completion of the move allowed TPS to claim Pounds Sterling 250,000 of grant funding from the development agency, One North East, and this amount was received in the third quarter.

Movements in restricted funds of Pounds Sterling 147,000 represent net movements in performance bond cash during the half year as certain performance bonds reached maturity including the release of performance bond cash on the cancelled CLRV programme.

Net receipts from an institutional equity placing during the second quarter contributed Pounds Sterling 3.8 million.

The overall decrease in cash during the period was Pounds Sterling 1.1 million leaving the Company with an unrestricted cash balance of Pounds Sterling 5.6 million and further restricted cash of Pounds Sterling 1.4 million at 30 June 2007.

Revenue

Production revenue in the nine months ended 30 September 2007 was Pounds Sterling 7.08 million compared with Pounds Sterling 3.63 million in 2006 and comprised



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Power electronics 6,855 3,459
Electrical machines 220 172

------- --------
7,075 3,631
------- --------
------- --------


The Power Electronics division has again seen strong turnover growth. Output volumes have grown significantly on the majority of production contracts and in particular on National Railway Equipment Co which is the highest contributor to revenues for the nine months.

Spares and service revenues were Pounds Sterling 0.3m for the nine months (2006: Pounds Sterling 0.8m).

In the Electrical Machines division revenue for the quarter related principally to the SKF contract and initial units on the Industrial motor and drive programme.

Development income

Development income in the nine months was Pounds Sterling 1.02 million compared with Pounds Sterling 0.58 million in 2006 and included receipts from Hamilton Sundstrand on the Boeing 787 Dreamliner programme, and initial incomes from Bombardier on both the Chicago Transit and Toronto Transit programmes.



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Development income 1,017 577
------- --------
------- --------


Production costs

The cost of product revenues in the nine months amounted to Pounds Sterling 5.32 million (2006: Pounds Sterling 2.80 million) and reflects the growth in production revenue.



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Power electronics 4,544 2,187
Electrical machines 776 615

------- --------
5,320 2,802
------- --------
------- --------


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

Included in production costs for the nine months are stock compensation charges on options awarded of Pounds Sterling 80,000 (2006: Pounds Sterling 34,000).

Research and product development

Research and product development expenditure in the nine months was Pounds Sterling 3.90 million compared with Pounds Sterling 2.61 million in 2006, and comprised



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Research and product development
expenditure 3,902 2,660
Accrued R&D tax credits - (50)

------- --------
Total expenditure 3,902 2,610
------- --------
------- --------


Product development costs increased in the nine months as development work progressed on both the Eaton contract and the Hamilton Sundstrand contract for the Boeing 787 Dreamliner and the Bombardier Chicago and Toronto Rail programmes.

Included in research and product development expenditure for the nine months are stock compensation charges on options awarded of Pounds Sterling 290,000 (2006: Pounds Sterling 188,000).

No R&D tax credits were accrued in the nine months as the majority of the Group's development resource moved on to commercial programmes.

General and administrative

General and administrative costs of Pounds Sterling 3.03 million (2006: Pounds Sterling 2.38 million) consist mainly of staff costs and facilities costs. Included in this category are Gateshead move costs of Pounds Sterling 0.20 million which have not been capitalized. Also included are stock compensation charges on options awarded of Pounds Sterling 170,000 (2006: Pounds Sterling 151,000).

Amortisation

Amortisation was Pounds Sterling 0.66 million compared with Pounds Sterling 0.89 million in 2006. The reduction reflects a number of assets becoming fully written down.

Interest income

Interest income for the nine months was Pounds Sterling 0.27 million compared with Pounds Sterling 0.21 million in 2006.

Interest expense and finance charges

Interest expense and finance charges arise from the issue of convertible bonds in July 2003 and March 2005, and the redemption of bonds and issue of shares in January 2007, and comprised



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Finance charges 118 66
Interest payable 87 420
Amortisation of deferred
finance charges - 121
Debt accretion 62 291
------- --------
267 898
------- --------
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Finance charges for the nine months were Pounds Sterling 118,000 (2006: Pounds Sterling nil) and were made up as below:

- During 2006 the company purchased U.S. dollar denominated currency contracts covering expected dollar income from programmes scheduled for 2006 and 2007. The value of the option as at 30 September 2007 was Pounds Sterling 37,000, resulting in a cost for the nine months of Pounds Sterling 7,000 (2006: Pounds Sterling 57,000).

- During the first half year the company redeemed 4,500,000 loan notes, resulting in a net charge of Pounds Sterling 82,000 (2006: Pounds Sterling nil).

- Charges related to the restricted cash movements and performance bonds totaled Pounds Sterling 29,000 (2006: Pounds Sterling 9,000).

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 nine months this charge amounted to Pounds Sterling 62,000 (2006: Pounds Sterling 291,000).

CASH FLOWS FOR THE NINE MONTHS

Cash outflow from operating activities

Operating cash outflow before movements in working capital was Pounds Sterling 3.75 million for the period (2006: Pounds Sterling 3.77 million). Included in this amount are interest payments to convertible note holders of Pounds Sterling 0.38 million for the period 1 July 2006 to 30 June 2007 and Gateshead move costs of Pounds Sterling 197,000.

Movements in stocks, work in progress and debtors and creditors produced a net cash outflow of Pounds Sterling 1.26 million during the period principally as a result of increased stock requirements (2006: outflow of Pounds Sterling 0.22 million).

Tax credits

During the nine months the company received research and development tax credit receipts of Pounds Sterling 0.31 million (2006: Pounds Sterling 0.12 million).

Investing activities

Purchases of long term tangible assets amounted to Pounds Sterling 0.60 million (2006: Pounds Sterling 0.12 million) and principally relate to the new Power Electronics facility in Gateshead. Cash inflows related to movements in restricted funds of Pounds Sterling 0.15 million (2006: Pounds Sterling nil) are the net result of the cancellation of performance bonds previously provided of Pounds Sterling 250,000 and Pounds Sterling 515,000, and the creation of new bonds totaling Pounds Sterling 615,000.

Cash flow from financing activities

Cash inflow from financing in the nine months of Pounds Sterling 3.80 million relates to net receipts of Pounds Sterling 3.88 million from an institutional placing of Pounds Sterling 4.0 million (gross) completed in June 2007, and the payment of final expenses of Pounds Sterling 7,000 in relation to the fundraising in December 2006, when the Company completed a Pounds Sterling 6.0 million (gross) financing agreement with institutional investors.

Overall cash flow for the nine months

Overall the cash outflow for the period was Pounds Sterling 1.09 million. This compares with a cash outflow of Pounds Sterling 4.07 million in 2006.

BALANCE SHEET AS AT 30 SEPTEMBER 2007

The Company ended the period with an unrestricted cash balance of Pounds Sterling 5.58 million compared with Pounds Sterling 6.67 million at 31 December 2006. Substantially all of the Company's cash balances are denominated in Sterling.

In addition the Company had restricted cash amounts of Pounds Sterling 1.35 million relating to performance bonds (2006: Pounds Sterling 1.50 million).

Long term assets excluding restricted cash have decreased from Pounds Sterling 3.69 million at 31 December 2006 to Pounds Sterling 3.16 million at 30 September 2007, after depreciation charges of Pounds Sterling 0.66 million and additions in plant and equipment of Pounds Sterling 0.44.

Long term liabilities have decreased to Pounds Sterling 1.89 million at 30 September 2007 compared to Pounds Sterling 6.13 million at 31 December 2006, reflecting the reduction in Loan Notes following the redemption of Pounds Sterling 4.5 million notes in January 2007.

Net working capital at 30 September 2007, excluding cash balances, was Pounds Sterling 1.89 million, compared with Pounds Sterling 0.85 million as at 31 December 2006.

As at 14 November 2007, the Company had 318,571,062 common shares issued and 115,000,000 A shares. As at that date there were 31,494,650 outstanding share options and 10,500,000 outstanding warrants.

REVIEW OF THIRD QUARTER TO 30 SEPTEMBER 2007

Revenue

Production revenue in the quarter ended 30 September 2007 was Pounds Sterling 2.70 million compared with Pounds Sterling 1.47 million in 2006 and comprised



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Power electronics 2,616 1,380
Electrical machines 84 90

------- --------
2,700 1,470
------- --------
------- --------


The Power Electronics division has again demonstrated strong turnover growth as a result of increased volumes on established programmes.

Spares and service revenues were Pounds Sterling 0.10 million for the quarter (2006: Pounds Sterling 0.30m).

In the Electrical Machines division revenue for the quarter related principally to the Industrial Motor and Drive contract.

Development income

Development income in the quarter was Pounds Sterling 0.65 million compared with Pounds Sterling 0.29 million in 2006.



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Development income 647 285
------- --------
------- --------


Production costs

The cost of product revenues in the quarter amounted to Pounds Sterling 1.91 million (2006: Pounds Sterling 1.13 million) and reflects the growth in production revenue.



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Power electronics 1,663 842
Electrical machines 249 288

------- --------
1,912 1,130
------- --------
------- --------


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

Included in production costs for the quarter are stock compensation charges on options awarded of Pounds Sterling 28,000 (2006: Pounds Sterling 18,000).

Research and product development

Research and product development expenditure in the quarter was Pounds Sterling 1.74 million compared with Pounds Sterling 0.92 million in 2006, and comprised



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Research and product
development expenditure 1,736 927
Accrued R&D tax credits - (10)

------- --------
Total expenditure 1,736 917
------- --------
------- --------



Included in research and product development expenditure for the quarter are stock compensation charges on options awarded of Pounds Sterling 97,000 (2006: Pounds Sterling 66,000).

No R&D tax credits were accrued in the quarter as the majority of the Group's development resource moved on to commercial programmes.

General and administrative

General and administrative costs of Pounds Sterling 1.08 million (2006: Pounds Sterling 0.81 million) consist mainly of staff costs and facilities costs. Included in this category are Gateshead move costs of Pounds Sterling 0.20 million which have not been capitalized. Also included are stock compensation charges on options awarded of Pounds Sterling 43,000 (2006: Pounds Sterling 54,000).

Amortisation

Amortisation was Pounds Sterling 0.22 million compared with Pounds Sterling 0.23 million in 2006.

Interest income

Interest income for the three months was Pounds Sterling 0.11 million compared with Pounds Sterling 0.06 million in 2006.

Interest expense and finance charges

Interest expense and finance charges arise from the issue of convertible bonds in July 2003 and March 2005, and the redemption of bonds and issue of shares in January 2007, and comprised



2007 2006
Pounds Sterling '000 Pounds Sterling '000

Finance charges 3 66
Interest payable 29 132
Amortisation of deferred
finance charges - 40
Debt accretion 10 97

------- --------
42 335
------- --------
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CASH FLOWS FOR THE THREE MONTHS

Cash outflow from operating activities

Operating cash outflow before movements in working capital was Pounds Sterling 1.19 million for the period (2006: Pounds Sterling 1.37 million).

Movements in stocks, work in progress and debtors and creditors produced a net cash outflow of Pounds Sterling 0.84 million during the period (2006: outflow of Pounds Sterling 0.26 million).

Investing activities

Purchases of long term tangible assets amounted to Pounds Sterling 0.12 million (2006: Pounds Sterling 0.15 million) and principally relate to the new Power Electronics facility in Gateshead.

Cash flow from financing activities

Cash outflow from financing in the three months relates to settlement of final fees from an institutional placing of Pounds Sterling 4,000,000 (gross) completed in June 2007.

Overall cash flow for the three months

Overall the cash outflow for the period was Pounds Sterling 2.11 million. This compares with a cash outflow of Pounds Sterling 1.66 million in 2006.



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

Notes Nine months ended 30 September
2007 2006
Pounds Pounds
Sterling '000 Sterling '000
(unaudited) (unaudited)

Statement of Net Loss

Revenue 2,3 7,075 3,631
Development income 2 1,017 577
------------------------
8,092 4,208
Expenses
Production costs 5,320 2,802
Research and product
development 4 3,902 2,610
General and administrative 3,026 2,384
Amortisation 660 892
------------------------
12,908 8,688

Loss before interest and
finance charges (4,816) (4,480)

Interest income 269 206
Interest expense and
finance charges 5 (267) (898)
Foreign exchange losses (7) (22)
------------------------
(5) (714)
------------------------
Net loss for the period (4,821) (5,194)
------------------------
------------------------

Statement of Comprehensive Loss

Net loss (4,821) (5,194)
Exchange adjustment on consolidation (16) 59
------------------------
Comprehensive Loss for the period (4,837) (5,135)
------------------------
------------------------

Statement of Loss Deficit

Loss deficit, beginning of period (53,636) (44,718)
Net loss for the period (4,821) (5,194)
Adjustment on adoption
of CICA3855 1 (140) -
Equity adjustment on issue
of shares 11 (2,512) -
------------------------
Loss deficit, end of period (61,109) (49,912)
------------------------
------------------------

Loss per share - basic 7 (1.6) p (2.7) p
Loss per share - diluted 7 (1.6) p (2.7) p



TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF NET LOSS
UNAUDITED

Notes Three months ended 30 September
2007 2006
Pounds Pounds
Sterling '000 Sterling '000
(unaudited) (unaudited)

Statement of Net Loss

Revenue 2,3 2,700 1,470
Development income 2 647 285
------------------------
3,347 1,755
Expenses
Production costs 1,912 1,130
Research and product development 4 1,736 917
General and administrative 1,083 814
Amortisation 218 230
------------------------
4,949 3,091

Loss before interest and
finance charges (1,602) (1,336)

Interest income 106 59
Interest expense and
finance charges 5 (42) (335)
Foreign exchange losses (20) (11)
------------------------
44 (287)
------------------------
Net loss for the period (1,558) (1,623)
------------------------
------------------------

Statement of Comprehensive Loss

Net loss (1,558) (1,623)
Exchange adjustment on consolidation (108) (2)
------------------------
Comprehensive loss for the period (1,666) (1,625)
------------------------
------------------------

Loss per share - basic 7 (0.5) p (0.8) p
Loss per share - diluted 7 (0.5) p (0.8) p



TURBO POWER SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED

As at As at
Notes 30 September 31 December
2007 2006
Pounds Pounds
Sterling '000 Sterling '000
(unaudited) (unaudited)

Current assets
Cash and cash equivalents 5,579 6,669
Restricted cash 8 - 765
Trade and other receivables 2,508 1,544
Stock and work in progress 2,248 1,230
Prepayments 323 419
Tax recoverable 451 718
------------------------
11,109 11,345
------------------------

Long-term assets
Restricted cash 8 1,349 731
Prepayments 89 254
Investments 9 35 31
Intangible assets 9 55 77
Goodwill 9 820 820
Deferred finance charges 9 - 145
Tangible assets 9 2,159 2,361
------------------------
4,507 4,419
------------------------
15,616 15,764
------------------------
------------------------

Liabilities and shareholders' equity
Creditors: amounts falling due within
one year
Trade and other payables 3,284 3,109
Deferred income 441 206
------------------------
3,725 3,315
------------------------

Creditors: amounts falling due after
more than one year
Warranty provision 303 303
Convertible notes 1,591 5,827
------------------------
1,894 6,130
------------------------

Capital and reserves
Share capital and other equity
instruments 10 71,190 60,023
Accumulated other comprehensive
income (84) (68)
Loss deficit (61,109) (53,636)
------------------------
Shareholders' funds 9,997 6,319
------------------------
15,616 15,764
------------------------
------------------------



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

Common A Accumulated
Share Ordinary Other other Loss Total
capital capital equity income deficit Equity
Pounds Pounds Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling Sterling Sterling
'000 '000 '000 '000 '000 '000

Balance at 1
January 2006 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)
-----------------------------------------------------------

Balance at 31
December 2006 51,919 6,123 1,981 (68) (53,636) 6,319
Loss for
the period (4,821) (4,821)
Exchange loss (16) (16)
Stock
compensation 540 540
Conversion
to shares 7,379 (638) (2,512) 4,229
Issue of shares 4,017 4,017
Fundraising
costs (131) (131)
Charge arising
on adoption
of CICA
Section 3855
- Financial
Instruments
- Recognition
and Measurement (140) (140)
-----------------------------------------------------------
Balance at 30
September 2007 55,805 13,502 1,883 (84) (61,109) 9,997
-----------------------------------------------------------
-----------------------------------------------------------



TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

Nine months ended 30 September
Notes 2007 2006
Pounds Pounds
Sterling '000 Sterling '000
(unaudited) (unaudited)

Net loss from operations (4,821) (5,194)
Amortisation 805 892
Accretion of debt 62 291
Stock compensation charges 540 373
Foreign currency instrument loss 7 -
Movement in net interest accrual (340) (134)
------------------------
(3,747) (3,772)

Cash outflow before movements in
working capital
Decrease/(increase) in debtors (436) (878)
Decrease/(increase) in stock (1,018) (524)
Increase/(decrease) in creditors 199 1,185
------------------------

Net cash outflow from operating
activities before tax (5,002) (3,989)
------------------------
Tax credits 312 121
------------------------

Net cash outflow from operating
activities after tax (4,690) (3,868)
------------------------

Investing activities
Purchase of long-term assets (596) (198)
Capital grant received 250 -
Movement in restricted funds 147 -
------------------------
Cash outflow from investing activities (199) (198)
------------------------

Financing activities
Equity placing 11 4,001 -
Net expense from equity placing 11 (202) -
------------------------
Cash inflow from financing activities 3,799 -
------------------------
Increase/(decrease) in cash in the period (1,090) (4,066)
------------------------
------------------------

Cash and cash equivalents:
Beginning of period 6,669 6,525
------------------------
End of period 5,579 2,459
------------------------
------------------------



TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

Three months ended 30 September
Notes 2007 2006
Pounds Pounds
Sterling '000 Sterling '000
(unaudited) (unaudited)

Net loss from operations (1,558) (1,623)
Amortisation 234 149
Accretion of debt 10 97
Stock compensation charges 168 138
Foreign currency instrument loss/(gain) (9) -
Movement in net interest accrual (33) (134)
------------------------
(1,188) (1,373)

Cash outflow before movements in
working capital
Decrease/(increase) in debtors (352) (749)
Decrease/(increase) in stock (73) (110)
Increase/(decrease) in creditors (411) 602
------------------------

Net cash outflow from operating
activities before tax (2,024) (1,630)
------------------------
Tax credits - 121
------------------------
Net cash outflow from operating
activities after tax (2,024) (1,509)
------------------------

Investing activities
Purchase of long-term assets (123) (150)
Capital grant received 250 -
Movement in restricted funds (208) -
------------------------
Cash outflow from investing activities (81) (150)
------------------------

Financing activities
Equity placing 11 - -
Net expense from equity placing 11 (6) -
------------------------
Cash outflow from financing activities (6) -
------------------------
Increase/(decrease) in cash in the period (2,111) (1,659)
------------------------
------------------------

Cash and cash equivalents:
Beginning of period 7,690 4,118
------------------------
End of period 5,579 2,459
------------------------
------------------------


TURBO POWER SYSTEMS INC.

NINE MONTHS ENDED 30 SEPTEMBER 2007

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 (Canadian GAAP). The Company provides a reconciliation from Canadian GAAP to International Financial Reporting Standards in Note 21 of the Consolidated Financial Statements for the year ended 31 December 2006. 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 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 2007.

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 2006. These interim financial statements are prepared in accordance with the requirements of Canadian GAAP for interim financial statements as recommended by CICA Handbook section 1751 "Interim Financial Statements". These consolidated financial statements follow the same accounting policies and methods of application as for the Company's 31 December 2006 financial statements, except as described below:

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 4.82 million for the nine month period ended 30 September 2007 and has a cumulative deficit of Pounds Sterling 61.11 million as at 30 September 2007. 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.

On January 1 the Company adopted new CICA accounting standards comprising CICA Handbook Section 3855 "Financial Instruments - Recognition and Measurement", Section 3861 "Financial Instruments - Disclosure and Presentation", Section 1530 "Comprehensive Income", and Section 3251, "Equity". As a result of adopting these requirements, a new statement has been added to report movements in Comprehensive Loss, after Net Loss, and consists of the gains and losses from the translation of the Company's self-sustaining foreign operations. Accumulated other income is presented as a separate section within the Statement of Changes in Equity. In determining the fair value of financial instruments, as required by Section 3855, the carrying value of the Convertible debt was decreased by Pounds Sterling 140,000, and the net value of the Deferred Finance Charges was offset against the Convertible debt balance, resulting in the elimination of the deferred finance charge asset, and a reduction in the Convertible debt balance of Pounds Sterling 145,000.

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 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 Power Electrical
Pounds Sterling '000 electronics machines Total
2007 2006 2007 2006 2007 2006
Nine months ended
30 September
Revenue 6,855 3,459 220 172 7,075 3,631
Development income 1,017 577 - - 1,017 577
Interest income 134 103 135 103 269 206
Interest expense (43) (210) (44) (210) (87) (420)
Amortisation (104) (104) (556) (788) (660) (892)
Net loss (1,182) (1,240) (3,639) (3,954) (4,821) (5,194)
Capital expenditure 408 87 28 30 436 117


Three months ended
30 September
Revenue 2,616 1,380 84 90 2,700 1,470
Development income 647 285 - - 647 285
Interest income 53 29 53 30 106 59
Interest expense (15) (163) (14) (163) (29) (326)
Amortisation (34) (34) (184) (196) (218) (230)
Net loss (305) (261) (1,253) (1,362) (1,558) (1,623)
Capital expenditure 114 48 9 6 123 54



As at Sep 2007 Dec 2006 Sep 2007 Dec 2006 Sep 2007 Dec 2006
Total assets 6,372 3,868 9,244 11,896 15,616 15,764
Total
liabilities 2,474 2,159 3,145 7,286 5,619 9,445


3 Significant Customers

During the nine month period ended 30 September 2007, 54% of the Company's revenue was from two customers (2006: 41% from three customers). During the three months to 30 September 2007, 59% of the Company's revenue was from two customer (2006: 28% from two customers).

4 Research and product development

Research and product development expenditure incurred during the period comprised:



Nine months ended Three months ended
30 September 30 September

2007 2006 2007 2006
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Research and product
development cost 3,902 2,660 1,736 927
Accrued tax credits - (50) - (10)
---------------------------------------
Total expenditure 3,902 2,610 1,736 917
---------------------------------------
---------------------------------------


Total accrued tax credits receivable at 30 September 2007 amounted to Pounds Sterling 180,000 (31 December 2006: Pounds Sterling 490,000).



5 Interest expense and finance charges

Nine months ended Three months ended
30 September 30 September
2007 2006 2007 2006
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Finance charges 118 66 3 66
Interest payable 87 420 29 132
Amortisation of deferred
finance charges - 121 - 40
Debt accretion 62 291 10 97
---------------------------------------
267 898 42 335
---------------------------------------
---------------------------------------


6 Financial Instruments

Certain of the Company's business transactions occur in currencies other than Sterling. The Company had a foreign exchange average rate option contract in place during the nine months ended 30 September 2007, and during the nine months ended 30 September 2006, to reduce exposure to fluctuations in foreign exchange rates on remittances from customers denominated in U.S. Dollars.

The Company holds 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 first nine months a loss of Pounds Sterling 7,000 was realised on this option (2006: loss Pounds Sterling 57,000).

As at 30 September 2007 the unrealised gain from the contract included within prepayments was Pounds Sterling 37,000 (2006: Pounds Sterling 23,000).

7 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 nine months was 292,753,630 (2006: 191,165,301). The loss for the nine months ended 30 September 2007 was Pounds Sterling 4,821,000 (2006: Pounds Sterling 5,194,000).The weighted average number of shares outstanding in the three months ended 30 September 2007 was 318,571,062 (2006: 191,494,592). The loss for the three months ended 30 September 2007 was Pounds Sterling 1,558,000 (2006: Pounds Sterling 1,623,000)

Anti-dilutive potential securities outstanding not included in the loss per common share calculation at 30 September 2007 total 171,902,983 (2006: 111,012,749)

8 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 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.

In March 2007 the CLRV contract was cancelled and the cash bond of Pounds Sterling 515,000 in respect of this programme was cancelled and the cash became unrestricted.

During March 2007 the Company committed cash bonds totalling Pounds Sterling 410,000 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.

The Company has also provided a property lease guarantee bond which is held in escrow and totals Pounds Sterling 231,000.

At 30 September 2007 cash subject to restrictions totalled Pounds Sterling 1,349,000 (December 2006: Pounds Sterling 1,496,000).



9 Long - term assets


Cost Impairment Amortisation Net book
value
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
At 30 September 2007:
Investments 108 73 - 35
Intangible assets 4,080 1,663 2,362 55
Goodwill 863 43 - 820
Tangible assets 8,780 - 6,621 2,159
-------- -------- -------- --------
Total long term assets 13,831 1,779 8,983 3,069
-------- -------- -------- --------
-------- -------- -------- --------
At 31 December 2006:
Investments 104 73 - 31
Intangible assets 4,074 1,663 2,334 77
Goodwill 863 43 - 820
Deferred finance 474 - 329 145
Tangible assets 8,350 - 5,989 2,361
-------- -------- -------- --------
Total long term assets 13,865 1,779 8,652 3,434
-------- -------- -------- --------
-------- -------- -------- --------


10 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 32,450,000 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
------------- -------- ------------ -------
------------- -------- ------------ -------
Redemption of convertible
notes - - 58,750,000 7,379
Issue of common shares, net
of share issue costs 44,626,470 3,886 - -
------------- -------- ------------ -------
At 30 September 2007 318,571,062 55,805 115,000,000 13,502
------------- -------- ------------ -------
------------- -------- ------------ -------


No options or warrants were exercised during the nine months ended 30 September 2007.

On 7 June 2007 the Company completed a Pounds Sterling 4,000,000 placing agreement with institutional investors for 44,450,000 Common shares of no par value in Turbo Power Systems Inc., at a price of Pounds Sterling 0.09 per placing share.

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 and an increase in retained deficit of Pounds Sterling 2,512,000.

12 Stock options, warrants and compensation expense

The number of options and warrants outstanding as at 30 September 2007, and the movement during the nine months then ended, are as follows:



Options Warrants
Number Number

Outstanding at 1 January 2007 21,567,281 7,000,000
Cancelled (1,832,631) -
Issued 11,760,000 3,500,000
------------ ------------
Outstanding at 30 September 2007 31,494,650 10,500,000
------------ ------------
------------ ------------


The stock based compensation expense for the nine month period ended 30 September 2007, included in Production costs was Pounds Sterling 80,000 (2006: Pounds Sterling 34,000), in Research and product development was Pounds Sterling 290,000 (2006: Pounds Sterling 188,000), and in General and administrative costs was Pounds Sterling 170,000 (2006: Pounds Sterling 151,000). On 6 January 2007 the Company issued 3,500,000 warrants as part of its financing agreement with institutional investors (see Note 11). The fair value of the stock options is the estimated fair value at grant date. The fair value is calculated using the Black-Scholes option-pricing model. In calculating the fair values of the options granted during the quarter ended 31 March 2007 a dividend yield of Nil, expected volatility of 65%, a risk free interest rate of 5.0% and an expected option life of 5 years have been assumed, and for options granted during the quarter ended 30 June 2007 a dividend yield of Nil, expected volatility of 75%, a risk free interest rate of 5.0% and an expected option life of 5 years have been assumed. The fair value of the stock options granted during the quarters ended 31 March 2007 and 30 June 2007 was Pounds Sterling 0.06 per share.

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 Contingent loss

The Company is currently working on two aerospace contracts which could result in future losses. Since negotiations are ongoing on the contracts in question a reliable estimate of any contingent liability can not be made at this time and no amount has been accrued.

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

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)
March 2007 2,033 (1,387) (0.5)
June 2007 2,342 (1,876) (0.7)
September 2007 2,700 (1,558) (0.5)

Contact Information

  • Turbo Power Systems
    Michael Hunt
    Chief Executive Officer
    +44 (0)20 8564 4460
    or
    Turbo Power Systems
    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