3rd Quarter Results

31 OCTOBER 2011

TURBO POWER SYSTEMS INC. ("TPS" or the "Company") ANNOUNCES RESULTS FOR

THE THIRD QUARTER AND NINE MONTHS ENDED 30 SEPTEMBER 2011

Key Features:

·; Order intake in the third quarter (Q3) of £6.36 million (2010: £1.34 million) and in the nine months ended 30 September (YTD) of £21.36 million (2010: £5.69 million) with a strong pipeline of prospective orders

·; Total revenue in Q3 increased by 143% to £4.60 million (2010: £1.89 million) and YTD by 35% to £9.97 million (2010: £7.39million)

·; Production revenue in Q3 increased by 116% to £3.87 million (2010: £1.79 million) and YTD by 35% to £8.31 million (2010: £6.14 million)

·; Board strategy to invest in further improving TPS's development and operational capabilities has continued:

§ Research and product development expenditure in Q3 increased 24% to £0.89 million (2010: £0.72 million) and YTD by 44% to £2.67 million (2010: £1.86 million)

§ Headcount increased in the three months to September 2011 by 21% and in the nine months to 30 September 2011 by 55% to 164; general and administrative costs YTD rose 42% to £3.55 million (2010: £2.50 million)

·; EBITDA loss for Q3 of £0.69 million (2010: £0.77 million) and YTD £3.29 million (2010: £1.15 million)

·; Net loss in Q3 £0.94 million (2010: £0.99 million) and YTD £4.00 million (2010: £ 4.14 million

·; Net cash outflow from operating activities YTD of £5.17 million (2010: £3.03 million)

·; Continuing support by TAO Sustainable Power Solutions (UK) Limited, TPS's parent undertaking, evidenced by an increase in their loan to 30 September 2011: £7.80 million (31 Dec 2010: £1.90 million)

·; Appointment of Carlos Neves as Chief Financial Officer in September

Peter Brown, CEO, said:

In the past quarter we have made significant progress in the development of the growth opportunities we have identified in all of our markets. The strategies that the business has implemented are designed to improve the long term financial performance of the business. Focus will remain on significant, funded Research and Development projects.

During the quarter we have continued to be successful in growing the order book. Our Power Electronics business continues to flourish and Electrical Machines is well placed to start to take advantage of the expanding markets in which we operate. I anticipate order intake in Q4 to be similar to that achieved in Q3, with a good mix of production and development contracts.

We remain a technology-led company, and have continued to strengthen the technical team to ensure we support relationships with science-based customers who have demanding applications for our technologies. We have also continued to invest in the infrastructure of the business, with particular emphasis on quality and project management. Investing in these key competencies will help us in achieving sustainable controlled growth.

At 30 September we employed 164 staff with further recruitment planned for the fourth quarter.

The growth in headcount in key areas of the business has enabled increased investment in research and product development which reached £2.67 million at the end of September. The business will continue to invest in technologies that are applicable to markets that show significant future growth opportunities. Numerous development opportunities have been identified spanning one, two and three year periods with a good mix of customer funded and self funded projects.

During the year, the business was successful in its bid for funding through the prestigious, UK Government-backed Regional Growth Fund. In order to start drawing down on this award, TPS will undergo due diligence of the plans that were submitted along with the application. Due to the continued growth of the Company to date, the proportion of the grant to be received for 2011 has increased. The first submission for 2011 will be in January 2012.

We announced the appointment of Carlos Neves as Chief Financial Officer in September. I look forward to working with him and believe that his strategic and analytical strengths will make a strong contribution as we continue to refocus and build the company.

The business is being repositioned for growth and has a strong order book to deliver. In an exciting and challenging environment, focus will remain on developing products and technology, with the success of the business dependent on excellence in execution and delivering on our commitments to customers. I am confident that the long term prospects for the business are positive.

For further information, please contact:

NOTES TO EDITORS

Company Website: www.turbopowersystems.com

Turbo Power Systems Inc (TSX:TPS.TO AIM:TPS.L) is a leading UK based designer and manufacturer of innovative power solutions. TPS'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 third party customers include blue chip companies such as Bombardier Transportation, McQuay International and Eaton Aerospace. The Company also has commercial contracts with its ultimate parent company, Vale Soluções em Energia S.A. ("VSE"), the Brazilian energy solutions company, and with Tao Sustainable Power Solutions (UK) Ltd ("TAO UK"), which is a VSE wholly owned subsidiary and TPS's parent undertaking.

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-IFRS 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, amortization, 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 amortization. EBITDA is not a recognised measure under IFRS and, accordingly, should not be construed as an alternative to operating income or net loss determined in accordance with IFRS 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.

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

This review has been prepared as at 28 October 2011.

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.

·; power electronics products, including variable frequency drives and inverters, which combine with the Company's electrical machines to create an integrated solution, and a range of rugged power conversion products for rail and industrial applications.

Strategic Direction

We remain a technology-led company. During the first nine months of 2011 we have continued to strengthen the technical team to ensure we support relationships with science-based customers who have demanding applications for our technologies.

Carlos Neves was appointed as Chief Financial Officer in September. Carlos has strategic and analytical strengths in developing and implementing growth plans to ensure that the Company remains focused on financial aims.

The business continues to pursue applications for its leading technologies and to leverage its relationship with TAO UK, TPS's parent undertaking, and its ultimate parent company, VSE, which is headquartered in Brazil.

The rapidly developing market place for advanced technologies in Brazil offers many exciting opportunities and, in the coming year, we expect to see tangible results from the Agency Agreement signed with VSE, which was announced in December 2010. Equally, there are active opportunities on almost every continent and we see clear signs that confidence is returning to our market places. We have seen an increasing number of system-based enquiries and contract wins in the period. This strengthens our belief that the marketplace is starting to recognize the value of our technology.

Operationally, our emphasis upon developing Integrated Systems demands that our two sites at Gateshead and Heathrow will work more closely together, functioning as one engineering team. We also recognize that our customer base is increasingly keen to secure regional manufacture capability outside the UK. We are taking steps to seek to ensure that TPS is commercially and operationally capable of responding positively.

Current Operating Climate

The rail and industrial sectors have shown strong signs of recovery, with good order intake achieved in 2011, and continued good prospects for our laser power suppliers and motors/drives for other industrial applications.

In the defence sector we have identified specialist pockets of growth potential in areas where TPS technology can be applied. We have been able to initiate contact with potential future partners and will continue to investigate this market further and hope to see increased activity in this sector.

Current Programmes

The Company operates with two reportable business segments.

The Power Electronics Division is involved in the development and manufacture of electrical power supply and control systems, encompassing rail and aerospace transport activities, power conditioning within the renewable energy area and industrial power supplies.

The Electrical Machines Division is involved in the development and commercialization of high speed electrical machines which are currently marketed within the renewable energy, industrial and defence markets.

As noted in the Strategic Direction above, the emphasis of the Board is moving to developing integrated solutions. This will mean that over time the divisional structure of the Company will be replaced by reporting as a single unit.

·; Transport

o Rail

The rate of delivery continues to grow on the major programmes (Bombardier Chicago Transit Authority and Bombardier Toronto). The team continues to focus upon the recently awarded Bombardier Monorail APU project. The programme to develop the Auxiliary Power solution for Bombardier Systems' new Innovia ART Vehicle platform continues to make progress, whilst the business is also engaged in the overhaul and support of the CL165 vehicle Auxiliary Power solution for Chiltern Rail.

o Aerospace

The Jettison Fuel Pump motor drives for Eaton Aerospace continue to be delivered in line with our customer's call-off rate.

·; Energy

The development work on the 1.2MW High Speed Generator & associated Power Electronics package has enabled a follow on programme with VSE to develop a 0.8MW demonstrator motor for Brazil. Revenue expectations from this programme remain as previously expected.

·; Industrial

o Laser Power Supplies

Demand from our customer has continued during 2011 and, as reported previously, will surpass the production rates of earlier years. The product range has also been streamlined and improved to support the needs of our customer's business.

o Industrial Motors and Drives 

An order for 175 systems from our Industrial Motors and Drives OEM (McQuay International) was awarded this year. These units are for use in McQuay International's recently launched Magnitude WME chiller.

Following the re-start of the manufacturing of the S2M Laser Blower products, there has been a continuing demand for this product throughout the year, with indication that there will be continuing demand for these units during the rest of 2011.

·; Defence

o 1MW High-Speed Generator

System trials of our high-speed machine are nearing completion. We expect that the overall system will be subject to rigorous field trails during Q4. As and when the trials are successful, we have indications that additional units and/or further products are likely to be required.

Financial Performance

Transition to International Financial Reporting Standards ("IFRS")

In February 2008, the Canadian Accounting Standards Board announced the adoption of IFRS for publicly accountable enterprises in Canada effective 1 January, 2011. The accompanying unaudited condensed consolidated interim financial statements for the three months and the nine months ended 30 September 2011 are TPS's third quarterly financial statements prepared under IFRS. The significant accounting policies adopted under IFRS were included in Note 3 to the unaudited condensed consolidated interim financial statements for the three months ended 31 March 2011 and the reconciliations and descriptions of the effect of transitioning from Canadian GAAP to IFRS were included in Note 6. In accordance with the transition rules, the Company has retroactively applied IFRS to the comparative data and has restated the 2010 comparative data throughout this document to reflect the adoption of IFRS, with effect from 1 January 2010 (Transition Date).

Quarterly Financial performance

Total revenues in the quarter ended 30 September 2011 ('Q3') of £4.6 million were 143% higher than in the same quarter in the previous year, 2010: £1.89 million, primarily due to increased production volumes.

The Board continued to implement its strategy of seeking to further improve the Company's development and operational capabilities.

Research and product development costs increased by 24% to £0.89 million (2010: £0.72 million), in line with the Board's strategy and the commercial development contracts in place.

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, were up by 82% to £1.31 million (2010: £0.72 million). The major element in the increase of £0.59 million was higher staff costs, as a result of increased headcount.

The Company recorded a loss before interest, tax, depreciation, amortization, and stock compensation for the quarter of £0.69 million (2010: £0.76 million), primarily as a result of increased cost of sales and general and administration expenditure.

The Company also recorded an operating cash outflow before working capital movements of £3.29 million for the year to date (2010: £1.15 million). After adjusting for changes in working capital items and purchases of property, plant and equipment, the Company suffered an overall cash outflow of £5.42 million (2010: £3.09 million).

The Company ended the quarter with an unrestricted cash of £1.28 million and held restricted cash of £0.34 million, the majority of which is associated with a rent deposit. During the period the Company obtained the release of restricted cash held against performance bonds on contracts. The performance bonds with the customer are still in place but security for the bank, if the Company is unable to satisfy the bond, has been provided by VSE the parent Company of TAO UK.

In Q3 the Company undertook significant transactions with related parties. In September 2011 the Company negotiated a loan facility from TAO UK, its parent undertaking, which provided £1.5 million to support working capital requirements bearing interest at 6% and being repayable upon request after 2 January 2012.

Going Concern

These condensed consolidated interim financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 30 September 2011 the Company had net operating cash outflows. Therefore the Company may require additional funding which, if not raised, may result in the curtailment of activities. The Company has a cumulative deficit of £84.09 million as at 30 September 2011.

At 30 September 2011 the Company had an unrestricted cash balance of £1.28 million and held restricted cash of £0.34 million, the majority of which is associated with rent deposit. If the Company is unable to generate positive cash flow from operations or secure additional debt or equity financing these conditions and events would cast substantial doubt regarding the "going concern" assumption and, accordingly, the use of accounting principles applicable to a going concern. These condensed consolidated interim financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, which would be necessary if the "going concern" assumption were not appropriate.

On 5 September 2011 the Company announced that it had extended the loan financing agreement with TAO UK, its parent undertaking, to provide the Company with access to a further £1.5 million of debt financing to support working capital requirements.

The Directors regularly review and consider the current and forecast activities of the Company in order to satisfy themselves as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure and forecast cash requirements and balances. Based on these evaluations the Directors consider that the Company is able to continue as a going concern.

Summary of Quarterly Results

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

Note: Revenue in the table above excludes development income. General and administrative includes depreciation, amortisation and foreign exchange gains/losses.

Production revenues decreased through 2010 as 2009 production programmes finished. The weak 2009 economy resulted in lower than normal order activity resulting in a declining customer production requirement through the following year. Production revenues have been increasing significantly in 2011 in line with the increasing order intake.

Research and development expenditure has begun to increase compared with previous years reflecting the commencement of development activities related to opportunities presented by the investment from TAO UK, which became TPS's parent undertaking, and the commercial development contract with VSE, which is TAO UK's parent.

Subsequent to the controlling investment made by TAO UK in June 2010, as from 1 January 2010 the Company no longer qualifies for R&D tax credit cash refunds under the UK SME R&D tax credit regime, which would previously have been used to reduce the Company's total research and development expenditure. Accordingly, in the year 2010 as a whole no tax credits were offset against such expenditure.

In Q2 2011 the Company agreed its claim for the UK SME R&D tax credit for 2009, receiving £580,000 and booking a one-time benefit of £230,000 in 2011.

The quarterly pattern of research and development expenditure, with reductions for R&D tax credits in the table below shown in brackets, was:

Reconciliation of net loss to EBITDA result

Copies of Quarterly and Annual Results

The Company's full Financial Results and Managements' Discussion and Analysis for 2010, together with the Second Quarter 2011 Financial Results and Managements' Discussion and Analysis are available on www.sedar.com.

Copies of the quarterly and annual results are available from the Company's office at Unit 3 Summit Centre, Hatch Lane, West Drayton, Middlesex UB7 0LJ, United Kingdom or available to view from the Company's website at www.turbopowersystems.com.

Review of the quarter ended 30 September 2011

Production revenue

Production revenue in the quarter ended 30 September 2011 was £3.87 million (2010: £1.79 million.)

Revenue for the power electronics division has increased mainly because of anticipated increase in unit requirements for major programmes with Bombardier.

Development income

Development income in the quarter was £0.73 (2010: £0.10 million).

Development income has increased as work commences on the new contract wins in H1 2011.

Cost of Sales

The cost of sales in the quarter amounted to £3.09 million (2010: £1.35 million). 

Production costs include certain facilities costs attributable to the manufacturing operation. The revenue increase included revenue from contracts with higher cost of sales.

Research and product development

Research and product development expenditure in the quarter was £0.89 million, (2010:£0.72 million).

General and administrative costs

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, were up by 82% from £0.72 million in 2010 to £1.31 million in 2011.

The major element in the increase of £0.59 million was higher staff costs, as a result of increased headcount.

Finance income

Finance income in both 2010 and 2011 was insignificant due to low cash balances maintained.

Finance expense

Finance expense in 2011 arises from the loans from TAO UK and comprises:

Following the settlement in June 2010 of the outstanding loan notes no finance charges were incurred in the quarter ended 30 September 2010.

Review of the nine months ended 30 September 2011

Production revenue

Production revenue in the nine months ended 30 September 2011 was £8.31 million (2010: £6.14 million).

Revenues at Power Electronics increased as the new major programmes with Bombardier for the Chicago Transit Authority and Toronto Rocket increase in delivery rate. Electrical Machines decreased compared with 2010 due to the completion of a major contract.

Development income

Development income in the nine months was £1.66 million (2010: £1.26 million).

Cost of Sales

The cost of sales in the nine months amounted to £7.07 million (2010: £4.22 million). 

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

Research and product development

Research and product development expenditure in the nine months was £2.67 million. (2010: £1.86 million).

Subsequent to the controlling investment made by TAO UK in June 2010,as from 1 January 2010 the Company no longer qualifies for R&D tax credit cash refunds under the UK SME R&D tax credit regime, which would previously have been used to reduce the Company's total research and development expenditure.

In June 2011 the Company agreed its claim for the UK SME R&D tax credit in respect of 2009, receiving a cash payment of £580,000 and recording in the income statement a one-time benefit of £230,000.

General and administrative costs

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, were up by 42% from £2.50 million in 2010 to £3.55 million in 2011. The major element in the increase of £1.05 million was higher staff costs, partly as a result of increased headcount and a management restructuring cost of £0.22 million.

Finance income

Finance income in both 2011 and 2010 was insignificant due to low cash balances maintained.

Finance expense

Finance expenses arises from the loans from TAO UK (2010: from the issue of convertible bonds in March 2005 and June and August 2008, and risk premium payment) and comprise:

Cash flows for the nine months ended 30 September 2011

Cash outflow from operating activities

Operating cash outflow before movements in working capital was £3.29 million for the nine months (2010: £1.15 million)

Movements in working capital produced a net cash outflow of £1.88 million during the nine months (2010: £1.30 million).

Investing activities

Cash outflows from capital investments in the nine months were £0.26 million (2010: £0.05 million).

Financing activities

Cash inflows in the period of £5.90 million relate to the increase in the loan from TAO UK (2010: £1.30 million, relates to the investment in the Company, and the settlement of the outstanding Loan Notes following the investment, and the settlement of the outstanding 2005 Loan Notes).

Overall cash outflow for the period

Overall the cash inflow during the nine months was £0.48 million (2010: cash outflow of £0.31 million).

Balance sheet as at 30 September 2011

The Company ended the period with an unrestricted cash balance of £1.28 million (31 December 2010: £0.80 million). Substantially all of the Company's cash balances are denominated in Sterling.

In addition the Company had restricted cash amounts of £0.34 million (31 December 2010: £0.77 million), principally relating to a rent deposit on the Company's office lease.

Non-current assets (excluding restricted cash) have decreased from £1.07 million at 31 December 2010 to £0.84 million at 30 September 2011, after depreciation and amortisation charges of £0.47 million.

Loans and borrowings (including accrued interest) increased from £1.92 million at 31 December 2010 to £8.01 million at 30 September 2011. The amounts are now shown as a current liability as the loan is repayable on 30 days notice expiring on or after 2 January 2012.

Net current liabilities at 30 September 2011, excluding restricted cash balances included under current assets, were £4.36 million (31 December 2010: current asset £0.70 million).

As at 30 September 2011, the Company had 1,437,754,811 common shares issued and outstanding and 448,333,334 A ordinary shares issued and outstanding. As at that date there were 31,377,273 outstanding share options.

Contractual Obligations

Shareholders' equity

The movement in shareholders' equity comprised:

As at 28 October 2011, the Company had 1,437,754,811 common shares issued and outstanding and 448,333,334 A ordinary shares issued and outstanding. As at that date there were 31,377,273 outstanding share options.

Liquidity

Cash, cash equivalents and short-term investments at 30 September 2011 were £1.28 million (31 December 2010: £0.80 million).

Restricted cash at 30 September 2011 was £0.34 million (31 December 2010: £0.77 million).

The Company reported a loss in the nine months of £4.00 million and has a cumulative deficit of £84.09 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.

The Company has not changed its approach to Currency risk and Interest rate risk management from that of the prior year and as disclosed in the annual statements at 31 December 2010.

Currency risk management

Essentially all of the Company's expenditure is denominated in Sterling, which is funded from Sterling cash balances. Exchange differences, which arise on consolidation of the Company's Canadian operations, are included in exchange adjustments within the income statement. 

At 30 September 2011 the Sterling equivalent of Canadian Dollar denominated net liabilities amounted to £77,600 (31 December 2010: net liabilities £103,000).

Interest rate risk management

The analysis of the Company's financial assets and borrowings analysed between floating and fixed interest rates is shown below

The fixed rate borrowings are at 6.0% per annum.

Financial instruments

The Company's financial assets and liabilities consist primarily of the cash and cash equivalents, restricted cash, trade receivables, investments, trade payables and loan notes.

The amounts at which the assets and liabilities above are recorded are considered to approximate to fair value.

Fair value estimation

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Company uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Techniques, such as estimated discounted cash flows, are used to determine fair value for the financial instruments. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date.

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to the short-term nature of trade receivables and payables. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the group for similar financial instruments.

Financial Risk Management and Capital Structure

The Company's risk management programme remains as detailed in the Annual Report and Accounts 31 December 2010. There have been no significant changes since 31 December 2010.

Further information is provided in Management's Discussion and Analysis and the notes to the Financial Statements.

Related Party Transactions

During the quarter ended 30 September 2011 the Company undertook one significant transaction with related parties. In September 2011 the Company negotiated an extension in the loan facility provided by its majority investor TAO UK, which provided £1.5 million to support working capital requirements bearing interest at 6% and being repayable upon request after 2 January 2012.

Critical accounting policies and estimates

Included in the 2010 annual consolidated financial statements, as well as in the 2010 annual MD&A, the Board has identified the accounting policies and estimates that are critical to the understanding of the business and to the results of operations. On 1 January 2011, with the adoption of IFRS, the Board has updated the critical accounting policies and estimates. See Notes 2 and 5 of the Q1 2011 condensed consolidated interim financial statements for a description of the adoption of IFRS and a detailed discussion regarding the significant accounting policies and the application of critical accounting estimates and judgments.

These condensed consolidated interim financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 30 September 2011 the Company had net operating cash outflows. Therefore the Company may require additional funding which, if not raised, may result in the curtailment of activities.

Future accounting pronouncements

As of 1 January 2013, the Company will be required to adopt IFRS 9 Financial Instruments, which is the result of the first phase of the IASB's project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Company is currently assessing the impact of this standard on its consolidated financial statements.

As of 1 January 2013, the Company will be required to adopt IFRS 10 Consolidated Financial Statements, which establishes principles for the preparation and presentation of consolidated financial statements when an entity controls one or more other entities. The Company does not expect IFRS 10 to have a material impact on its consolidated financial statements.

As of 1 January 2013, the Company will be required to adopt IFRS 13 Fair Value Measurement, which defines fair value and sets out a framework for measuring fair value when fair value measurements are required or permitted by other IFRSs. The Company is currently assessing the impact of this standard on its consolidated financial statements.

As of 1 January 2013, the Company will be required to adopt amendments to IAS 1 Presentation of Financial Statements, which require that an entity present separately the items of OCI that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. The Company intends to adopt the amendments in its financial statements for the annual period beginning on January 1, 2013. As the amendments only require changes in the presentation of items in other comprehensive income, the Company does not expect the amendments to IAS 1 to have a material impact on the financial statements.

As of 1 January 2013, the Company will be required to adopt IAS 19 Employee Benefits, which requires recognition of actuarial gains and losses immediately in other comprehensive income, the full recognition of past service costs immediately in profit or loss, recognition of the expected return on plan assets in profit or loss to be calculated based on the rate used to discount the defined benefit obligation, and certain additional disclosures. The Company is currently assessing the impact of this standard on its consolidated financial statements.

Risks and uncertainties

The development and commercialisation plans for the Company's products presented in this Management's Discussion & Analysis are forward-looking statements and as such are subject to a number of risks and uncertainties including those detailed below and in the Going Concern section above.

The business entails risks and uncertainties that affect the outlook and eventual results of the business and commercialisation plans. The primary risks relate to meeting the product development and commercialisation milestones, which require that the products exhibit the functionality, cost, durability, and performance required in a commercial product.

There is a risk that the markets for certain of our products may never develop, or that market acceptance might take longer to develop than anticipated. Our business planning process recognises and, to the extent possible, attempts to manage these risks by pursuing diverse markets for each of our products. Within these markets our commercialisation plan is focused on products that we believe have a competitive advantage.

We develop both subsystems and complete systems across our high speed motors and generators and power electronics product ranges and these development programmes are subject to risk. These risks include problems or delays due to technical difficulties and inability to meet design performance goals, including power output, life and reliability. We mitigate these risks to the extent possible through detailed project management, formal design reviews, reviews by external experts, contingency plans which anticipate likely problems, safety reviews, training and testing programs related to the operation and maintenance of the products.

We seek to maintain our technology lead through our strong intellectual property position, which will act as a barrier against competitors, and by continuing to invest in technology development. However, there can be no assurance that our present or future issued patents will protect our technology lead. We also rely upon know-how and trade secrets to maintain our technology lead. However, there is no assurance that this information can be completely protected.

Another market driver for products is the development of government policy related to the environment. Unfavourable decisions related to environmental policies (such as noise and exhaust emission levels) could result in delays in the introduction of our distributed power generation products. We mitigate, to the extent possible, the effects of changes in government regulations by developing products for diverse geographic locations.

We cannot predict with certainty our future revenues or results from our operations. If we experience significant cost overruns on any of our programs and we cannot obtain additional funds to cover such overruns or additional cash requirements, certain research and development activities may be delayed, resulting in changes or delays to our commercialisation plans. We may be required to raise additional capital through the issuance of equity or debt. We seek to mitigate this risk by securing funding commitments from a variety of sources and through adjustments to our development plans, by maintaining a substantial cash reserve, by being financially conservative in our expenditures and by maintaining good communications with investors and investment bankers to assist us should we need to access the public or private capital markets.

We are also subject to normal operating risks such as credit risks and foreign currency risks. Foreign currency sales and purchases are made in Sterling, Euros, Canadian and US Dollars. Over time, currency balances are matched, to the extent possible, to planned currency purchases.

Internal Control

The Board of Directors has overall responsibility for the accounting policies and ensuring that the Company maintains an adequate system of internal financial control to provide them with reasonable assurance that assets are safeguarded and of the reliability of financial information used for the business and for publication. There are inherent limitations in any system of internal financial control and, accordingly, even the most effective system can provide only reasonable, and not absolute, assurance with respect to the preparation of financial information and the safeguarding of assets.

Management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, is also responsible for establishing and maintaining adequate internal controls over financial reporting within the Company. Management have designed and evaluated the effectiveness of the Company's Internal Controls over Financial Reporting to provide reasonable assurance that the financial reporting is reliable and that the consolidated financial statements are prepared in accordance with International Financial Reporting Standards. Based on the latest evaluation, management has concluded that the following potential weaknesses existed as at 30 September 2011, but that they are sufficiently mitigated through appropriately designed controls. Management has determined that these controls are effective and provide reasonable assurance that the financial reporting is reliable and in accordance with IFRS.

Limited resources

Given the Company's size, it has limited resources within the Finance department. This impacts on its ability to provide comprehensive knowledge in certain areas of financial accounting, as detailed below. The Company is highly reliant on the knowledge of a limited number of employees and on the performance of mitigating procedures during its financial close and consolidation process to ensure that the consolidated financial statements are presented fairly and in all material respects.

Income taxes

Income tax law is a highly technical area that requires an in-depth understanding of national, international, federal and provincial tax laws and the Company's Finance staff has only a fair and reasonable knowledge of the rules related to income tax accounting and reporting. Although this represents a weakness in the Company's control environment, the Company retains and will continue to retain the services of external experts to provide advice and guidance on income tax accounting and disclosures. The Company does not consider that this weakness in control environment has resulted in any material misstatements of the financial statements.

Complex and non-routine transactions

At times the Company records complex and non-routine transactions which are extremely technical in nature and require an in-depth understanding of IFRS. The Company's Finance staff has a fair and reasonable knowledge of the rules related to IFRS. There is potential that these transactions could be recorded incorrectly resulting in potential material misstatement of the financial statements of the Company. Where the Company identifies a transaction as potentially complex or non-routine it will utilize the services of external experts to provide guidance and advice.

Turbo Power Systems Inc.

Condensed consolidated interim statement of comprehensive income

Unaudited

The Notes on pages 27 to 38 form an integral part of these condensed consolidated interim financial statements.

Turbo Power Systems Inc.

Condensed consolidated interim statement of financial position

Unaudited

Approved by the Board:

J J M Pessoa, Chairman

28 October 2011

The Notes on pages 27 to 38 form an integral part of these condensed consolidated interim financial statements.

Turbo Power Systems Inc.

Condensed consolidated interim statement of changes in equity

Unaudited

The Notes on pages 27 to 38 form an integral part of these condensed consolidated interim financial statements.

Turbo Power Systems Inc.

Condensed consolidated interim statement of cash flows

Unaudited

The Notes on pages 27 to 38 form an integral part of these condensed consolidated interim financial statements.

Turbo Power Systems Inc.

Notes to the condensed consolidated interim financial statements

Unaudited

1 Reporting entity

Turbo Power Systems Inc ("The Company") is subsisting pursuant to the Business Corporations Act (Yukon Territory). The Company's registered office is Suite 200-204 Lambert Street, Whitehorse, Yukon Y1A 3T2, Canada.

The Company conducts operations through its wholly owned subsidiary company, Turbo Power Systems Limited ("TPSL") and the main trading address is Unit 3, Heathrow Summit Centre, Skyport Drive, Hatch Lane, West Drayton, Middlesex UB7 0LJ, United Kingdom.

The Company's parent undertaking is TAO Sustainable Power Solutions (UK) Limited ("TAO UK"), a company registered in England and Wales, UK. The Company's ultimate parent company is Vale Soluções em Energia S.A. ("VSE"), a company registered in Brazil.

These consolidated financial statements of the Company as at and for the quarter and nine months ended 30 September 2011 comprises the Company and its subsidiaries.

TPSL has initiated commercialisation of its technology in relation to high speed permanent-magnet machine systems for power generation and industrial motor applications at its London location, whilst its operation based in North East England is an established provider of advanced power electronics.

2 Going concern

These interim financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations.

At 30 September 2011 the Company had net operating cash outflows. Therefore the Company may require additional funding which, if not raised, may result in the curtailment of activities. The Company has a cumulative deficit of £84.09 million as at 30 September 2011 (December 2010: £80.09 million).

At 30 September 2011 the Company had an unrestricted cash balance of £1.28 million (December 2010: £0.80 million) and held restricted cash of £0.34 million (December 2010: £0.77 million) the majority of which is associated with rent deposit. If the Company is unable to generate positive cash flow from operations or secure additional debt or equity financing these conditions and events would cast substantial doubt regarding the "going concern" assumption and, accordingly, the use of accounting principles applicable to a going concern. These interim financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, which would be necessary if the "going concern" assumption were not appropriate.

On 15 April 2011 the Company announced that it had extended the loan financing agreement with its principal shareholder, TAO UK, to provide the Company with access to a further £2.2 million of debt financing to support working capital requirements. In May 2011 a further £1.0 million was provided through the loan financing agreement, and on 5 September 2011 a further £1.5m taking the total loan to £7.8 million.

The Directors regularly review and consider the current and forecast activities of the Company in order to satisfy themselves as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure and forecast cash requirements and balances. Based on these evaluations the Directors consider that the Company is able to continue as a going concern.

3 Basis of preparation and statement of compliance

The Company's consolidated financial statements were prepared in accordance with Canadian Generally Accepted Accounting Principles (Canadian GAAP) until 31 December 2010. As from 1 January, 2011, publicly accountable enterprises are required to adopt IFRS. Accordingly, we have commenced reporting on this basis in these condensed consolidated interim financial statements.

These interim financial statements (the interim financial statements) have been prepared in accordance with IAS 34 Interim Financial Reporting. These are the Company's third IFRS interim financial statements for part of the period covered by the first International Financial Reporting Standards (IFRS) annual financial statements and IFRS 1 First-time Adoption of International Financial Reporting Standards relevant to interim reports has been applied. They do not include all of the information required for full annual financial statements.

These interim financial statements have been prepared in accordance with the accounting policies set out in note 4 of the first quarter 2011 interim financial statements, which are based on the recognition and measurement principles of IFRS in issue and are effective at 30 September 2011 or are expected to be adopted and effective at 31 December 2011, our first annual reporting date at which we are required to use IFRS. These interim financial statements should be read in conjunction with the Annual Report and Accounts 2010 and the first quarter 2011 interim financial statements.

An explanation of how the transition to IFRSs has affected the reported financial position, financial performance and cash flows of the Company is provided in note 5. This note includes reconciliations of equity and total comprehensive income for comparative periods reported under Canadian GAAP.

The unaudited interim financial statements were authorised for issuance by the Board of Directors on 28 October, 2011.

The interim financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial instruments.

The interim financial statements are presented in £ sterling, rounded to the nearest £1,000, which is the Company's functional and presentation currency.

As of 1 January 2013, the Company will be required to adopt IFRS 9 Financial Instruments, which is the result of the first phase of the IASB's project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Company is currently assessing the impact of this standard on its consolidated financial statements.

As of 1 January 2013, the Company will be required to adopt IFRS 10 Consolidated Financial Statements, which establishes principles for the preparation and presentation of consolidated financial statements when an entity controls one or more other entities. The Company does not expect IFRS 10 to have a material impact on its consolidated financial statements.

As of 1 January 2013, the Company will be required to adopt IFRS 13 Fair Value Measurement, which defines fair value and sets out a framework for measuring fair value when fair value measurements are required or permitted by other IFRSs. The Company is currently assessing the impact of this standard on its consolidated financial statements.

As of 1 January 2013, the Company will be required to adopt amendments to IAS 1 Presentation of Financial Statements, which require that an entity present separately the items of OCI that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. The Company intends to adopt the amendments in its financial statements for the annual period beginning on January 1, 2013. As the amendments only require changes in the presentation of items in other comprehensive income, the Company does not expect the amendments to IAS 1 to have a material impact on the financial statements.

As of 1 January 2013, the Company will be required to adopt IAS 19 Employee Benefits, which requires recognition of actuarial gains and losses immediately in other comprehensive income, the full recognition of past service costs immediately in profit or loss, recognition of the expected return on plan assets in profit or loss to be calculated based on the rate used to discount the defined benefit obligation, and certain additional disclosures. The Company is currently assessing the impact of this standard on its consolidated financial statements.

4 Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

Estimates and underlying assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future period affected.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year were set out in Note 5 of the first quarter 2011 interim financial statements.

5 Changes in accounting policies on adoption of IFRS

The Company adopted IFRS on 1 January 2011 and in accordance with IFRS 1 has applied IFRS retrospectively to its comparative data as at 1 January 2010, the Transition date.

An explanation of how the transition from Canadian GAAP to IFRS has affected the Company's financial position, financial performance and cash flows is set out below. The following reconciliations are provided:

(a) Reconciliation of equity at 30 September 2010

(b) Reconciliation of total comprehensive income for the quarter ended 30 September 2010;

(c) Reconciliation of total comprehensive income for the nine months ended 30 September 2010.

(d) Any material adjustments to the prior year cash flow statement.

Reconciliation of equity:

Reconciliation of total comprehensive loss:

Under IAS 32 the convertible shares have been classified as an equity instrument and classified as a part of shareholders equity. Previously under Canadian GAAP this was classified as an equity instrument but classified as a non-controlling interest.

IAS 19 Employee benefits

Under Canadian GAAP, the company did not meet the criteria for accruing outstanding staff holiday pay at the balance sheet date. IFRS requires that the accrual be calculated at each balance sheet date.

Cash Flow statement

The adoption of IFRS did not significantly impact our cash flows compared to Canadian GAAP.

7 Segmental analysis

The Company'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 Company and other related management activities are allocated between the two reportable segments.

The power electronics and electrical machines systems segments both operate in the United Kingdom. Except for the Investments held by the Company which are located in Canada, all of the Company's assets are located in the United Kingdom.

Geographic Segmental Information

All property, plant and equipment was located within the United Kingdom during both periods ended 30 September 2011 and 30 September 2010.

8 Loss for the period

9 Staff costs and employees

10 Significant customers

In the nine months ended 30 September 2011, 58% of the Company's sales were derived from three customers (2010: 64% from three customers), each of whom represented 10% or more of the Company's sales.

11 Loss per share

Loss per common share has been calculated using the weighted average number of shares in issue during the relevant financial periods.

As the Company experienced a loss in both years all potential common shares outstanding from dilutive securities are considered anti-dilutive and are excluded from the calculation of diluted loss per share.

Details of anti-dilutive potential securities outstanding not included in EPS calculations at 30 September are as follows:

12 Trade and other payables

Trade creditors and other payables principally comprise amounts outstanding for trade purchases and ongoing costs.

The Directors consider that the carrying amount of trade payables approximates to their fair value.

13 Loans and borrowings

On 22 October 2010 the Company agreed to a loan facility with TAO UK, which bears interest at 6% per annum and is repayable upon demand commencing 2 January 2012. The loan is secured by a fixed and floating charge over the assets of the Company's subsidiary TPSL.

14 Share capital and options

Authorised

At 30 September 2011 and 31 December 2010, the authorised share capital of the Company comprised an unlimited number of common shares and an unlimited number of preferred shares, issuable in series, without nominal or par value. 

The Company has issued share options under the 2002 Stock Option Plan and A Ordinary Shares in Turbo Power Systems Limited that are convertible into common shares of the Company.

Convertible shares

Holders of A Ordinary Shares of TPSL carry no voting rights, cannot attend any shareholder meetings and, in the event of winding-up of TPSL are entitled to a maximum distribution of £500,000 in aggregate, to rank before the Common Shares. The A Ordinary shares are convertible into an equal number of Common Shares of the Company on request by the holder, having given 61 days notice. Under certain take over or change in control events, the A Ordinary Shares are exchangeable under "super exchange" rights, converting for 3 common shares of the Company for every A Ordinary Share held.

2002 Stock Option Plan

The movements in the outstanding stock options granted under the 2002 Stock Option Plan are as follows: