Turbine Truck Engines Inc (TTEG) SEC Annual Report (10-K) for 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2011

For the transition period from        , 20        , to        , 20        .

Commission File Number 333-109118

Turbine Truck Engines, Inc.

(Exact Name of Registrant as Specified in its Charter)

46600 Deep Woods Road, Paisley Florida 32767

(Address of Principal Executive Offices)

(386) 943-8358

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405) during the preceding 12 months. Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No x

The Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter, June 30, 2011 was $8,044,593.

There were 63,901,396 shares of the Registrant's $0.001 par value common stock outstanding as of March 26, 2012.

Documents incorporated by reference: none

TURBINE TRUCK ENGINES, INC.

FORM 10-K INDEX

TURBINE TRUCK ENGINES, INC.

This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about Turbine Truck Engines Inc.'s industry, management beliefs, and assumptions made by management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements.

PART I

Turbine Truck Engines, Inc. was incorporated in Delaware on November 27, 2000. On February 20, 2008, the Company was re-domiciled to the State of Nevada. The Company is currently pursuing the continued development of the Detonation Cycle Gas Turbine Engine" ("DCGT").

The development of the DCGT Engine has been at the core of the Company's business for many years.  On December 15, 2000, we acquired the option rights for an exclusive License from Alpha Engines Corporation ("Alpha") for manufacturing and marketing heavy duty highway truck engines utilizing Alpha's DCGT technology embodied in U.S. Patent No. 6,000,214 and other proprietary technology and rights owned by Alpha including Marketing Survey Data in the highway trucking industry. We exercised our option and acquired the licensing rights on July 22, 2002. Alpha has completed the design and prototype of a 540 hp engine for use in highway trucks.

The Company has a number of agreements regarding the development and manufacture of the DCGT Engine over the last few years that have terminated of their own accord, but which the Company classifies as "on hold", pending the successful completion the testing of the 6 th generation prototype that is a condition precedent to the development of the engine which would serve as a platform for these companies to work off of.  Upon the successful completion of the testing of the 6 th generation prototype, the Company intends revisit these strategic alliances and potential joint ventures

The Company, through AbM Engineering, completed the 6 th generation prototype in June 2011 and intends on continuing the testing thereof over the next quarter, subject to the receipt of adequate funding.

KINGTEC AGREEMENT

The Company entered into a Share Purchase Agreement in May 2010 with Hua Tec Enterprise Co. LTD, ("Hua Tec") an international company incorporated in the Independent State of Samoa. HUA TEC owns all of the issued and outstanding shares of Guandong Kingtec Electrical Co., LTD, a wholly foreign owned enterprise established under the laws of the People's Republic of China. Kingtec is primarily engaged in the business of manufacturing and selling automobile starters, generators and other accessories in the People's Republic of China. The closing of this purchase agreement is contingent upon certain conditions as outlined in the agreement, the terms of which are currently being negotiated.

The Company entered into various strategic alliances with foreign companies during 2009 and 2010.  During the year ended December 31, 2011, there were no material changes as disclosed in the December 31, 2010 Form 10K which would warrant further disclosure to these financial statements.  The agreements with GUOHAO, TIANJIN and BEIJING ROYAL are based on the Company building, testing and demonstrating a prototype that will meet the efficiencies required to commercialize the engine for their respective products.  Once the Company has demonstrated that it can produce an engine with the power output and efficiencies required, the time line set in the original agreements for the respective companies to fulfill their agreements and fund the Company to bring the engine to full commercialization for that product will begin.

PRODUCT STATUS

THE DCGT ENGINE

To date, our DCGT Engine is not yet marketable, but we have completed initial testing of the 6th generation prototype. The Company continues to demonstrate the engine to investors and potential joint venture partners. Over the course of the last few years, the Company has entered into numerous strategic alliances and potential joint ventures for the development of the engine; however, those agreements have been placed on hold pending the successful completion of the testing on the 6 th generation prototype. The prototype was completed in June 2011, and preliminary testing has been completed. Comprehensive testing will continue over the next quarter or longer, dependent upon adequate funding being received by the Company.  Costs incurred for the prototype was included research and development costs for the year ended December 31, 2011.

Once the company has demonstrated that it can produce an engine with the power output and efficiencies required of the marketplace, the Company will revisit the prior agreements, as they have indicated that they remain interested.  The Company continues to pursue funding to bring the engine to full commercialization.

GOLDEN GATE

In June 2008, the Company issued a Convertible Debenture to Golden Gate Investors, Inc. (the "holder") in the principal amount of $1,000,000, dated June 6, 2008, pursuant to Rule 506 promulgated by the Securities and Exchange Commission, for the purpose of accessing necessary funding to continue operations.

Pursuant to the terms of the Debenture, the related Securities Purchase Agreement, Secured Promissory Note and Stock Pledge Agreement, each executed in connection therewith, the Company issued $1,000,000 Convertible Debenture (the "Debenture") for the payment by Golden Gate of $100,000 in cash and the execution and delivery by Golden Gate of a $900,000 Secured Promissory Note of even date (the "Note"), bearing interest at 8% per annum. As of December 31, 2011, the Company has $205,000 available to draw on the Convertible Debenture.

The Debenture bears interest at 7.75% per annum, payable monthly, maturing June 30, 2012, and was secured by a Continuing Personal Guaranty, whereby the Company's Chief Executive Officer and majority shareholder guaranteed the Company's obligations for a period of eight months. Originally, the Debenture Holder was entitled to convert into common stock of the company at the conversion price equal to the lesser of (i) $0.50, or (ii) 80% of the average of the 3 lowest Volume Weighted Average Prices during the 20 Trading Days prior to Holder's election to convert, as such terms are defined in the Debenture. Effective January 15, 2010, the agreement was amended with the Holder and the conversion price has a $0.15 fixed floor price that limits the number of common shares that can be issued upon conversion to a fixed amount. The Holder can only convert that amount of the Debenture that has actually been paid for by either cash at closing or principal pre-payments made on the Promissory Note.

Golden Gate's secured Promissory Note is payable at the rate of 8% per annum with interest, payable monthly and provides for the prepayment of the Note in an amount not less than $200,000 upon the triggering of certain events. It matures on June 30, 2012. During 2011, the Company has drawn $50,000 in proceeds related to the note and converted $50,000 in convertible notes into 333,334 common shares. For financial statement purposes, the Securities Purchase Agreement and the Convertible Promissory Note have been netted, as the Company has the legal right of offset.

OUR PRODUCTS AND BUSINESS LINES

Detonation Cycle Gas Turbine Engine

Our product is slated to be a new energy-efficient, Detonation Cycle Gas Turbine Engine ("DCGT") for heavy-duty highway trucks as well as other potential applications. To date, we have no marketable product and will rely on the research firms of AbM Engineering and AMEC and our Strategic Alliance partners to continue the development and testing of a 540 horsepower prototype that will conform to our licensed application. Since our inception, we have continued to raise capital to bring this patented technology closer to where it can be utilized in a common market. The application demanding the most change is the highway trucking market.

Detonation refers to an instant burning of a fuel-air mixture producing an explosion. Cycle refers to the explosion happening in one chamber and then in another chamber, repeating over and over again. Gas is the fuel which is in a gaseous state. Turbine is a rotating wheel or disk connected to a shaft spinning in one direction. This combined process along with the Electromagnetic Isothermal Combustion "(EIC") process creates the high efficiency, low emission engine that we intend to bring to market.

Alpha has completed the design and prototype of a 540 hp engine for use in highway trucks. Therefore compliance with state and federal regulators will not be a factor until we have an engineered prototype in a test vehicle here in the United States. Alpha completed all research and development in 1997, which resulted in a patent being issued in 1999. Alpha has completed the design for the truck engine. The Company is currently testing the 6 th generation prototype,  however, this takes a considerable amount of money.

Under our Agreement with Alpha, they will continue to consult and advise with AbM Engineering on future development of this 540 horsepower DCGT highway truck engine prototype at AbM's facilities in Daytona Beach, Florida. This new energy efficient detonation cycle gas turbine can be designed and manufactured as a new or replacement engine for all heavy duty trucks that utilize engines ranging from 300 to 1,000 horsepower.

It was our initial intention solely to target 18 wheel class 8 vehicles commonly used for transporting goods throughout the United States for distribution of our engine, however, based on the interest among numerous  Chinese companies, the Company has expand that  goal by pursuing other applications of the DCGT engine technology as deemed necessary and appropriate to further the development and commercialization of the engines.

PATENTS AND LICENSE

Patent #6000214 is a novel patent with a 20-year life from the filing date of December 16, 1997. The patent was based on research and development beginning in 1984, which included the design, construction, and testing of four (4) working prototypes. The patent attorneys were Schoemaker & Mattare Ltd. The inventor has and will file additional patents to protect any new developments in the engine technology. We will have access to any new patent filings on the highway truck engines as provided for in our licensing agreement.

This patent in its simplicity makes it very unique. A detonation cycle gas turbine engine includes a turbine rotor contained in a housing. The exhaust ports of respective valveless combustion chambers are located on opposite sides of the rotor directing combustion gases toward the turbine. The chambers are connected by a valveless manifold fed with fuel and oxidizer. When combustible gases are detonated by an igniter in one of the combustion chambers, the back pressure from the detonation shuts off the fuel and oxidizer flow to that chamber and redirects the fuel and oxidizer to the opposite chamber, where detonation occurs. The process repeats cyclically. Power is taken off the rotor shaft mechanically or electrically.

The invention utilizes a water wheel as the turbine wheel which has blades that are positively displaced through a blade race by the rapid expansion of gases exiting from combustion chambers via nozzles, rather than pistons or gas turbines.

Our engine has a blower, rather than a compressor, to supply less air per horsepower hour than required by existing gas turbines or piston engines, thereby producing less exhaust gases per horsepower hour.

The blower supplies low pressure air via a single manifold to two combustion chambers simultaneously thereby requiring less work to complete a detonation cycle, resulting in higher thermo mechanical efficiencies than gas turbines or piston engines.

The engine manifolds, combustion chambers, and ignition system has the capability of cyclically detonating fuel-air mixtures without using valves. The engine uses a fuel pump and vaporizers to gasify wet fuels prior to mixing with combustion air in the manifolds to produce complete combustion of all fuel-air mixtures in the detonation process. The engine uses a plasma arc ignition, a visibly constant illuminating plasma flame between two electrodes to detonate fuel-air mixtures and does not require critical ignition timing.

Low pressure air and fuel mixtures are detonated instantaneously–in less than one millisecond–producing high velocity shock waves that kinetically compress inert gases resulting in higher working pressures than the pressures produced in constant pressure heating utilized in gas turbine engines, and Otto and Diesel cycle piston engines.

The detonation cycle engine uses less working fluid and produces less exhaust gas per horsepower hour than Brayton cycle turbines and Otto or Diesel cycle piston engines.

Alpha has developed six working prototypes as described below:

The DCGT includes an Electromagnetic Isothermal Combustion ("EIC") process that powers the engine. The EIC process produces complete combustion of fuel-oxidizer mixtures in cyclic detonations that negate unwanted nitrogen oxide and carbon monoxide emissions. The high pressure gases produced by the detonations drive a unique turbine producing shaft horsepower.

The EIC process enables the DCGT to operate with blower air at low static pressure, negating the necessity of compressing and preheating fuel-oxidizer mixtures prior to combustion. By eliminating the compression of fuel-oxidizer mixtures, the DCGT achieves higher thermal efficiencies in a simplified mechanical structure. The DCGT has the following proprietary and competitive advantages over current diesel, gasoline and gas turbine engines:

Alpha has completed basic research, exploratory development, and advanced development with the design, construction and testing of four experimental prototype engines.

Our new energy efficient detonation cycle gas turbine can be designed and manufactured as a new or replacement engine for all heavy duty trucks that utilize engines ranging from 300 to 1,000 horsepower. We are currently exploring additional applications, such as motorcycle engines, generators and various other shaft driven applications.

We will not require governmental approval until such time as the engine is placed in vehicles for use. Our engine will meet the new more stringent tailpipe emission requirements set forth by the Environmental Protection Agency ("EPA").

Research and development of our engine was completed in 1997 with patents obtained in 1999. Through testing, we hope to be able to comply with existing and future environmental laws. We intend to supply our fuel efficient, lower emission engine to a marketplace that must comply with more stringent governmental regulations. In each of the last two years, the Company has spent $146,779 (2011) and $208,565 (2010) on research and development.

We acquired our license from Alpha on July 22, 2002. The material terms of the license agreement, as amended, are as follows:

During the year ended December 31, 2006, the Company issued 125,000 shares of common stock in satisfaction of the $250,000 note payable to Alpha and the accrual of minimum royalty fees began. In addition, during the year ended December 31, 2006, the Company paid $416,667 of royalty fees through the issuance of 100,000 shares of common stock. As of December 31, 2011, the Company has accrued $1,301,500 of royalty fees related to this agreement.

Other than being the licensor and a principal shareholder, we have no affiliation with Alpha.

HYDROGEN GENERATORS

PATENTS AND LICENSE

To date there are no patents or patents pending for the Hydrogen Generator. However, in the future ETS and the Company will share in patent applications and approvals on any part of the Hydrogen Generator that is able to be patented.

COMPETITION

The Company has identified seven (7) major engine manufacturers, including Ford, Caterpillar, Cummins, Detroit Diesel, Mack Trucks, Navistar International and Volvo Truck that each manufacture heavy duty truck engines, both gasoline and diesel, which are likely to be the major competitors to our company as to the DCGT Engine, once our product is ready for market. To the Company's knowledge, at this time, none of the Company's major competitors are working on the development of a turbine engine that would be in direct competition to the Company's engine, and although we would be competing with them for customers, the Company believes that the technological differences between its product and those that are currently on the market, will provide the Company with a market niche that it can expand upon, even in the face of such established competitors.

The Company has identified a handful of competitors, including Air-Gas, that manufacture hydrogen generators.  There are however, three main types of hydrogen generators, those that (a) convert methane to hydrogen through a catalyst; (b) convert water through electrolysis; and (c) convert methanol through catalysis.  There are commercialized units for each method, however, to our knowledge, there are no commercialized units, like the ETS generator that produce hydrogen on demand, without the safety issues involved with storage and transportation.  In that regard, the Company considers itself uniquely positioned to provide the market with a hydrogen generator that is uniquely different than its competitors.

EMPLOYEES

We presently have three full-time employees. Staffing levels will be determined as we progress and grow. We also plan to add several employees to our staff. The level of employees is primarily contingent on the level of success of an offering. Our board of directors will determine the compensation of all new employees based upon job description.

Not applicable.

None.

The Company leases a 55 acre parcel located outside Paisley, Florida with two home/office buildings and one storage/demonstration facility from J.K. Schmale. The lease agreement is currently being extended on a month to month basis. Base rent is $25,000 per year and the lease agreement contains an option to purchase the property and all buildings located on the property.

As of the date of this Report, neither we nor any of our officers or directors is involved in any litigation either as plaintiffs or defendants. As of this date, there is not any threatened or pending litigation against us or any of our officers or directors.

None.

PART II

Since the August 2004 closing of the Company's initial public offering, the Company's Common Stock has traded in the over-the-counter market on the National Association of Securities Dealers, Inc. OTC Bulletin Board System ("OTCBB") under the symbol "TTEG." The following table sets forth the range of high and low closing bid quotations of the Common Stock as reported by the OTCBB for each fiscal quarter for the past two fiscal years. High and low bid quotations reflect inter-dealer prices without adjustment for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions.

On March 26, 2012 the closing bid price of the Company's Common Stock as reported by the OTCBB was $0.16 and there were approximately 429 shareholders of record.

DIVIDENDS

We have not paid any cash dividends on our common or preferred stock and do not anticipate paying any such cash dividends in the foreseeable future. Earnings, if any, will be retained to finance future growth. We may issue shares of our common stock and preferred stock in private or public offerings to obtain financing, capital or to acquire other businesses that can improve our performance and growth. Issuance and or sales of substantial amounts of common stock could adversely affect prevailing market prices in our common stock.

Common Stock

During the year ended December 31, 2011, there was no modification of any instruments issued herein for the fourth quarter, defining the rights of holders of the Company's common stock and no limitation or qualification of the rights evidenced by the Company's common stock as a result of the issuance of any other class of securities or the modification thereof.

During October 2011, the Company issued 50,000 shares of common stock to a qualified investor for services valued at $0.05 per share for a total of $2,500.

During October 2011, the Company issued 50,000 shares of common stock to a qualified investor for $0.10 per share for a total of $5,000.

During October 2011, the Company issued 578,000 shares of common stock to a former employee in settlement of accounts payable valued at $0.10 per share for a total of $57,800.

During October 2011, the Company issued 850,000 shares of common stock to employees for services valued at $0.10 per share for a total of $85,000.

During October 2011, the Company issued 100,000 shares of common stock to a qualified investor for services valued at $0.14 per share for a total of $14,000.

During October 2011, the Company issued 1,000,000 shares of common stock to a qualified investor for services valued at $0.20 per share for a total of $200,000.

The sale and issuance of securities above was deemed to be exempt from registration under the Securities Act of 1933, as amended, by virtue of Rule 506 of Regulation D promulgated there under.

Not required.

THIS FILING CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS "ANTICIPATED," "BELIEVE," "EXPECT," "PLAN," "INTEND," "SEEK," "ESTIMATE," "PROJECT," "WILL," "COULD," "MAY," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS FILING ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.

The following discussion and analysis of our financial condition and plan of operations should be read in conjunction with our financial statements and related notes appearing elsewhere herein. This discussion and analysis contains forward-looking statements including information about possible or assumed results of our financial conditions, operations, plans, objectives and performance that involve risk, uncertainties and assumptions. The actual results may differ materially from those anticipated in such forward-looking statements. For example, when we indicate that we expect to increase our product sales and potentially establish additional license relationships, these are forward-looking statements. The words expect, anticipate, estimate or similar expressions are also used to indicate forward-looking statements.

For the year ended December 31, 2011 compared to the year ended December 31, 2010:

Research and Development Costs – During the years ended December 31, 2011 and 2010, research and development costs totaled $146,779 and $208,565, respectively. The decrease of $61,786 was mainly attributable to pausing research and development while waiting for funding.

Operating Costs – During the years ended December 31, 2011 and 2010, operating costs totaled $2,077,436 and $2,121,168, respectively. The decrease of $43,732 was mainly attributable to a $95,645 decrease in consulting expenses, a $145,274 decrease in travel and entertainment expenses which were partially offset by an increase of $226,789 in stock based compensation expense.

Interest (Income) Expense - Net - During the years ended December 31, 2011 and 2010 net interest expense totaled $15,540 and $239,490, respectively. The decrease of $223,950 was primarily due to the Company issuing less convertible debentures to Golden Gate Investors, Inc. of $50,000 in 2011 and $250,000 in 2010.

The net loss for the years ended December 31, 2011 and 2010 was ($2,238,011) and ($2,569,223), respectively. The decrease of $331,212 was mainly attributable to the decrease in research and development expenses, operating costs and interest expenses.

Liquidity and capital resources

As shown in the accompanying financial statements, for the years ended December 31, 2011 and 2010 and since November 27, 2000 (date of inception) through December 31, 2011, the Company has had net losses of $2,238,011, $2,569,223 and $16,371,158, respectively. As of December 31, 2011, the Company has not emerged from the development stage. In view of these matters, the Company's ability to continue as a going concern is dependent upon the Company's ability to begin operations and to achieve a level of profitability. However, there can be no assurance that the Company will be able to raise capital or begin operations to achieve a level of profitability to continue as a going concern. Since inception, the Company has financed its activities principally from the sale of public equity securities. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements.

As previously mentioned, since inception, we have financed our operations largely from the sale of common stock. From inception through December 31, 2011 we raised cash of approximately $3,683,259 net of issuance costs, through private placements of common stock financings and $894,750 through the issuance of convertible notes payable. Additionally, we have raised net proceeds from stockholder advances of $114,068.

Since our inception through December 31, 2011 we have incurred $3,882,494 of research and development costs. These expenses were principally related to the acquisition of a license agreement in July 2002 in the amount of $2,735,649, which was expensed to research and development costs for the DCGT technology and general and administrative expenses.

We have incurred significant net losses and negative cash flows from operations since our inception. As of December 31, 2011, we had an accumulated deficit of $16,371,158 and working capital deficit of $122,333.

We anticipate that cash used in product development and operations, especially in the marketing, production and sale of our products, will increase significantly in the future.

On June 6, 2008, the Company issued a 7 ¾ Convertible Debenture to Golden Gate Investors, Inc. in the principal amount of $1,000,000, pursuant to Rule 506 promulgated by the Securities and Exchange Commission, for the purpose of accessing necessary funding to continue operations.

Pursuant to the terms of the Debenture, the related Securities Purchase Agreement, secured Promissory Note and Stock Pledge Agreement, each executed in connection therewith, the Company issued $1,000,000 Convertible Debenture (the "Debenture") for the payment by Golden Gate of $100,000 in cash and the execution and delivery by Golden Gate of a $900,000 Secured Promissory Note of even date (the "Note"), bearing interest at 8% per annum.

The Debenture bears interest at 7.75% per annum, payable monthly, maturing June 30, 2012, and is secured by a Continuing Personal Guaranty by Michael H. Rouse, the Company's CEO. Originally, the Holder was entitled to convert into common stock of the company at the conversion price equal to the lesser of (i) $0.50, or (ii) 80% of the average of the 3 lowest Volume Weighted Average Prices during the 20 Trading Days prior to Holder's election to convert, as such terms are defined in the Debenture. Effective January 15, 2010 the agreement was amended with the Holder and the conversion price having a $0.15 fixed floor price that limits the number of common shares upon conversion of a fixed amount. The Holder can only convert that amount of the Debenture that has actually been paid for by either cash at closing or principal pre-payments made on the Promissory Note.

Golden Gate's secured Promissory Note is payable at the rate of 8% per annum, payable monthly and provides that for the prepayment of the Note in an amount not less than $200,000 monthly upon the happening of certain events. It matures on June 30, 2012. During 2011 and since inception, the Company has drawn $50,000 and $795,000, respectively, in proceeds related to the note. During 2011 and since inception, the Holder has converted $50,000 and $747,000 in convertible notes into 333,334 and 7,340,152 common shares, respectively.

Provided certain conditions are met, pursuant to the terms of the Securities Purchase Agreement executed between the parties, Golden Gate or its assigns has the right to enter into 4 additional Debentures with the Company upon similar terms. The Company incurred no additional expenses in this matter and the Company is utilizing the proceeds for its on-going working capital needs.

We will be dependent upon our existing cash, together with anticipated net proceeds from a public offering and future debt issuances and private placements of common stock and potential license fees, to finance our planned operations through the next 12 months. We will continue to proceed in the design and testing phase of the DCGT engine during the next 12 months and will require additional funding to continue operations. Based on our anticipated growth, we plan to add several employees to our staff.

Additional capital may not be available when required or on favorable terms. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain or potential markets, either of which could have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to our existing stockholders.

The Company may receive proceeds in the future from the exercise of warrants and options outstanding as of December 31, 2011 in accordance with the following schedule:

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our financial statements.

We account for stock option grants in accordance with US GAAP. Stock-based compensation cost recognized during the years ended December 31, 2011 and 2010 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006 and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on their relative grant date fair values estimated in accordance with US GAAP. The Company recognizes compensation expenses on a straight-line basis over the requisite service period.

Determination of the fair values of stock option grants at the grant date requires judgment, including estimating the expected term of the relevant grants and the expected volatility of the Company's stock. Additionally, management must estimate the amount of stock option grants that are expected to be forfeited. The expected term of options granted represents the period of time that the options are expected outstanding and is based on historical experience of similar grants, giving consideration to the contractual terms of the grants, vesting schedules and expectations of future employee behavior. The expected volatility is based upon our historical market price at consistent points in a period equal to the expected life of the options. Expected forfeitures are based on historical experience and expectations of future employee behavior.

Furniture and equipment are recorded at cost and depreciated on a declining balance and straight-line basis over their estimated useful lives, principally two to seven years. Accelerated methods are used for tax depreciation. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When furniture and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.

The Company has incurred deferred offering costs in connection with raising additional capital through the sale of its common stock. These costs are capitalized and charged against additional paid-in capital when common stock is issued. If there is no issuance of common stock, the costs incurred are charged to operations.

Research and development costs are charged to operations when incurred and are included in operating expenses.

New Accounting Pronouncements

For a description of recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our financial statements, see "Note 3: Significant Accounting Polices: Recent Accounting Standards" in Part II, Item 8 of this Form 10-K.

Not applicable.

Turbine Truck Engines, Inc.

(A Development Stage Enterprise)

Financial Statements

For the Years Ended December 31, 2011 and 2010,

and the Period November 27, 2000 (Date of Inception)

through December 31, 2011

Contents

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Turbine Truck Engines, Inc.

(A Development Stage Enterprise)

Paisley, Florida

We have audited the accompanying balance sheets of Turbine Truck Engines, Inc. (a development stage enterprise) ("the Company") as of December 31, 2011 and 2010 and the related statements of operations, changes in stockholders' deficit, and cash flows for the years ended December 31, 2011 and 2010 and the period from November 27, 2000 (Date of Inception) through December 31, 2011. These financial statements are the responsibility of the management of Turbine Truck Engines, Inc. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we expressed no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Turbine Truck Engines, Inc. as of December 31, 2011 and 2010 and the results of its operations and its cash flows for the years ended December 31, 2011 and 2010 and the period from November 27, 2000 (Date of Inception) through December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company incurred a net loss of $2,238,011 during the year ended December 31, 2011 and has an accumulated deficit of $16,371,158 since inception and has a working capital deficit of $122,333 as of December 31, 2011. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Pender Newkirk & Company LLP

Certified Public Accountants

Tampa, Florida

March 30 , 2012