The TT was first shown as a concept car at the 1995 Frankfurt Motor Show. The design is credited to J Mays and Freeman Thomas of Volkswagen's California design studio, with Martin Smith contributing to the award winning interior design. The TT name does not indicate "twin turbo" as is sometimes assumed. The car is named for the NSU TT, a small rear-engine model with a formidable racing pedigree that NSU produced.

In the 1960s and was based on the NSU Prinz, although the modern TT shares next to nothing with that model's design concepts. The NSU TT was, in turn, named for the famous Isle of Man TT (Tourist Trophy) motorcycle races. The production model (internal designation Typ 8N) was launched as a coupé in September 1998, followed by a roadster in August 1999, based on the Volkswagen A platform used for the Volkswagen Golf, Skoda Octavia and others. Styling wise, it differed little from the concept, except for slightly reprofiled bumpers and the addition of rear quarterlight windows behind the doors. Mechanically, the TT uses a transversely mounted engine with front or quattro all wheel drive. It was first available with a 1.8 L turbocharged inline four cylinder 20-valve engine. with either 180 PS (178 hp/132 kW) or 225 PS (222 hp/165 kW). The engines share the same basic design but the 225 PS version features a larger turbocharger, an additional intercooler on the driver's side, forged connecting rods, a dual exhaust, and a few other internals designed to accommodate the increase in turbo boost from roughly 10 psi peak to 15. Quattro was optional on the small engine, and standard on the more powerful version.