<PAGE>

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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                               ----------------

                                  FORM 10-KSB

(Mark One)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934

                    For the fiscal year ended June 30, 1999

                                      OR

[_]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934

                For the transition period from        to

                        Commission file number 0-21832

                         TURBOSONIC TECHNOLOGIES, INC.
                (Name of Small Business Issuer in its Charter)

                                                     13-1949528
               Delaware                 (I.R.S. Employer Identification No.)
    (State or other jurisdiction of
    incorporation or organization)

                                                       N2L 5V4

                                                     (Zip Code)
          550 Parkside Drive,
         Suite A-14, Waterloo,
            Ontario, Canada
    (Address of principal executive
               offices)

                                (519) 885-5513
               (Issuer's telephone number, including area code)

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

<TABLE>
<CAPTION>
                                                         Name of Each Exchange
              Title of Each Class                         on Which Registered
              -------------------                        ---------------------
              <S>                                        <C>


</TABLE>

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

                                 Common Stock
                               (Title of Class)

  Check whether the Issuer (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 Issuer was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.  Yes [X]  No [_]

  Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B herein, and will not be contained, to the best of the Issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-
KSB.  Yes [X]  No [_]

  Issuer's revenues for its most recent fiscal year: $3,856,842

  Aggregate market value of the Issuer's common stock held by non-affiliates
of the Issuer as of September 8, 1999: $1,552,993

                  ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                        DURING THE PRECEDING FIVE YEARS

  Check whether the Issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court.  Yes [X]  No [_]

  The number of shares outstanding of the Issuer's common stock is 10,000,000
(as of 6/30/99).

  Transitional Small Business Disclosure Format (check one):  Yes [_]  No [X]

                      DOCUMENTS INCORPORATED BY REFERENCE

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<PAGE>

                                    PART I

ITEM 1. BUSINESS

  (a) General Development of Business

  TurboSonic Technologies, Inc., formerly known as Sonic Environmental
Systems, Inc. (the "Company"), directly and through subsidiaries, designs and
markets integrated pollution control and industrial gas cooling/conditioning
systems, wet scrubber systems, flue gas desulfurization systems, and dust
suppression systems to ameliorate or abate industrial environmental problems.

  Contemporaneously with the Company's filing on September 16, 1996 of a
voluntary Chapter 11 reorganization proceeding under the Federal Bankruptcy
Code, the Company entered into an agreement with Turbotak Technologies, Inc.
("Turbotak"), a privately held Canadian Company engaged in the design,
manufacture, and servicing of air pollution control equipment, which, among
other matters, proposed a Chapter 11 reorganization plan which would provide
for a merger of the Company and Turbotak. The Company's plan of reorganization
(hereinafter referred to as the "Plan") was confirmed by the Bankruptcy Court
on July 3, 1997 following requisite creditor approval. The Plan provided for
the extinguishments of all of the outstanding shares of the Company's common
stock, as well as all outstanding warrants and options to purchase the
Company's common stock. The Plan further provided that the Company consolidate
with Turbotak (the "Consolidation") to form a company to be called TurboSonic
Technologies, Inc. which would have 10,000,000 shares of common stock
outstanding, of which 8,200,000 shares (82%) would be owned by Turbotak's
shareholders, and 1,255,700 shares or approximately 12.6% would be issued to
the existing shareholders on a pro-rata basis. The balance of such 10,000,000
shares would be issued to the Company's existing creditors and others as
described in the Plan. Consummation of the Consolidation took place on
August 27, 1997 (the "Consolidation Date"), and resulted in the Company's
subsequent discharge from its Chapter 11 Proceeding. Reference is made to the
Company's Current Report on Form 8-K dated July 29, 1997 and the several
exhibits thereto for more detailed information about the Consolidation.

  The Company was incorporated in the State of Delaware in April 1961. The
executive offices of the Company are located at 550 Parkside Drive, Suite A-
14, Waterloo, Ontario, Canada N2L 5V4; its telephone number is (519) 885-5513.

  Unless the context indicates to the contrary, references to the Company
herein include both the Company and its majority and wholly-owned
subsidiaries, all references to shares of Common Stock and per share data
herein give effect to the implementation of the Plan upon the effectiveness of
the Consolidation and all references to the Company's business refer to those
operations conducted by the Company subsequent to the Consolidation Date.

  (b) Financial Information About Industry Segments

  Reference is made to Note 16 of the Notes to the Consolidated Financial
Statements, which information is incorporated herein by reference.

  (c) Narrative Description of Business

Introduction

  The Company's proprietary technology is designed to control a wide variety
of air pollution control problems for industries ranging from pulp and paper,
wood products, mining, non-ferrous metallurgical, iron and steel, chemical,
food and beverage, waste processing, hazardous and municipal solid waste (MSW)
incineration, power generation, automotive, cement, as well as general
manufacturing. The Company believes its products, which are designed to meet
the strictest emission regulations for gaseous and particulate emissions,
afford economic and technical advantages over conventional air pollution
equipment.

  Certain of the Company's products and systems employ proprietary nozzles to
atomize liquids passing through the nozzles, resulting in the liquid being
converted into fine droplets. Droplet sizes and liquid flow rates

                                       2
<PAGE>

can be modulated by controlling the liquid and gas pressures applied to the
nozzle. The atomizing nozzles, which have been designed to reduce the
temperature of gases, have been sold by the Company for many years.

  The following table reflects the approximate percentages of the Company's
revenue derived from its principal customer categories during the fiscal years
indicated:

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                  June 30,
                                                                 -------------
                                                                 1999    1998
                                                                 -----   -----
   <S>                                                           <C>     <C>
   Hazardous waste incineration.................................     3%      3%
   Solid waste incineration.....................................     5      15
   Chemical and mining processing...............................    43      27
   Metallurgical processing.....................................    10      33
   Dust suppression.............................................     6       1
   Pulp and paper...............................................    21      16
   Other........................................................    12       5
                                                                 -----   -----
                                                                   100%    100%
                                                                 =====   =====
</TABLE>

  The Company is contractually responsible to its customers for all phases of
the design, fabrication and, if included in the scope of the Company's
contract, field installation of its products and systems. The Company's
successful completion of its contractual obligation is generally determined by
a performance test that is conducted either by its customer or by a customer-
selected independent testing agency.

  The Company performs all process engineering, including but not limited to,
the determination of the size, geometry and structural characteristics of the
particular system needed for gaseous, non-condensate or particulate removal,
and performs the detailed design of, and develops specifications for, all
structural, electrical, mechanical and chemical components of such system. The
Company, historically, has not manufactured or fabricated its own products or
systems. Rather, it purchases alloy steel components and various electrical
and other parts consisting of both off-the-shelf items and items, such as its
atomizing nozzles, which are made to its design and specifications by third
party manufacturers and fabricators, enters into subcontracts for field
construction, which it supervises, and manages all technical, physical and
commercial aspects of the performance of its contracts. The Company also does
not engage in the field construction of its systems but relies on field
construction subcontractors operating under the supervision of the Company's
own employees.

Products and Systems

  The Company offers a range of products and systems, incorporating diverse
technologies, to address the industrial processing, air pollution control and
other environmental management needs of its customers. Many of such customers
have historically purchased individual products or systems from the Company
that, in many instances, operate in conjunction with products and systems
supplied by others. In the last several years, the Company has emphasized the
marketing of custom engineered air pollution control systems that may provide
combinations of its own products and systems as an integrated environmental
management solution.

  The following table reflects the approximate percentages of the Company's
revenue derived from its principal products and systems during the fiscal
years indicated below:

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                  June 30,
                                                                 -------------
                                                                 1999    1998
                                                                 -----   -----
   <S>                                                           <C>     <C>
   Evaporative gas cooling and conditioning systems.............    39%     56%
   Flue gas desulfurization systems.............................     3     --
   Wet scrubber systems.........................................    35      28
   Dust control and suppression systems.........................     8       2
   Other nozzle systems.........................................    15      14
                                                                 -----   -----
                                                                   100%    100%
                                                                 =====   =====
</TABLE>

                                       3
<PAGE>

  The principal products and systems offered by the Company are described
below:

 Evaporative Gas Cooling and Conditioning Systems

  Gases containing particulates and other gaseous pollutants generally emanate
from their sources at extremely high temperatures (approximately
500(degrees)F--2,500(degrees)F). The temperature of such gases must be reduced
prior to their passage through air pollution control equipment to enable such
equipment to operate efficiently. The conventional method for reducing the
temperature of gases is to pass them through an evaporative gas cooling tower
that typically utilizes atomizing nozzles to spray a liquid into the gases.
However, liquid droplets injected into the hot gases do not always evaporate
completely, which may cause uneven wetting of particulates and may not
sufficiently lower the temperature of the gases if such droplets are too
large. Any one or more of these problems will adversely affect the operating
efficiency of the air pollution control equipment. The Company's evaporative
gas cooling and conditioning systems are designed to efficiently reduce the
temperature of gases by utilizing its atomizing nozzle to produce extremely
small liquid droplets.

  The Company is an internationally known leader in evaporative gas cooling
with over 450 installations throughout the world. Principal customers include
businesses engaged in chemical, cement, mining and metallurgical processing
and solid waste, medical and hazardous waste and sewage sludge incineration.

 Wet Scrubber Systems

  Wet scrubber systems are generally used to remove gaseous pollutants as well
as particulate matter contained in exhaust gas streams.

  Each wet scrubber system relies on the Company's proprietary spray nozzle
systems to finely atomize scrubbing liquids into literally trillions of
droplets. These droplets are the vehicle for removal of solid, liquid and
gaseous contaminants from process exhaust gas streams. This approach is more
efficient than "conventional" practice because energy input is focused on
atomized spray production, rather than overall gas handling, resulting in
reduced operating costs.

  The Company has applied its patented scrubber technology to a wide variety
of air pollution control problems. Its equipment, designed to meet the most
stringent regulations limiting gaseous and particulate emissions, has also
been retrofitted into competing technologies to improve their performance.

  Flue Gas Desulfurization (FGD) Systems

  Sulfur dioxide (SO\\2\\) emissions from utilities' coal-fired generation
facilities are the major contributor to "acid rain." The Company's flue gas
desulfurization (FGD) system employs a regenerative process, utilizing an
amine-based sorbent, manufactured by The Dow Chemical Company, to selectively
absorb SO\\2\\ from process gas exhaust streams, with particular application
to oil and coal-fired power boilers, acid plants and refineries. Further, the
amine-based sorbent is regenerated for re-use during the on-going scrubbing
process. SO\\2\\ removal efficiencies of greater than 99% have been achieved.
The system also allows for the recovery of SO\\2\\ in pure form, which can be
processed to produce secondary by-products including liquid SO\\2\\, sulfuric
acid and elemental sulfur, depending on available markets for the byproduct.
This technology represents an advancement in the FGD field as it provides an
economic return for the user in addition to meeting regulatory requirements.
The Company also offers conventional FGD processes employing liquid/slurry
reagents that effect the removal of SO\\2\\ and particulate in a single
scrubbing unit, which have been shown to achieve higher efficiencies at
reduced energy and reagent consumption.

  A pilot FGD system has been successfully tested at a major paper company
installation and an engineering study has been completed and is presently
being evaluated by a major U.S. utility. The Company is currently working with
several companies who have expressed an interest in FGD systems, although no
sales of such systems have been made as of September 15, 1999.


                                       4
<PAGE>

 Wet Electrostatic Precipitator Systems

  Wet electrostatic precipitators ("WESPs") are one of several methods of
removing particulate from gas streams. WESPs, however, are able to remove much
finer particulate than dry electrostatic precipitators, scrubbers and fabric
filters. In a typical WESP, a gas stream flows into a vertical tube between
discharge and collecting electrodes. Particulate in the flowing gases are
charged as they pass through electrodes and are then attracted to oppositely
charged collection surfaces. In a WESP, particulate are removed from the
collecting surface by an irrigating film of liquid. The Company believes that
its SonicKleen(R) WESP system, which is based upon the use of atomizing
nozzles, is effective due to its design which concentrates the electrical
discharge in specific zones within the collecting tube.

  Increasingly stringent standards for control of fine (sub-micron)
particulate necessitate the use of highly efficient particulate collection
technology. Currently, the U.S. EPA is tightening emission standards to target
finer respirable particulate. In an increasing number of cases, this new
standard will require the use of electrostatic precipitation. The Company's
WESP is capable of achieving high efficiency sub-micron particulate capture at
lower energy consumption than wet scrubbing.

  First introduced in 1991, five SonicKleen(R) WESP systems have been
installed in sewage sludge incinerators, one in a hospital medical waste
facility, and one in a large pulp and paper manufacturing facility. There have
not been any sales of WESP systems in the two year period ended June 30, 1999.

 Dust Control and Suppression Systems

  Dust particles from primary and secondary crushing, screening, transfer and
loading-unloading facilities such as hoppers, feeders, bins, ducts, silos, and
rail and motor vehicles are a major source of atmospheric pollution as well as
a contributing factor towards a reduction in the useful life of operating
machinery components. The Company is a leader in dust control with its Dry
Fog(R) engineered systems which control virtually all types of respirable and
larger size fugitive dust. The Company's Dry Fog(R) dust control and
suppression system is used primarily by businesses engaged in the handling or
processing of mineral ore, limestone, and aggregates. Over 400 dust control
and suppression systems have been completed to date by the Company.

 Chemical Oxidizers

  Sulfurous odors are commonly associated with emissions from pulp and paper
mills. The pulping process generates a variety of hazardous air pollutants,
such as non-condensable gases predominantly comprised of reduced sulfur
compounds (TRS). TRS gases are highly odorous and have traditionally been
treated by thermal oxidation (incineration). The Company's NCG (non-
condensable gases) chemical oxidizer, which chemically treats TRS gases,
substantially eliminates these odors at significant savings in capital and
operating costs when compared to thermal oxidizers and does not produce
greenhouse gases.

 Heat Exchangers

  The Company, through an 80% owned subsidiary, owns patent rights and
technology relating to the use of ceramic heat exchangers. Ceramic heat
exchangers are generally used to extract thermal energy from heated air, which
can be used in diverse applications to improve fuel efficiencies and/or
industrial processes. Most applications are found in high temperature ranges
(generally above 1800F) where metal heat exchangers would be unsuitable due to
excessive erosion or decomposition. Such heat exchangers, which employ ceramic
composite materials in such a manner as to effectively and efficiently seal
and reuse heated process air, have operated successfully in some, but not all,
commercial environments.

  The persons from whom the Company acquired its ceramic heat exchanger patent
rights and technology commenced adversary proceedings against the Company to
rescind the transfer of such rights and for damages. One of the lawsuits has
been resolved in the Company's favor and the other one has not been pursued in
Court.

                                       5
<PAGE>

The Company believes it has clear title to the patents and technology;
however, due to capital limitations, the Company has not pursued the
commercialization of this technology.

 Spare Parts

  The Company provides replacement and spare parts for both its industrial gas
processing and air pollution control systems following the expiration of the
Company's warranty. Such warranty generally ranges from 12 to 18 months
depending, respectively, upon when the system becomes operational or when it
is shipped to the customer. Warranty liabilities have been minimal to date.
The Company believes that in view of the extreme conditions under which
industrial process and air pollution control systems operate that there is an
ongoing requirement for spare parts that should create additional demand for
the Company's products.

Contractual Liabilities

  The Company's standard contractual terms with respect to the sale of its
products and systems disclaim any liability for consequential or indirect
losses or damages stemming from any failure of the Company's products or
systems or any component thereof. The Company customarily seeks contractual
indemnification from its subcontractors for any loss, damage or claim arising
from the subcontractor's failure of performance, negligence or malfeasance. It
is likely, however, that a customer's inability to comply with applicable
pollution control laws or regulations stemming from the failure or non-
performance of the Company's products or systems may subject the Company to
liability for any fines imposed upon such customer by governmental regulatory
authorities or for damages asserted to have been incurred by any third party
adversely affected thereby.

Marketing and Sales

  The Company's marketing efforts are technical in nature and currently
involve its senior management and technical professionals, supported by
independent sales representatives. The Company's contractual arrangements with
its 20 current independent sales representatives accord each a defined
territory within which to sell some or all of the Company's products and
systems, provide for the payment of agreed-upon sales commissions and are
terminable at will by either the Company or the representative upon relatively
short prior notice. None of such representatives, however, have authority to
execute contracts on the Company's behalf. A significant portion of the
Company's sales are made through the recommendation of engineering firms,
which play a significant role in the design and manufacture of air pollution
control systems and in customers' selection of the vendors of such systems.

  The Company's sales representatives, who assist the Company in consummating
sales of its products and services, serve an ongoing liaison function between
the Company and its customers during the installation phase of the Company's
products and systems and address customers' questions or concerns arising
thereafter. Sales representatives are selected by the Company based upon
industry reputation, prior sales performance including number of prospective
leads generated and sales closure rates, and the breadth of territorial
coverage, among other criteria.

  Technical inquiries received from potential customers are referred to the
Company's engineering personnel. Thereafter, the Company's sales and
engineering personnel jointly prepare either a budget for future planning or a
final bid. The period between initial customer contact and issuance of an
order varies widely, but is generally between 6 and 24 months.

  Although the Company seeks to obtain repeat business from its customers, it
does not depend upon any single customer to maintain its level of activity
from year to year. However, one or more different customers may be expected to
account for greater than 10% of the Company's net revenues in any consecutive
twelve month period.

  One customer, Wheelabrator, APC, accounted for 10% of the Company's net
revenues during the fiscal year ended June 30, 1998. During the fiscal year
ended June 30, 1999, one customer, E.I.DuPont de Nemours, accounted for 12% of
the Company's net revenues.

                                       6
<PAGE>

Backlog

  At September 1, 1999, the amount of the Company's contract backlog was
approximately $947,000, contrasted with $569,000 at September 1, 1998. Backlog
represents work for which the Company has entered into a signed agreement or
has received an order to proceed. Completion of all of the Company's backlog
is anticipated to occur prior to June 30, 2000.

Product Development

  The Company has an ongoing program for the development and commercialization
of new industrial processing and air pollution control products, systems and
technologies, and the enhancement of existing products and systems.

Proprietary Protection

  The Company owns or has licensed rights to 30 international patents relating
to a variety of air pollution control applications.

  The Company has registered servicemarks or trademarks in the United States
and certain foreign countries for several identifying names which it uses with
its products and systems including Sonicool(R), Sonicore(R), SonicKleen(R) and
Dry Fog(R).

  The Company relies on a combination of patents, trade and service marks,
trade secrets and know-how to protect its proprietary technology and rights.
There can be no assurance that the Company's patents will not be infringed
upon, that the Company would have adequate remedies for any such infringement,
or that its trade secrets will not otherwise become known to or independently
developed by competitors. There can also be no assurance that any patents now
or hereafter issued to, licensed by or applied for by the Company will be
upheld, if challenged, or that the protections afforded thereby will not be
circumvented by others. Litigation may be necessary to defend the Company's
proprietary rights, which would result in significant cost to the Company and
a diversion of effort of its personnel.

Suppliers and Subcontractors

  Like other companies in the industrial processing and environmental
management control industry, the Company has historically relied on third
parties to manufacture and fabricate its products and to supply parts and
components for its systems in accordance with the Company's specifications. In
those instances in which the Company's scope of work includes installation of
equipment, the Company selects and supervises subcontractors for this work. To
date, the Company has not experienced difficulties either in obtaining
fabricated components and other materials and parts used in any of its
products and systems or in obtaining qualified subcontractors. The Company's
vendor sources for various components, materials and parts used in its
systems, including its atomizing nozzle, control switches and electrical and
other components, includes more than 50 firms. The Company does not depend on
any one of the vendors to a material extent, and in any event the Company
believes that alternative vendors would be available if needed. With respect
to fabricators, the Company has satisfactory relationships with more than ten
fabricators. Similarly, with respect to subcontractors for installation work,
the Company has satisfactory relations with more than three firms. On the
basis of the number of vendors, fabricators and subcontractors which it
utilizes and the availability of alternative sources, the Company does not
believe that the loss of its relationship with any one firm would have a
material adverse effect on its business.

Bonding and Insurance

  While only one of the contracts performed by the Company to date has
required it to procure bid and performance bonds, such requirements are
prevalent for projects partially or fully funded by federal, state or local
governments. A bid bond guarantees that a bidder will execute a contract if it
is awarded the job and a performance bond guarantees performance of the
contract. The Company does not, at the present time, have any

                                       7
<PAGE>

ability to provide bid or performance bonds. This could have an adverse effect
on the Company's ability to obtain certain contracts.

  The Company currently maintains different types of insurance, including
general liability and property coverage. The Company, however, does not
maintain any professional liability insurance with respect to the engineering
and other professional services it renders its customers. A successful claim
or claims in an amount in excess of the Company's insurance coverage or for
which there is no coverage could have a material adverse effect on the
Company.

Government Regulation

  Stringent environmental laws have been enacted in the United States and, to
a lesser extent, in Canada and certain Western European nations in response to
public concern about the environment. The Company believes that the need to
comply with these laws creates demand for the Company's products and systems.
The Federal Clean Air Act, Federal, state and local regulations which
implement it and the enforcement of these laws and regulations largely
determine the level of expenditures that customers will make to limit
emissions from their facilities.

  The Federal Clean Air Act, initially adopted in 1970 and extensively amended
in 1990, requires compliance with ambient air quality standards and empowers
the EPA to establish and enforce limits on the emission of various pollutants
from specific types of industrial facilities. The states have primary
responsibility for implementing these standards, and, in some cases, have
adopted standards more stringent than those established by the EPA.

  The 1990 amendments to the Federal Clean Air Act require, among other
matters, the reduction in the United States of the annual emission of sulfur
oxides, believed to be the cause of "acid rain" from approximately 20,000,000
tons to 10,000,000 tons by the year 2000, significant reductions in the
emission of 189 identified hazardous air pollutants and toxic substances and
the installation of equipment and systems which will contain certain named
toxic substances used in industrial processes in the event of sudden,
accidental, high-volume releases. Such amendments also extend regulatory
coverage to many facilities previously exempt due to their small size and
require the EPA to identify those industries which will be required to install
the mandated control technology for the industry to reduce the emission of
hazardous air pollutants from their respective plants and facilities.
Regulations promulgated by the EPA in February 1993 further limit the
concentration of pollutants, such as hydrogen chloride, sulfur dioxide,
chlorine, heavy metals and other hazardous solid substances in the form of
extremely fine dust, from sewage sludge incinerators. Sewage sludge
incineration facilities were required to comply with these newly adopted
regulations by February 1995 although the EPA has since extended the time by
which these facilities must be in compliance.

  Legislative proposals introduced in the U.S. Congress seek abolition of
certain environmental laws and regulations, reduced levels of enforcement for
others and cost justification and extended hearings prior to the enactment of
any future such laws and regulations. The enactment into law of any one or
more of such proposals, the likelihood of which cannot be predicted, could
have an adverse effect on the Company's ability to sell its products and
systems.

  The materials handling aspect of the Company's business is also dependent in
part upon the regulation under the Federal Occupation and Safety Health Act of
the level of dust concentration to which workers may be exposed in the
workplace.

Competition

  The Company faces substantial competition in each of its principal markets
from numerous competitors. Most of the Company's competitors are larger and
have greater financial resources than the Company. The Company competes
primarily on the basis of price as well as its engineering and technological
expertise, know-

                                       8
<PAGE>

how and quality of its products, systems and service. Additionally, the
Company believes that the successful performance of its installed products and
systems is a key factor in dealing with its customers, which typically prefer
to make significant purchases from a company with a solid performance history.

  Virtually all contracts for the Company's products and systems are obtained
through competitive bidding. Although price is an important factor and may in
some cases be the governing factor, it is not always determinative, and
contracts are often awarded on the basis of the efficiency or reliability of
products and the engineering and technical expertise of the bidder.

Employees

  As of June 30, 1999, the Company employed 26 full time and 1 part time
persons, of whom 2 were executive officers, 7 were engineers, 4 were in sales,
1 in production, 10 in technical support and 3 in administrative support. None
of the Company's employees are represented by a labor union. The Company
believes that its relationship with its employees is satisfactory.

  (d) Financial Information about Foreign and Domestic Operations and Export
Sales

  U.S. and Canadian customers collectively accounted for approximately 83% and
79% of the Company's sales during the years ended June 30, 1999 and 1998,
respectively. All revenue derived from export sales is transacted in U.S.
dollars.

  The following table reflects the approximate percentages of the Company's
revenue derived from United States, Canadian and foreign sales during the
fiscal years indicated below:

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                  June 30,
                                                                 -------------
                                                                 1999    1998
                                                                 -----   -----
   <S>                                                           <C>     <C>
   United States................................................    61%     49%
   Canada.......................................................    22      30
   South and Central America....................................    10       8
   Far East.....................................................     5       4
   Other........................................................     2       9
                                                                 -----   -----
                                                                   100%    100%
                                                                 =====   =====
</TABLE>

                          FORWARD-LOOKING STATEMENTS

  Forward-looking statements in this Report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that such forward-looking statements involve risks
and uncertainties that could cause actual results to differ materially from
those expressed therein. Such risks and uncertainties include, among others,
the following:

  .  Dependence on Environmental Regulation. The market for the Company's air
     pollution control products and systems is directly dependent upon the
     existence and enforcement of laws and regulations which limit or
     prohibit the release of pollutants into the atmosphere and impose
     substantial penalties for non-compliance. Legislative proposals
     introduced in the current session of the U.S. Congress seek abolition or
     reduced enforcement of many previously enacted environmental laws and
     regulations and would impose substantial impediments to the adoption of
     any additional environmental regulatory programs. The enactment of any
     such proposals into law or any reduction in the stringency of
     environmental law enforcement from present levels could have an adverse
     effect on the Company's ability to sell its products and systems and may
     have a materially adverse effect upon its future revenues and prospects
     of profitability.


                                       9
<PAGE>

  .  Limited Protection of Patents and Proprietary Rights. The Company relies
     on a combination of patents, trade and service marks, trade secrets and
     know-how to protect its proprietary technology and rights. There can be
     no assurance that the Company's patents will not be infringed upon, that
     the Company would have adequate remedies for any such infringement, or
     that its trade secrets will not otherwise become known to or
     independently developed by competitors. There can also be no assurance
     that any patents now or hereafter issued to, licensed by or applied for
     by the Company will be upheld, if challenged, or that the protections
     afforded thereby will not be circumvented by others. Litigation may be
     necessary to defend the Company's proprietary rights, which would result
     in significant cost to the Company and a diversion of effort of its
     personnel.

  .  Export Sales. Approximately 17% and 21% of the Company's revenues during
     the fiscal years ended June 30, 1999 and 1998, respectively, were
     derived from sales made outside of the United States and Canada. The
     Company's profitability and financial condition are materially
     dependent, therefore, on the success of its foreign sales efforts.
     Foreign sales are subject to certain inherent risks, including
     unexpected changes in regulatory and other legal requirements, tariffs
     and other trade barriers, great difficulty in collection of accounts
     receivable and potentially adverse tax consequences. There can be no
     assurance that these factors will not have any adverse impact on the
     Company's future foreign sales and, consequently, on the Company's
     operating results.

  .  Bonding Requirements. While only one of the contracts performed by the
     Company to date has required it to procure bid and performance bonds,
     such requirements are prevalent for projects partially or fully funded
     by federal, state or local governments. A bid bond guarantees that a
     bidder will execute a contract if it is awarded the job and a
     performance bond will guarantee performance of the contract. The
     Company's inability to obtain bonding could have an adverse effect on
     the Company's future revenues.

  .  Permitting Delays. All of the Company's domestic projects generally
     require permits to be issued by one or more governmental agencies prior
     to the commencement of both construction and operation. Issuance of such
     permits are often delayed by political and other considerations.
     Permitting delays could cause extended delay or cancellation of one or
     more of the Company's large projects, which would adversely impact the
     Company's future revenues.

  .  Dependence on Manufacturers, Fabricators and Subcontractors. The Company
     in most instances does not manufacture or fabricate its own products or
     systems, relying instead upon the services of third party manufacturers
     and fabricators. The Company also does not engage in the field
     construction of its systems but relies on field construction
     subcontractors operating under the supervision of the Company's own
     employees. The unavailability of the services of, or a substantial
     increase in pricing by a significant number of, these manufacturers,
     fabricators or subcontractors could adversely affect the Company. Given
     the number of manufacturers, fabricators and subcontractors which it
     utilizes and the availability of alternative sources, the Company does
     not believe that the loss of its relationship with any one firm would
     have a material adverse effect on its business.

  .  Competition. Most of the Company's competitors are larger and have
     greater financial and other resources than the Company. The markets for
     environmental control products and systems are both characterized by
     substantial competition based primarily on engineering and technological
     expertise and quality of service. Because virtually all contracts for
     the Company's products and systems are obtained through competitive
     bidding, price is also a competitive factor and may be the most
     significant factor in certain instances. Although the Company believes
     that it competes on the basis of its technical expertise and reputation
     for service, there can be no assurance that the Company will maintain
     its competitive position in its principal markets.

  .  Fixed Price Contracts. The Company's receipt of a fixed price contract
     as a consequence of being the lowest competitive bidder carries the
     inherent risk that the Company's actual performance costs may exceed the
     estimates upon which its bid for such contract was based. To the extent
     that contract performance costs exceed projected costs, the Company's
     profitability could be materially adversely affected.


                                      10
<PAGE>

  .  Potential Liability. The Company may become subject to liability claims
     in connection with the use of its products and systems. The Company does
     not carry any product liability insurance nor does it carry any
     professional liability insurance with respect to the engineering and
     other professional services it renders its customers. Any future
     inability to obtain insurance of the type and in the amounts required
     could impair the Company's ability to obtain some contracts, which are,
     in certain instances, conditioned upon the availability of adequate
     insurance coverage.

ITEM 2. PROPERTIES

  The Company leases approximately 9,700 square feet of executive and
administrative offices and shop space in Waterloo, Ontario, Canada at an
annual rent of approximately $48,000. Insurance and utilities are paid
separately. This lease expires on June 30, 2002 and, at the Company's option,
may be renewed for an additional two year term on substantially identical
terms.

  The Company also leases approximately 5,040 square feet of office and shop
space in East Hanover, New Jersey at an annual rental of approximately
$50,000. In addition, the Company must pay annual cost of living increases
(not to exceed 4% per year) based upon changes in the Consumer Price Index,
taxes, insurance and utilities. This lease will expire on August 30, 2002 and
may be renewed for an additional five year term on substantially identical
terms. The Company sub-leases approximately 20% of this space to a company
owned by one of its directors on a month to month basis for $1,000 per month.

ITEM 3. LEGAL PROCEEDINGS

  None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  No matters were submitted for a vote to the Company's security holders
during the fourth quarter of the Company's fiscal year ended June 30, 1999.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  (a) The following table sets forth the range of the bid quotations for the
Company's Common Stock for the periods shown, as furnished by National
Quotation Bureau Incorporated and NASDAQ.

<TABLE>
<CAPTION>
                                                                 Common Stock
                                                                      (1)
                                                                ---------------
                                                                 High     Low
                                                                ------- -------
<S>                                                             <C>     <C>
Fiscal Year Ended June 30, 1998:
  Second Quarter (commencing December 23, 1997)................ $  0.25 $  0.30
  Third Quarter................................................ $ 1.125 $  0.25
  Fourth Quarter............................................... $  1.00 $ 0.375
Fiscal Year Ended June 30, 1999:
  First Quarter................................................ $ 0.687 $ 0.375
  Second Quarter............................................... $ 0.562 $  0.04
  Third Quarter................................................ $ 0.593 $  0.20
  Fourth Quarter............................................... $ 0.562 $  0.25
</TABLE>
--------
  (1) The above quotations represent prices between dealers and do not include
retail mark up, markdown or commission. They do not necessarily represent
actual transactions.

                                      11
<PAGE>

  The Company's securities were delisted from the NASDAQ Small-Cap Market in
April 1996. Subsequent trading took place upon the OTC Bulletin Board until
the Consolidation Date at which time all of the Company's then outstanding
securities were extinguished, resulting in a cessation of trading activity.
The Company's Common Stock resumed trading on the OTC Bulletin Board on
December 23, 1997. Prior to that date and subsequent to the Consolidation
Date, the Common Stock was quoted in the "pink sheets" published by National
Quotation Bureau Incorporated.

  (b) As of June 30, 1999, there were 600 holders of record of the Common
Stock.

  (c) The Company does not anticipate paying any cash dividends in the
foreseeable future, as it is the current policy of the Company's Board of
Directors to retain any earnings to finance the Company's future operations
and expand its business.

                                      12
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

  The selected consolidated financial data presented below are derived from
the Company's consolidated financial statements. This financial information
should be read in conjunction with Item 5--"Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 7--
"Financial Statements and Supplementary Data".

                         Statement of Operations Data:
           (In thousand U.S. Dollars, except per share information)

<TABLE>
<CAPTION>
                                                    Year Ended June 30,
                                               --------------------------------
                                                  1999       1998       1997
                                               ----------  ---------  ---------
<S>                                            <C>         <C>        <C>
Total revenue................................  $    3,857  $   2,849  $   4,150
Total cost of revenue........................       2,356      1,965      2,601
Selling, general and administrative expenses.       1,406      1,953      1,541
Interest income (expense)....................         (14)        13         10
                                               ----------  ---------  ---------
Earnings (loss) from continuing operations
 before income taxes (benefit)...............          81     (1,056)        18
Income taxes (benefit).......................          25        (14)        59
                                               ----------  ---------  ---------
Net income (loss) from continuing operations.          56     (1,042)       (41)
Extinguishment of debt.......................         113        --         --
                                               ----------  ---------  ---------
Net income (loss)............................  $      169  $  (1,042) $    ( 41)
                                               ==========  =========  =========
Basic earnings (loss) per share:
  Net income (loss) per share before
   extraordinary item........................  $     0.01  $   (0.12) $   (0.00)
  Net income per share from extraordinary
   item......................................  $     0.01        --         --


Diluted earnings (loss) per share:
  Net income (loss) per share before
   extraordinary item........................  $     0.01  $   (0.12) $   (0.00)
  Net income (loss) from extraordinary item..  $     0.01        --         --
Cash dividends per share.....................         --         --         --
Weighted average number of shares
 outstanding:
      --basic................................  10,000,000  8,609,707  8,200,000
      --diluted..............................  10,600,000  8,609,707  8,200,000

BALANCE SHEET DATA:

Working capital..............................  $      482  $    (138) $     523
Total assets.................................  $    2,483  $   2,421  $   2,146
Long-term debt...............................  $      380  $     152  $     724
Accumulated deficit..........................  $   (2,312) $  (2,481) $  (1,439)
Stockholders' equity.........................  $    1,414  $   1,239  $     301
</TABLE>


                                      13
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

Results of Operations

  Twelve Months Ended June 30, 1999 Compared with Twelve Months Ended June 30,
1998

  Nozzle revenue increased $321,500 (15.6%) to $2,386,445 from $2,064,945.
This increase is due primarily to the receipt of several large gas cooling and
dust suppression orders during 1999 and an increased volume of spare parts
orders over the previous year.

  Scrubber revenue increased $686,780 (87.6%) to $1,470,397 from $783,617 in
1998. This increase in revenues, in the current fiscal year, is attributable
to the supply of two scrubbers to a major chemical processing firm, a
significant increase in spare parts orders and the completion of an
engineering study commissioned by a major US utility with respect to the
technological feasibility of the Company's FGD system.

  Cost of nozzle equipment for the twelve month period ended June 30, 1999
decreased by $53,834 (3.7%) to $1,399,844 as compared to $1,453,678 for the
corresponding 1998 period. Expressed as a percentage of nozzle revenue, cost
of nozzles was 58.7% for the current twelve month period and 70.4% for the
same period in 1998. This decreased percentage was due to a return to more
historical margins than was experienced in the previous fiscal year.

  Cost of scrubbers increased $444,125 (86.8%) to $955,791 for the twelve
month period ended June 30, 1999 from $511,666 for the previous fiscal period.
Expressed as a percentage of scrubber revenue, scrubber costs for the 1999 and
1998 fiscal periods were 65.0% and 65.3%, respectively.

  Total expenses including selling, general and administrative expenses
decreased by $546,269 to $1,405,662 as contrasted with $1,951,931 for the same
period in 1998. Expressed as a percentage of total revenue, the selling,
general and administrative expenses were 36.4% for the current twelve month
period ended June 30, 1999 and 68.5% for the preceding fiscal period. This
reduction was the result of increased engineering absorption over the previous
fiscal period, a reduction in expenses related to the Company's New Jersey
operation, approval for investment tax credits for a previous year's R & D
claim (in Canada) and the non-recurrence of a charge against income in fiscal
1998 for Debt Conversion Inducement expense.

  Interest expense of $14,683 was recorded for the twelve months ended June
30, 1999 as compared to interest income of $12,895 in the 1998 fiscal period,
a decrease of $27,578. This increase in interest expense is the result of
interest expense on shareholder loans, together with a full year's interest on
pre-petition repayment programs for state and federal taxes.

Liquidity and Capital Resources

  The Company had a negative cash flow from operating activities of $24,227
for the twelve month period ended June 30, 1999, as compared to negative cash
flow of $421,983 for the same period in fiscal 1998, an improvement in cash
flow of $397,756.

  On an overall basis, the Company had a positive cash flow of $241,667 for
fiscal 1999 as compared to negative cash flow of $512,356 during the same
period in 1998, an improvement of $754,023. This increase is due primarily to
new shareholder loans of $273,411 in the current fiscal period.

  At June 30, 1999, the Company had positive working capital of $482,215 as
compared to negative working capital of $138,434 as at June 30, 1998, an
increase of $620,649. The Company's current ratio (current assets divided by
current liabilities) was 1.70 and 0.87 at June 30, 1999 and June 30, 1998,
respectively.

  The Company's contracts typically provide for progress payments based upon
the achievement of performance milestones or the passage of time. The
Company's contracts often provide for the Company's

                                      14
<PAGE>

customers to retain a portion of the contract price until the achievement of
performance guarantees has been demonstrated. The Company attempts to have its
progress billings exceed its costs and estimated earnings on uncompleted
contracts; however, it is possible, at any point in time, that costs and
estimated earnings can exceed progress billings on uncompleted contracts,
which would negatively impact cash flow and working capital. At June 30, 1999
and June 30, 1998, "Unearned revenue and contract advances" exceeded "Deferred
cost and unbilled revenue" by $37,254 and $110,988, respectively, thereby
negatively affecting working capital.

  As a result of the loss from operations incurred in the year ended June 30,
1998, the Company depleted its cash resources and had a working capital
deficiency as at June 30, 1998 of $138,434. As a consequence of such
deficiency, Donald R. Spink, Sr. and Patrick J. Forde, directors and officers
of the Company, together with two shareholders of the Company, lent an
aggregate of Canadian $400,000 (representing $261,510 at the exchange rate at
the date of each loan) to the Company. These lenders have indicated their
intention to provide financial support to the Company, if required, to meet
working capital needs during the coming year.

  The Company believes that projected cash generated from operations and the
proceeds from the shareholder loans, mentioned above, will be sufficient to
meet its cash needs through the end of the fiscal year ended June 30, 2000.

Year 2000

  The Company is aware of the potential for business disruption due to the
Year 2000 issue, and has taken steps to assess and address these issues. The
Company is addressing Y2K compliance in three major areas: internal operating
systems, including sales, purchasing, production, engineering, and finance;
products, including installed base and new products; and third party vendors.
Based on current internal audits, management believes that it has established
a Y2K plan which will address these issues.

  In order to assess Y2K compliance in its internal operating systems, the
Company first took an inventory of all such systems and identified those that
are critical to its operations. All such systems have been or will be tested
for Y2K compliance by September 30, 1999. Based on the results of testing to
date, it is estimated that about 90% of these systems are Y2K compliant. All
non-compliant systems are expected to be brought into compliance by October
31, 1999, either by upgrades or replacement.

  The Company has reviewed all systems and components, both those currently
being shipped as well as its installed base, and have found them to be Y2K
compliant.

  The area of Y2K compliance which poses the greatest risk to the Company is
its vendors, because of the Company's lack of control over their products and
operations. In order to assess their compliance, the Company has surveyed all
major vendors and expects that any compliance issues will be addressed by
October 31, 1999.

  Costs associated with the Company's Y2K compliance program are not
anticipated to be substantially different than normal, recurring costs, and
are not expected to materially affect financial results.

  While management believes that the Company's Y2K compliance program is on
plan for assessing and addressing any Y2K issues, full compliance cannot be
assured until this effort is completed. In particular, despite the Company's
best efforts, it may be unable to establish with certainty the compliance of
third party vendors, including those outside the United States and Canada. It
is possible that the non-compliance of a key vendor could interrupt the
Company's production schedules and adversely impact its ability to make timely
deliveries of its products.

  As this program progresses, management will be better able to assess the
Company's Y2K status in all of the areas outlined above, and focus its efforts
on any Y2K issues which become identified. By October 31, 1999, management
expects to develop contingency plans to be put into place in the event that
any of the Company's corrective actions fail to fully address the Y2K issues.


                                      15
<PAGE>

Quantitative and Qualitative Information About Market Risk

  The Company does not engage in trading market risk sensitive instruments and
does not purchase hedging instruments or "other than trading" instruments that
are likely to expose the Company to market risk, whether interest rate,
foreign currency exchange, commodity price or equity price risk. The Company
has issued no debt instruments, entered into no forward or future contracts,
purchased no options and entered into no swaps. The Company has no bank
borrowing facility that could subject it to the risk of interest rate
fluctuations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  Reference is made to pages F-1 through F-18 comprising a portion of this
Annual Report on Form 10-KSB.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

  Reference is made to the Company's Current Report on Form 8-K dated February
16, 1998 (filed February 20, 1998), the contents of which are incorporated
herein by reference, for information relating to the Company's dismissal of
Arthur Andersen LLP as its independent auditors and its subsequent retention
of Ernst & Young LLP as its independent auditors.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

  The Company's executive officers and directors are as follows:

<TABLE>
<CAPTION>
          Name              Age                Positions and Offices
          ----              ---     -------------------------------------------
<S>                         <C>     <C>
Edward F. Spink              44     Chairman of the Board and CEO

Patrick J. Forde             65     President, Secretary/Treasurer and Director

Richard H. Hurd              62     Director

Dr. Donald R. Spink, Sr.     75     Director
</TABLE>

  EDWARD F. SPINK served as President of the Company from the Consolidation
Date until June 15, 1999. On that date, the Board of Directors elected him
Chairman of the Board and Chief Executive Officer. Prior thereto and from
1995, he was President and a director of Turbotak. Mr. Spink was Vice
President--Operations of Turbotak from 1989 to 1995.

  PATRICK J. FORDE has been Secretary/Treasurer of the Company since the
Consolidation Date. He was elected President of the Company on June 15, 1999.
Prior thereto and from 1986 he was a director of Turbotak. Mr. Forde has
served as Vice President--Corporate Planning for Turbotak since 1996. He was
Chairman and Chief Executive Officer of Borg Textile Corporation from 1982 to
1995. He is president and owner of Glencree Investments, Inc., chairman of the
board of Waterloo Scientific, Inc. and serves on the board of several other
companies.

  RICHARD H. HURD served as President of the Company from August 1993 to
August 1997 and Treasurer of the Company from April 1994 to August 1997. He
has been a director of the Company since February 1993. From July 1996 through
the Consolidation Date, the Company operated as a debtor-in-possession under
Chapter 11 of the Federal Bankruptcy Code. Mr. Hurd has been President and
sole owner of RHB Capital Company Inc., a financial consulting company since
1987. He is also Co-Managing Director of Genuine Article Publishing Group,
LLC, a publisher of children's books.

  DR. DONALD R. SPINK, SR. served as Chairman of the Company from the
Consolidation Date until his resignation on June 15, 1999. He continues to
serve as a director and, upon request, as a technical advisor. Prior thereto
and from 1976 he was Chairman of Turbotak.

                                      16
<PAGE>

  All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Executive officers are
elected annually by the Board of Directors to hold office until the first
meeting of the Board following the next annual meeting of stockholders or
until their successors are chosen and qualified.

  The Audit Committee of the Board is charged with the review of the
activities of the Company's independent auditors including, but not limited
to, fees, services and audit scope. The Audit Committee is comprised of
Messrs. Forde and Hurd. The Compensation Committee of the Board is responsible
for oversight and administration of executive compensation. The Compensation
Committee is comprised of Messrs. Donald Spink and Forde. The Board of
Directors held three meetings during the fiscal year ended June 30, 1999.

  The Company has no standing nominating committee of its Board of Directors,
nor any committees performing similar functions. The Board of Directors as a
whole searches for potential nominees for Board positions and periodically
reviews the compensation of the Company's officers and employees and makes
appropriate adjustments.

  Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of the Company's
Common Stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors and greater
than 10% stockholders are required by the SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.

  Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no such forms were
required for those persons, the Company believes that during the fiscal year
ended June 30, 1999, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation

  Set forth below is the aggregate compensation for services rendered in all
capacities to the Company during its fiscal years ended June 30, 1999 and 1998
to its chief executive officer and each of its executive officers whose
compensation exceeded $100,000 during its fiscal year ended June 30, 1999 (the
"Named Officers"):

<TABLE>
<CAPTION>
                                                       Long Term
                           Annual Compensation    Compensation Awards
                         ----------------------- ----------------------
Name and          Year                           Restricted  Number of
Principal         Ended  Fiscal                    Stock    Options and
Position         June 30 Salary  Commissions (1)   Awards    Warrants
---------        ------- ------- --------------- ---------- -----------
<S>              <C>     <C>     <C>             <C>        <C>
Edward F. Spink   1999   $66,243     $ 3,505        --          --
CEO               1998   $30,754     $52,231        --          --
</TABLE>
--------
(1) Commissions represent a fixed percentage of sales recorded in each fiscal
   year. Effective July 1, 1998, Edward F. Spink's compensation was revised to
   include a base salary of $100,000 Canadian (US$63,000 at $1.47) plus a
   discretionary bonus to be determined at the end of each fiscal year by the
   Board of Directors.


                                      17
<PAGE>

Option Grants in Last Fiscal Year

  There were no option grants to the Named Officer during the year ended June
30, 1999. As provided in the Plan, one employee-director and two non-employee
directors of the Company were granted options on the Consolidation Date to
acquire, respectively, 100,000, 50,000 and 50,000 shares of the Company's
Common Stock at an exercise price of $1.00 per share, being the market price
of the Company's Common Stock on the Consolidation Date. The two 50,000 share
options expired on August 27, 1999. The 100,000 share option, which also was
scheduled to expire on that date, was extended until August 27, 2000.

Aggregated Option and Warrant Exercises in Last Fiscal Year and Fiscal Year
End Option Values

  Not applicable

Employment Agreements

  None of the Company's current executive officers is employed pursuant to an
employment agreement with the Company.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The following table sets forth, as of June 30, 1999 the shares of the
Company's Common Stock beneficially owned by each person who, to the knowledge
of the Company, is the holder of 5% or more of the Common Stock of the
Company, by each director of the Company, by the Named Officers and by all of
the executive officers and directors of the Company as a group:

                                      18
<PAGE>

<TABLE>
<CAPTION>
                                                      Amount and
Name of                                               Nature of      Approximate
Beneficial Owner or                                   Beneficial     Percentage
Identity of Group                                   Ownership (1)     of Class
-------------------                               ------------------ -----------
<S>                                               <C>                <C>
Dr. Donald R. Spink, Sr.*........................ 3,456,931(1)(2)(5)    32.9%
Edward F. Spink*.................................   465,338(1)           4.4%
Patrick J. Forde*................................   819,159(1)(3)(5)     7.8%
Richard H. Hurd**................................   213,938(1)(4)        2.0%
Canadian Venture Founders
 114 Lakeshore Road East
 Oakville, Ontario L6J 6N2 Canada................ 1,334,979(1)          12.7%
All executive officers
 and directors as a
 group (4 persons)............................... 4,955,366(1)-(5)      47.2%
</TABLE>
--------
*  550 Parkside Drive, Suite A-14, Waterloo, Ontario N2L 5V4, Canada.
** 11 Melanie Lane, Unit 22A, East Hanover, NJ 07936.
(1) Represents shares of Sonic Canada Inc., a wholly owned subsidiary of the
    Company, which by their terms are convertible at any time into a like
    number of shares of Common Stock of the Company ("Sonic Canada Shares").
(2) Includes 3,008,186 Sonic Canada Shares owned by Canadian numbered
    corporation, over which shares Dr. Spink exercises voting control.
(3) Includes 507,642 Sonic Canada Shares owned by the Patrick and Joan Forde
    Family Trust.
(4) Includes 1,195 shares owned by Mr. Hurd's spouse, as to which Mr. Hurd
    disclaims any beneficial ownership; also includes 100,000 shares issuable
    upon exercise of an option expiring in August 1999 at an exercise price of
    $1.00 per share, which option was granted pursuant to the Plan. The Board
    of Directors extended the expiration date for one year to August 27, 2000.
(5) Includes detachable warrants for each of Messrs. Donald Spink and Patrick
    Forde to purchase 100,000 common shares at an initial exercise price of
    $0.50 per share through October 31, 2000, increasing to $0.75 per share
    thereafter through October 31, 2002 and to $1.00 per share thereafter
    through October 31, 2003, respectively (see Note 8--Loans from
    Shareholders).

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Edward F. Spink is Dr. Donald R. Spink, Sr.'s son. On October 21, 1998 and
January 4, 1999, Mr. Donald Spink and Mr. Patrick Forde, respectively, lent an
aggregate of $130,190 to the Company. These loans are repayable two years from
the date of the loans, bear interest at 10% per annum and are collateralized
by a lien upon and security interest in substantially all of the Company's
assets. As an inducement to advance these sums to the Company, Mr. Donald
Spink and Mr. Forde were granted detachable warrants to purchase an aggregate
of 200,000 Common Stock of the Company at an initial exercise price of $0.50
per share through October 31, 2000, increasing to $0.75 per share thereafter
through October 31, 2002 and to $1.00 per share thereafter through October 31,
2003, respectively. The warrants, whose initial exercise price was greater
than the market price of the Company's Common Stock on the date such warrants
were granted, expire on the earlier of October 31, 2003 or 30 days after the
Company's shares have closed at a price per share above $1.50 for 10
consecutive trading days on the NASDAQ Electronic Bulletin Board.


                                      19
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND EXHIBITS, LIST AND
         REPORTS ON FORM 8-K

  (a) Financial Statements and Financial Statements Schedules:

  (i) Financial Statements
<TABLE>
<CAPTION>
                                                                       Page
                                                                    -----------
       <S>                                                          <C>
       Report of Independent Public Auditors                        F-1
       Consolidated Balance Sheet--June 30, 1999                    F-2
       Consolidated Statements of Operations for the years ended
        June 30, 1999 and 1998                                      F-3
       Consolidated Statement of Changes in Stockholders' Equity
        (Net Capital Deficiency) for the years ended June 30, 1999
        and 1998                                                    F-4
       Consolidated Statement of Cash Flows for the years ended
        June 30, 1999 and 1998                                      F-5
       Notes to Consolidated Financial Statements                   F-6 to F-18
</TABLE>

  (ii) Financial Statements Schedules

  All financial statement schedules are omitted because the conditions
requiring their filing do not exist or the information required thereby is
included in the financial statements filed, including the notes thereto.

  (b) Exhibits, List and Reports on Form 8-K:

    (i)Exhibits
      21--Subsidiaries
      27--Financial Data Schedule

    (ii)List
      Inapplicable.

    (iii)Reports on Form 8-K
      None.


                                       20
<PAGE>

                                   SIGNATURES

  In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                          TURBOSONIC TECHNOLOGIES, INC.

                                                  /s/  Patrick J. Forde
                                          By: _________________________________
                                                     Patrick J. Forde,
                                                         President

Date: September 28, 1999

  In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in its capacities and on the
dates indicated.

<TABLE>
<CAPTION>
              Signatures                        Capacity                 Date
              ----------                        --------                 ----

<S>                                    <C>                        <C>
       /s/ Edward F. Spink             Chairman of the Board of   September 28, 1999
______________________________________  Directors (Principal
           Edward F. Spink              Executive Officer)

       /s/ Patrick J. Forde            President, Secretary,      September 28, 1999
______________________________________  Treasurer and Director
           Patrick J. Forde             (Principal Financial and
                                        Accounting Officer)

       /s/ Richard H. Hurd             Director                   September 28, 1999
______________________________________
           Richard H. Hurd

     /s/ Donald R. Spink, Sr.          Director                   September 28, 1999
______________________________________
       Dr. Donald R. Spink, Sr.
</TABLE>

                                       21
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

To the Directors and Stockholders of TurboSonic Technologies, Inc.:

  We have audited the accompanying consolidated balance sheets of TurboSonic
Technologies, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 consolidated financial position of TurboSonic
Technologies, Inc. and subsidiaries as of June 30, 1999 and 1998 and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the
United States.

                                          Ernst & Young LLP
                                          Chartered Accountants

Kitchener, Canada
August 30, 1999

                                      F-1
<PAGE>

                 TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
      [Incorporated under the laws of Delaware, United States of America]

                          CONSOLIDATED BALANCE SHEETS
                                 As at June 30
                       Expressed in United States dollars

<TABLE>
<CAPTION>
                                                           1999        1998
                                                        ----------  ----------
                                                            $           $
<S>                                                     <C>         <C>
                        ASSETS
CURRENT
  Cash.................................................    310,944      69,277
  Accounts receivable (Note 4).........................    475,804     491,137
  Investment tax credits receivable....................     57,497      29,135
  Income taxes receivable..............................     18,682         --
  Inventories (Note 5).................................    126,764     137,388
  Deferred contract costs and unbilled revenue.........    106,275      52,764
  Other current assets.................................     74,600     111,286
                                                        ----------  ----------
    TOTAL CURRENT ASSETS...............................  1,170,566     890,987
                                                        ----------  ----------
FIXED ASSETS (Note 6)..................................     89,519     113,489
GOODWILL, LESS ACCUMULATED AMORTIZATION (Note 7).......  1,202,374   1,395,943
OTHER ASSETS...........................................     20,415      20,406
                                                        ----------  ----------
                                                         1,312,308   1,529,838
                                                        ----------  ----------
  TOTAL ASSETS.........................................  2,482,874   2,420,825
                                                        ==========  ==========
         LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
  Accounts payable and accrued charges.................    453,897     675,428
  Accrued commissions..................................     27,311      35,940
  Accrued professional fees............................     63,614     154,301
  Unearned revenue and contract advances...............    143,529     163,752
                                                        ----------  ----------
    TOTAL CURRENT LIABILITIES..........................    688,351   1,029,421
                                                        ----------  ----------
  Accrued charges......................................    113,206     152,262
  Loans from shareholders (Note 8).....................    266,964         --
                                                        ----------  ----------
    TOTAL LIABILITIES..................................  1,068,521   1,181,683
                                                        ----------  ----------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY
Share capital (Note 10)
 Authorized
  21,800,000 common shares par value $0.10 per share...
  8,200,000 exchangeable shares par value $0.10 per
   share...............................................
 Issued
  1,800,000 common shares..............................        --          --
  8,200,000 exchangeable shares........................  2,299,096   2,299,096
  Additional paid-in capital...........................  1,448,038   1,439,586
                                                        ----------  ----------
                                                         3,747,134   3,738,682
  Accumulated other comprehensive income...............    (20,936)    (18,384)
  (Deficit)............................................ (2,311,845) (2,481,156)
                                                        ----------  ----------
    TOTAL SHAREHOLDERS' EQUITY.........................  1,414,353   1,239,142
                                                        ----------  ----------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.........  2,482,874   2,420,825
                                                        ==========  ==========
</TABLE>

                             See accompanying notes

                                      F-2
<PAGE>

                 TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
                               Year ended June 30
                       Expressed in United States dollars

<TABLE>
<CAPTION>
                                                            1999        1998
                                                         ----------  ----------
                                                             $           $
<S>                                                      <C>         <C>
Contract revenue and sales..............................  3,856,842   2,848,560
Contract costs and cost of sales........................  2,355,635   1,965,344
                                                         ----------  ----------
    Gross margin........................................  1,501,207     883,216
                                                         ----------  ----------
EXPENSES
  Selling, general and administrative...................  1,401,256   1,445,937
  Research and development (Note 11)....................    (14,997)    108,670
  Engineering...........................................     19,403     302,649
  Debt conversion expense...............................        --       94,675
                                                         ----------  ----------
                                                          1,405,662   1,951,931
                                                         ----------  ----------
Income (loss) from operations...........................     95,545  (1,068,715)
Net interest (expense) income...........................    (14,683)     12,895
                                                         ----------  ----------
Income (loss) before income taxes.......................     80,862  (1,055,820)
Provision for (recovery of) income taxes (Note 12)......     24,909     (13,925)
                                                         ----------  ----------
Income (loss) before extraordinary item.................     55,953  (1,041,895)
Extinguishment of debt (Note 13)........................    113,358         --
                                                         ----------  ----------
Net income (loss).......................................    169,311  (1,041,895)
                                                         ==========  ==========
Basic earnings (loss) per share (Note 14)
  Income (loss) before extraordinary item...............      $0.01      $(0.12)
  Extraordinary item....................................       0.01         --
                                                         ----------  ----------
                                                               0.02       (0.12)
                                                         ==========  ==========
Diluted earnings (loss) per share (Note 14)
  Income (loss) before extraordinary item...............       0.01       (0.12)
  Extraordinary item....................................       0.01         --
                                                         ----------  ----------
                                                               0.02       (0.12)
                                                         ==========  ==========

Basic weighted average shares (Note 14)................. 10,000,000   8,609,707
                                                         ==========  ==========
Diluted weighted average shares (Note 14)............... 10,600,000   8,609,707
                                                         ==========  ==========
</TABLE>

                             See accompanying notes

                                      F-3
<PAGE>

                 TURBOSONIC TECHNOLOGIES INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                               Year ended June 30
                          (Expressed in U.S. Currency)

<TABLE>
<CAPTION>
                             Exchangeable &                             Accumulated
                              Common Stock     Additional                  Other
                          --------------------  Paid-in   Accumulated  Comprehensive   Total
                            Shares    Amount    Capital     Deficit       Income       Equity
                          ---------- --------- ---------- -----------  ------------- ----------
                                         $         $           $             $           $
<S>                       <C>        <C>       <C>        <C>          <C>           <C>
Balance--August 27, 1997
 (Note 10)..............   9,851,950 2,284,291 1,328,292  (1,439,261)         --      2,173,322
Private placement.......     148,050    14,805   111,294         --           --        126,099
Net (loss)..............         --        --        --   (1,041,895)         --     (1,041,895)
Translation adjustment..         --        --        --          --       (18,384)      (18,384)
                          ---------- --------- ---------  ----------      -------    ----------
Balance--June 30, 1998..  10,000,000 2,299,096 1,439,586  (2,481,156)     (18,384)    1,239,142
Detachable warrants
 (Note 8)...............         --        --      8,452         --           --          8,452
Net income..............         --        --        --      169,311          --        169,311
Translation adjustment..         --        --        --          --        (2,552)       (2,552)
                          ---------- --------- ---------  ----------      -------    ----------
Balance--June 30, 1999..  10,000,000 2,299,096 1,448,038  (2,311,845)     (20,936)    1,414,353
                          ========== ========= =========  ==========      =======    ==========
</TABLE>



                             See accompanying notes

                                      F-4
<PAGE>

                 TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                               Year ended June 30
                       Expressed in United States dollars

<TABLE>
<CAPTION>
                                                            1999       1998
                                                          --------  ----------
                                                             $          $
<S>                                                       <C>       <C>
OPERATING ACTIVITIES
  Net income (loss)......................................  169,311  (1,041,895)
  Add (deduct) charges to operations not requiring a
   current cash payment
    Depreciation and amortization........................  193,186     270,735
    Debt conversion expense..............................      --       94,675
                                                          --------  ----------
                                                           362,497    (676,485)
  Adjustment to goodwill.................................   31,314         --
  Changes in non-cash working capital balances related to
   operations (Note 15).................................. (418,038)    254,502
                                                          --------  ----------
    Cash (applied to) operating activities...............  (24,227)   (421,983)
                                                          --------  ----------
INVESTING ACTIVITIES
  Purchase of fixed assets...............................  (12,502)    (47,394)
  Deposit and prepaid costs..............................      --     (118,391)
                                                          --------  ----------
    Cash (applied to) investing activities...............  (12,502)   (165,785)
                                                          --------  ----------
FINANCING ACTIVITIES
  Shareholder loans......................................  273,411         --
  Issue of common shares.................................      --      144,113
  Cash held in trust.....................................      --       67,427
  Deposit on common share offering.......................      --     (109,355)
                                                          --------  ----------
    Cash provided by financing activities................  273,411     102,185
                                                          --------  ----------
  Effect of exchange rate changes on cash................    4,985     (26,773)
                                                          --------  ----------
Net cash provided (applied) during year..................  241,667    (512,356)
Cash, beginning of year..................................   69,277     406,847
Cash, acquired on reverse acquisition....................      --      174,786
                                                          --------  ----------
Cash, end of year........................................  310,944      69,277
                                                          ========  ==========
Cash paid during the year for interest...................   31,217       3,739
Cash paid during the year for income taxes...............      583       9,819
                                                          ========  ==========
</TABLE>

                             See accompanying notes

                                      F-5
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 June 30, 1999
                      Expressed in United States dollars

1. ORGANIZATION AND BUSINESS DESCRIPTION

  TurboSonic Technologies, Inc., formerly known as Sonic Environmental
Systems, Inc. and its subsidiaries (collectively the "Company"), directly and
through subsidiaries, designs and markets integrated pollution control and
industrial gas cooling/conditioning systems including liquid atomization
technology and dust suppression systems to ameliorate or abate industrial
environmental problems. Sonic Environmental Systems, Inc. (Sonic) was
consolidated with Turbotak Technologies Inc. (Turbotak) on August 27, 1997
pursuant to a Plan of Reorganization that was approved by the Federal
Bankruptcy Court on July 3, 1997.

  The August 27, 1997 merger was treated for accounting purposes as a purchase
by Turbotak of Sonic in a reverse acquisition. Consequently, the accompanying
consolidated financial statements include the accounts of Turbotak and its
majority-owned subsidiaries. The accounts of Sonic were included with
Turbotak's accounts effective September 1, 1997 and incorporated all
adjustments related to the Plan of Reorganization ["the Plan"].

  This reorganization was accounted for as a reverse acquisition in accordance
with accounting principles generally accepted in the United States.
Application of reverse acquisition accounting resulted in the following:

    (i) The consolidated financial statements of the combined entity are
  issued under the name of the legal parent [TurboSonic] but were considered
  a continuation of the financial statements of the legal subsidiary
  [Turbotak];

    (ii) As Turbotak was deemed to be the acquirer for accounting purposes,
  its assets and liabilities were included in the consolidated financial
  statements of the continuing entity at their carrying values; and

    (iii) For purposes of the business combination, the consideration was the
  $990,304 ascribed to the 9,847,370 common shares of Sonic outstanding
  immediately prior to the business combination plus $484,313 of transaction
  costs.

  The purchase price attributed to Turbotak as the acquirer included the
following:

<TABLE>
<CAPTION>
                                                                         $
                                                                     ---------
   <S>                                                               <C>
   Acquisition cost of the bank note payable by Sonic Environmental
    Systems, Inc...................................................    250,000
   Professional fees...............................................    234,313
   Exchange of shares..............................................    990,304
                                                                     ---------
     Total consideration...........................................  1,474,617
                                                                     =========

  Management made an allocation of the purchase price among the individual
assets and liabilities of Sonic Environmental Systems, Inc. as follows:

<CAPTION>
                                                                         $
                                                                     ---------
   <S>                                                               <C>
   Current assets..................................................    481,911
   Capital assets..................................................     71,386
   Other assets....................................................     99,308
                                                                     ---------
                                                                       652,605
   Current liabilities.............................................    727,406
                                                                     ---------
                                                                       (74,801)
   Goodwill........................................................  1,549,418
                                                                     ---------
     Total purchase price..........................................  1,474,617
                                                                     =========
</TABLE>

                                      F-6
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars

  Effective August 27, 1997, all existing and outstanding stock, warrants and
options of Sonic were terminated and cancelled. TurboSonic has authorized
share capital of 30,000,000 common shares. TurboSonic incorporated a
subsidiary corporation [TurboSonic Canada] in the Province of Ontario, Canada
which was authorized to issue Class A and Class B common shares. TurboSonic
subscribed for 100% of TurboSonic Canada's Class A shares in exchange for a
nominal capital contribution.

  Also on August 27, 1997, the stockholders of Turbotak exchanged their shares
for TurboSonic Canada's Class B shares, which were distributed to each
stockholder of Turbotak on a pro rata basis. As a result of this exchange,
Turbotak became a wholly-owned subsidiary of TurboSonic Canada. The Class B
shares of TurboSonic Canada are exchangeable, at any time, at the election of
the holders of such shares, into an equivalent number of such shares of
TurboSonic and have voting rights through a trustee.

  The exchangeable shares of TurboSonic Canada represent approximately 82% of
the outstanding shares of TurboSonic and represent voting control.
Approximately 13% of the shares of TurboSonic were issued to the existing
stockholders of the Company and the balance were issued in accordance with the
Plan to unsecured creditors and other identified interests.

  On August 9, 1999, the Federal Bankruptcy Court, on the basis that Sonic's
bankruptcy had been fully administered and all fees owing to the United States
Trustee Office had been paid in full, ordered that Sonic's bankruptcy case be
closed.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and are within
the framework of the significant accounting policies summarized below:

Principles of consolidation

  The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Significant inter-company accounts and
transactions have been eliminated in consolidation.

Inventories

  Raw materials are valued at the lower of cost, on a first-in, first-out
basis, and replacement cost.

  Finished goods are valued at the lower of cost, on a first-in, first-out
basis, and net realizable value. Net realizable value is defined as selling
price less estimated selling costs.

Goodwill

  Goodwill, which arose on the reverse acquisition of TurboSonic Technologies,
Inc. is being amortized to expense on a straight-line basis over 10 years. The
Company assesses the recoverability of goodwill by determining whether the
amortization of goodwill over its remaining life can be recovered through
projected, undiscounted, future cash flows from the related operations.

Fixed assets

  Fixed assets and leasehold improvements are recorded at cost. Depreciation
is calculated on the straight-line method over the estimated useful lives of
the assets, typically 5 or 7 years. Leasehold improvements are amortized on a
straight-line basis over the lease term.

                                      F-7
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars


Accounting for revenues and long-term contracts

  The Company derives revenue from long-term contracts which require
performance [i.e. design, construction and performance testing] over a time
span which may extend one or more accounting periods. Generally, the
percentage-of-completion method is used to account for long-term contracts.
For contracts involving significant uncertainty, such as the use of new
technology, the completed contract method is used. Other revenues are recorded
when products are shipped to the customer or services are performed.

  The percentage-of-completion is determined by best available engineering
estimates. When the current estimated costs to complete indicate a loss, such
losses are recognized immediately for accounting purposes.

  Contract revenues recorded under the percentage-of-completion method in
excess of amounts billed are classified as deferred contract costs and
unbilled revenue. Amounts billed in excess of revenue earned and work-in-
process balances are classified as unearned revenue and contract advances.

Segmented information

  In June 1997, The Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information,
which was adopted by the Company for the year ended June 30, 1999. Under the
new requirements, financial information about operating segments is reported
on the basis that is used internally by the Company for evaluating operating
segments and resource allocation decisions.

Government grants

  Government grants are recorded when qualifying expenditures are incurred or
the specific terms of grant contracts are fulfilled. Grants received in
advance of the incurrence of qualifying expenditures are recorded as deferred
grant revenue. Grants received to finance specific expenses are included in
the statement of income as a reduction of these expenses. Grants received to
finance capital expenditures are applied to reduce the cost of the related
capital assets.

Investment tax credits

  Investment tax credits are accrued when qualifying expenditures are made and
there is reasonable assurance that the credits will be realized. Investment
tax credits earned with respect to current expenditures for qualified research
and development activities are included in the statement of income as a
reduction of expenses. Tax credits earned with respect to capital expenditures
are applied to reduce the cost of the related fixed assets.

Research and development expenditures

  Research and development costs [other than capital expenditures] are
expensed as incurred. Expenditures are reduced by any related investment tax
credits and government grants.

Income taxes

  The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ["SFAS 109"]. SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance against the deferred

                                      F-8
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars

tax assets is provided when it is more likely than not that a portion or all
of a deferred tax asset will not be realized.

Advertising costs

  All costs associated with advertising and promoting products are expensed as
incurred. Advertising and promotion expense was $10,763 in 1999 [$18,390 in
1998].

Stock-based compensation

  The Company has in the past, granted subscription warrants for a fixed
number of Class B shares to employees and options to employees and certain
directors for common shares, however, there is currently no stock compensation
plan in place. The Company accounts for the warrant and option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issues to Employees,
and, where the exercise price approximates the share value on the date of the
grant, recognizes no compensation expense. No compensation expense has been
recognized for options granted to date.

  Financial Accounting Standards Board ["FASB"] Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
provides an alternative to APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for stock-based compensation issued to employees. The
Statement allows for a fair value based method of accounting for employee
stock options and similar equity instruments. However, for companies that
continue to account for stock-based compensation arrangements under Opinion
No. 25, Statement No. 123 requires disclosure of the pro forma effect on net
income and earnings per share of its fair value based accounting for those
arrangements. The Company has determined the fair value of the options and
warrants at their date of grant using a Black-Scholes option pricing model.

Earnings (loss) per share

  The earnings (loss) per share figures are calculated on the following basis:
the number of shares outstanding prior to the date of the reverse acquisition
are deemed to be the number of shares issued by the legal parent to the
shareholder of the legal subsidiary. The number of shares outstanding from the
date of the reverse takeover to the end of the fiscal period are deemed to be
the actual number of shares of the legal parent outstanding in that period.
The loss per share is calculated using the weighted average number of shares
based on the aforementioned determined number of shares.

  In computing the earnings (loss) per share, the Company has adopted
Statement of Financial Accounting Standard No. 128 ["SFAS 128"], Earnings per
Share; there was no impact on prior year's per share amounts. In addition, the
TurboSonic Canada Class B exchangeable shares are considered outstanding
common shares of TurboSonic. There was no effect on the 1998 diluted (loss)
per share as the effect of exercising options would be anti-dilutive.

Foreign currency translation

  The Company maintains its accounts in Canadian dollars for Canadian-based
subsidiaries, their functional currency, and in United States dollars for the
legal parent company. The consolidated financial statements have been
translated into United States dollars in accordance with FASB Statement No.
52, Foreign Currency Translation. All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date.
Income statement amounts have been translated using the average exchange rate
for the year. The gains and losses resulting from the changes in exchange
rates from year to year have been reported separately as a component of
comprehensive income.

                                      F-9
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars


Use of estimates

  In preparing these consolidated financial statements in accordance with
accounting principles generally accepted in the United States, management is
required to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Significant
estimates include allowance for doubtful accounts, inventory obsolescence and
profitability on long-term contracts. Actual results could differ from those
estimates.

Impact of recently issued accounting standards

  In June 1998, the FASB released Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 2000. The Company has determined the effect of
adopting this pronouncement would not be material on its consolidated
financial statements.

3. FINANCIAL INSTRUMENTS

 Fair value of financial instruments

  The carrying amounts reported in the balance sheet for cash, accounts
receivable, investment tax credits receivable, accounts payable, accrued
liabilities, and shareholder loans approximate fair value based on the short-
term maturity of these instruments.

 Concentration of risk

  Financial instruments that potentially subject the Company to credit risk
consist principally of trade accounts receivable. Sales are made to end users
of all sizes located primarily in North America. The Company provides an
allowance for doubtful accounts equal to the estimated losses expected to be
incurred in the collection of accounts receivable.

  As at June 30, 1999, the Company had three customers that comprised 30% of
the total trade receivable balance and had one customer that comprised 24% of
the total trade receivable balance in fiscal 1998.

  Trade accounts receivable and trade accounts payable are received or paid in
either U.S. or Canadian dollars. Accordingly, the Company is at risk of a loss
for decreases in the value of the Canadian dollar relative to the U.S. dollar
for trade accounts receivable and increases in the value of the Canadian
dollar relative to the U.S. dollar for trade accounts payable. The Company
does not use financial instruments to mitigate the foreign exchange risk.

  The Company's cash balances are maintained in one United States chartered
bank which is an AA rated financial institution. The Company's cash balances
for the Canadian-based subsidiaries are maintained in one Canadian chartered
bank which is an AA rated financial institution.

4. ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                               1999      1998
                                                              -------  --------
                                                                 $        $
   <S>                                                        <C>      <C>
   Trade accounts receivable................................. 480,272   510,724
   Other receivables.........................................  62,296    89,529
   Allowance for doubtful accounts........................... (66,764) (109,116)
                                                              -------  --------
                                                              475,804   491,137
                                                              =======  ========
</TABLE>

  Bad debt expense was $5,870 in 1999 and $2,924 in 1998.

                                     F-10
<PAGE>

                 TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                       Expressed in United States dollars


5. INVENTORIES

<TABLE>
<CAPTION>
                                                               1999      1998
                                                             --------  --------
                                                                $         $
   <S>                                                       <C>       <C>
   Raw materials............................................    9,973    13,405
   Finished goods...........................................  331,267   334,988
   Reserve for obsolescence................................. (214,476) (211,005)
                                                             --------  --------
                                                              126,764   137,388
                                                             ========  ========
</TABLE>

6. FIXED ASSETS

<TABLE>
<CAPTION>
                                                          Accumulated
                                                          Depreciation
                                                              and      Net Book
                                                  Cost    Amortization   Value
                                                --------- ------------ ---------
                                                    $          $           $
   <S>                                          <C>       <C>          <C>
   1999
     Office equipment..........................   404,815   361,590       43,225
     Other equipment...........................   337,080   306,595       30,485
     Leasehold improvements....................    23,936     8,127       15,809
                                                ---------   -------    ---------
                                                  765,831   676,312       89,519
                                                =========   =======    =========
<CAPTION>
                                                          Accumulated
                                                          Depreciation
                                                              and      Net Book
                                                  Cost    Amortization   Value
                                                --------- ------------ ---------
                                                    $          $           $
   <S>                                          <C>       <C>          <C>
   1998
     Office equipment..........................   401,500   340,050       61,450
     Other equipment...........................   327,097   294,871       32,226
     Leasehold improvements....................    23,865     4,052       19,813
                                                ---------   -------    ---------
                                                  752,462   638,973      113,489
                                                =========   =======    =========

7. GOODWILL

<CAPTION>
                                                          Accumulated  Net Book
                                                  Cost    Amortization   Value
                                                --------- ------------ ---------
                                                    $          $           $
   <S>                                          <C>       <C>          <C>
   1999
                                                1,558,579   356,205    1,202,374
                                                =========   =======    =========
<CAPTION>
                                                          Accumulated  Net Book
                                                  Cost    Amortization   Value
                                                --------- ------------ ---------
                                                    $          $           $
   <S>                                          <C>       <C>          <C>
   1998
                                                1,589,893   193,950    1,395,943
                                                =========   =======    =========
</TABLE>

  Amortization charged to income in fiscal 1999 was $162,255 [$153,475 in
1998]. In addition, $31,314 in tax benefits arising from the recognition of
loss carryforwards of Sonic have been used to reduce the carrying amount of
goodwill.

                                      F-11
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars


8. LOANS FROM SHAREHOLDERS

  An officer and director of the Company, together with another shareholder of
the Company, lent an aggregate of Canadian $200,000 (representing $129,400 at
the exchange rate of $0.647 at such date) to the Company on October 21, 1998.
Another officer and director and another shareholder each lent Canadian
$100,000 (representing $65,490 and $66,620 at the exchange rates of $0.6549
and $0.6662 at the date of their respective loans) to the Company on January
4, 1999 and April 9, 1999, respectively. All of these loans are repayable two
years from the date of the loan, bear interest at 10% per annum and are
collateralized by a lien upon and security interest in substantially all of
the Company's assets. As an inducement to advance these sums to the Company,
the lenders were granted detachable warrants to purchase an aggregate of
400,000 common shares of the Company at an initial exercise price of $0.50
through October 31, 2000, increasing to $0.75 thereafter through October 31,
2002 and to $1.00 thereafter through October 31, 2003, respectively. The
warrants, whose initial exercise price was greater than the market price of
the Company's common shares on the date such warrants were granted, expire on
the earlier of October 31, 2003 or 30 days after the Company's shares have
closed at a price per share above $1.50 for 10 consecutive trading days on the
NASDAQ over-the-counter Bulletin Board. In accordance with APB 14, a portion
of the proceeds of the debt securities issued with detachable stock purchase
warrants, which is allocated as the fair-value of the warrants, has been
accounted for as paid-in capital. The related discount on the debt securities
will be amortized over the remaining period to maturity.

9. COMMITMENTS AND CONTINGENCIES

 [a] Operating leases

  The Company has entered into operating leases for office equipment and
premises. Minimum annual payments under these leases for years after June 30,
1999 are as follows:

<TABLE>
<CAPTION>
                                                                            $
                                                                         -------
   <S>                                                                   <C>
   2000................................................................. 101,009
   2001.................................................................  94,974
   2002.................................................................  90,728
   2003.................................................................  37,239
   2004.................................................................     --
                                                                         -------
                                                                         323,950
                                                                         =======
</TABLE>

  Rental expense for office equipment and premises was $121,538 in 1999
[$101,329 in 1998].

 [b] Litigation

  One of the former owners of the Company's heat exchanger technology has
filed lawsuit against the Company for monetary damages and reversion of the
patents to him. Although the litigation seeks to terminate the Company's right
to utilize the intellectual property, management believes any monetary claims
by the litigants arising out of the litigation will be treated in the Plan of
Reorganization, discussed in note 1, as unsecured claims and discharged as
provided in the Plan. There has been no activity on this lawsuit in the past
year.

 [c] Contractual liabilities

  The Company's standard contractual terms with respect to the sale of its
products and systems disclaim any liability for consequential or indirect
losses or damages stemming from any failure of the Company's products

                                     F-12
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars

or systems or any component thereof. The Company customarily seeks contractual
indemnification from its subcontractors for any loss, damage or claim arising
from the subcontractor's failure of performance, negligence or malfeasance. It
is likely, however, that a customer's inability to comply with applicable
pollution control laws or regulations stemming from the failure or non-
performance of the Company's products or systems may subject the Company to
liability for any fines imposed upon such customer by governmental regulatory
authorities or for damages asserted to have been incurred by any third party
adversely affected thereby.

10. SHARE CAPITAL

 To August 27, 1997

  The authorized share capital of Turbotak which, for accounting purposes, is
deemed to have acquired Sonic effective August 27, 1997, consisted of an
unlimited number of common shares without par value and 200,000 Class B, non-
voting, non-cumulative, special shares redeemable for $0.01 per share. Changes
in the capital stock of Turbotak to August 27, 1997, the effective date of the
business combination with Sonic, were as follows:

<TABLE>
<CAPTION>
                                             Common shares        Class B shares
                                      --------------------------- --------------
                                                                  Number
                                      Number of  Stated   Paid-in   of   Stated
                                       shares    capital  capital shares capital
                                      --------- --------- ------- ------ -------
                                          #         $        $      #       $
   <S>                                <C>       <C>       <C>     <C>    <C>
   Balance June 30, 1997............. 1,509,413 1,382,656 354,607 66,600   --
     Debenture conversion............   290,562   772,327  94,675    --    --
     Debenture option exercise.......    25,000    18,014     --     --    --
     Conversion of warrants..........       --        --      --  11,800   --
                                      --------- --------- ------- ------   ---
   Balance August 27, 1997........... 1,824,975 2,172,997 449,282 78,400   --
                                      ========= ========= ======= ======   ===
</TABLE>

  During fiscal 1998, the Company's debenture holder converted a debt
instrument into common shares and was granted an option to purchase an
additional 25,000 common shares at $0.72 [$1.00 Cdn.] per share.

  In prior years, as part of its discretionary incentive plan, the Company
issued subscription warrants to employees which, upon becoming vested, may be
redeemed for Class B shares at a price of $0.001. In the past, the vesting
period ranged from one day to three years upon the discretion of the President
of the Company. As a result of a resolution of the Board of Directors, the
outstanding warrants were exercised on August 27, 1997, the effective date of
the Combination Agreement discussed in note 1.

  As a result of the reverse acquisition, the 11,800 outstanding warrants as
at June 30, 1997 were converted to Class B shares. The Class B shares of
TurboSonic Canada are exchangeable, at any time, at the election of the
holders of such shares, into an equivalent number of such shares of TurboSonic
and have voting rights through a trustee. No additional Class B shares have
been issued.

 As at August 27, 1997

  For accounting purposes, the share capital of the continuing consolidated
entity as at August 27, 1997 is computed as follows:

<TABLE>
<CAPTION>
                                                                         $
                                                                     ---------
   <S>                                                               <C>
   Existing share capital and paid-in capital of Turbotak, August
    27, 1997........................................................ 2,622,279
   Ascribed value of the shares of Sonic............................   990,304
                                                                     ---------
   Share capital of Sonic, August 27, 1997.......................... 3,612,583
                                                                     =========
</TABLE>

                                     F-13
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars


  As a result of the business combination, Turbotak became a wholly-owned
subsidiary of Sonic. For accounting purposes, at August 27, 1997, the
outstanding shares of the continuing consolidated entity consisted of the
number of Sonic shares issued to that date with an ascribed value equal to the
share capital of the continuing consolidated entity as computed above. As a
result, the number of outstanding shares of Sonic as at August 27, 1997 is
computed as follows:

<TABLE>
<CAPTION>
                                                                     Number of
                                                                       shares
                                                                     ----------
   <S>                                                               <C>
   Existing outstanding shares of Sonic, August 27, 1997............  9,847,370
   Share transactions related to the business combination:
     Share consolidation upon bankruptcy............................ (8,511,370)
     Issued to Turbotak shareholders................................  8,051,950
     Other issuances of common shares...............................    464,000
                                                                     ----------
   Outstanding common shares of Sonic, August 27, 1997..............  9,851,950
                                                                     ==========
</TABLE>

  During fiscal 1998, 148,050 common shares were issued as a private placement
for total consideration of $126,099. The price per share was $0.852 [$1.18
Cdn.].

  Certain directors were granted options in fiscal 1998, which vested
immediately, to purchase a total of 200,000 common shares of the Company at an
exercise price of $1.00 per share. These options were outstanding as at June
30, 1999 and expire August 27, 1999. The expiry date has been extended by one
year for one director for options to purchase 100,000 common shares. No
options were granted during the year ended June 30, 1999.

11. RESEARCH AND DEVELOPMENT EXPENSES

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
                                                                  $        $
   <S>                                                         <C>      <C>
   Expenses incurred..........................................  35,611  111,419
   Government grants and investment tax credits............... (50,608)  (2,749)
                                                               -------  -------
                                                               (14,997) 108,670
                                                               =======  =======
</TABLE>

12. INCOME TAXES

<TABLE>
<CAPTION>
                                                    1999           1998
                                                 ------------  -------------
                                                    $      %      $       %
   <S>                                           <C>      <C>  <C>       <C>
   (Recovery of) provision for income taxes
    based on basic Canadian federal income tax
    rates.......................................  56,325   29  (303,400) (29)
   (Recovery of) provision for income taxes
    based on basic Canadian provincial income
    tax rates...................................  31,076   16  (161,494) (16)
   Lower effective tax rate of other countries..     --   --     27,823    3
   Increase (decrease) resulting from:
     Debt conversion expense....................     --   --     39,663    4
     Non-deductible goodwill amortization.......  31,314   16    44,639    4
     Small business deduction................... (46,000) (24)   29,912    3
     Realization of loss carryforwards from
      prior years............................... (41,401) (21)  (17,423)  (2)
     Benefits of loss carryforwards not
      recognized................................     --   --    302,934   30
     Minimum tax................................  10,000    5       --   --
     Other...................................... (16,405)  (8)   23,421    2
                                                 -------  ---  --------  ---
                                                  24,909   13   (13,925)  (1)
                                                 =======  ===  ========  ===
</TABLE>

                                     F-14
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars


  Because the majority of taxable income is generated in Canada the above
table reflects Canadian tax rates.

  Income taxes paid are as follows:

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
                                                                  $        $
   <S>                                                         <C>      <C>
   Canadian Federal...........................................     511    7,753
   U.S. Federal...............................................     --    21,166
   Canadian Provincial........................................      72    1,998
                                                               -------  -------
                                                                   583   30,917
                                                               =======  =======

  Income tax refunds received are as follows:

<CAPTION>
                                                                1999     1998
                                                               -------  -------
                                                                  $        $
   <S>                                                         <C>      <C>
   Canadian Federal........................................... (16,912) (10,724)
   Canadian Provincial........................................     --    (7,948)
                                                               -------  -------
                                                               (16,912) (18,672)
                                                               =======  =======
</TABLE>

  The Company is eligible for investment tax credits with respect to
qualifying scientific research and experimental development expenditures in
Canada. Amounts of approximately $43,600 relating to the 1995 fiscal year,
$2,100 for 1996 and $15,400 for 1997 have been included in investment tax
credits receivable [a total of $45,000 in 1998].

  The Company's US subsidiaries have unutilized, non-capital losses at June
30, 1999 of approximately $9,700,000 available for United States income tax
purposes to carry forward to future years and which expire in the years 2009
through 2018. Approximately $8,900,000 of these losses are related to the
period before the reverse acquisition described in note 1.

  The Company's Canadian subsidiaries have unutilized, non-capital losses at
June 30, 1999 of approximately $300,000 available for Canadian income tax
purposes to carry forward to future years, which expire in the years 1999
through 2006.

  Deferred tax liabilities and assets are comprised of the following as at
June 30:

<TABLE>
<CAPTION>
                                                            1999        1998
                                                         ----------  ----------
                                                             $           $
   <S>                                                   <C>         <C>
   Tax over book depreciation...........................     11,911      13,966
                                                         ----------  ----------
     Total deferred tax liabilities.....................     11,911      13,966
                                                         ----------  ----------
   Net operating loss carryforward......................  3,519,151   3,475,214
                                                         ----------  ----------
     Total deferred tax assets..........................  3,519,151   3,475,214
   Valuation allowance for deferred tax assets.......... (3,507,240) (3,475,214)
                                                         ----------  ----------
     Net deferred tax asset (liabilities)...............        --          --
                                                         ==========  ==========
</TABLE>

13. EXTINGUISHMENT OF DEBT

  The business of a wholly owned subsidiary of Sonic Environment Systems, Inc.
closed operations in 1996 and was registered under Chapter 7 of the Federal
Bankruptcy laws. The assets of this subsidiary were liquidated and the
proceeds were provided to its creditors. The residual liabilities of $113,358,
net of taxes of nil, are not legally enforceable and have therefore been taken
into income.

                                     F-15
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars


14. EARNINGS (LOSS) PER SHARE

  The following table sets forth the computation of basic and diluted earnings
per share. The effect of dilutive securities are included only when not anti-
dilutive.

<TABLE>
<CAPTION>
                                                            1999        1998
                                                         ----------  ----------
                                                             $           $
   <S>                                                   <C>         <C>
   Numerator
     Net income (loss).................................     169,311  (1,041,895)
   Denominator
     Denominator for basic (loss) earnings per share--
      weighted average shares outstanding..............  10,000,000   8,609,707
   Effect of dilutive securities:
     Warrants..........................................     400,000         --
     Options...........................................     200,000         --
                                                         ----------  ----------
                                                         10,600,000   8,609,707
                                                         ----------  ----------
   Dilutive potential common shares
     Denominator for diluted (loss) earnings per
      share--adjusted weighted average shares and
      assumed conversions..............................  10,600,000   8,609,707
                                                         ==========  ==========
   Basic earnings (loss) per share.....................       $0.02      $(0.12)
   Diluted earnings (loss) per share...................       $0.02      $(0.12)
                                                         ==========  ==========

15. SUPPLEMENTARY INFORMATION ON CASH FLOWS

<CAPTION>
                                                            1999        1998
                                                         ----------  ----------
                                                             $           $
   <S>                                                   <C>         <C>
   Changes in non-cash working capital balances related
    to operations
     Decrease (increase) in accounts receivable........      15,333     426,654
     (Increase) decrease in investment tax credits
      receivable.......................................     (28,362)    (30,171)
     (Increase) in income taxes receivable.............     (18,682)        --
     Decrease in inventories...........................      10,624      16,597
     Decrease (increase) in deferred contract costs and
      unbilled revenue.................................     (53,511)    249,964
     (Increase) in other current assets................      36,686      (9,621)
     Decrease in other assets..........................         --            9
     (Decrease) in accounts payable and accrued
      charges..........................................    (359,903)   (281,547)
     (Decrease) increase in unearned revenue and
      contract advances................................     (20,223)   (105,010)
     (Decrease) increase in income taxes payable.......         --      (12,373)
                                                         ----------  ----------
                                                           (418,038)    254,502
                                                         ==========  ==========
</TABLE>

16. SEGMENT INFORMATION

  The Company offers a range of products and systems, incorporating diverse
technologies, to address the industrial process, air pollution control and
other environmental management needs of its customers. The business can
generally be broken into two segments; scrubber and nozzle systems. Wet
scrubber systems are generally used to absorb gaseous pollutants and
particulate matter contained in exhaust gas streams such as smoke stacks, and
incorporate the use of the Company's proprietary air-atomizing nozzle
technology. Nozzle systems typically operate in conjunction with products and
systems supplied by others. Examples of nozzle systems supplied include
evaporative gas cooling and conditioning, dust suppression and combustion.

                                     F-16
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars


  There are no inter-segment sales, transfers or profit or loss.

  The Company's reportable segments are business units that offer different
products and services. The reportable segments are each managed separately
because they develop, manufacture and distribute different products and
services.

  Contract revenue and sales of approximately $864,000 of the scrubber segment
and $1,460,000 of the nozzle segment were to customers in the U.S. The
remainder of the consolidated revenues were primarily from customers in Canada
[$833,000] with lesser amounts from Asia [$106,000], Mexico and the Caribbean
[$110,000] and South America [$258,000]. The long-lived assets of the nozzle
segment are located in the United States while the remainder of the Company's
assets including those of the scrubber segment are located in Canada. For the
year ended June 30, 1999, one customer represented 12% of total revenues, and
one customer in fiscal 1998 represented 10% of total revenues.

Industry Segments

<TABLE>
<CAPTION>
                                       Scrubber    Nozzle
                                        Systems    Systems    Other    Total
                                       ---------  ---------  ------- ---------
                                           $          $                  $
   <S>                                 <C>        <C>        <C>     <C>
   1999
   Contract revenue and sales
     Evaporative gas cooling..........       --   1,513,039      --  1,513,039
     Dust suppression.................       --     310,090      --    310,090
     Other nozzle systems.............       --     563,316      --    563,316
     Wet scrubber systems............. 1,351,823        --       --  1,351,823
     Flue gas desulphurization........   118,574        --       --    118,574
                                       ---------  ---------  ------- ---------
   Total contract revenue and sales... 1,470,397  2,386,445      --  3,856,842
                                       ---------  ---------  ------- ---------
   (Loss) income from operations......  (116,127)   211,672      --     95,545
   Interest income....................     9,766      9,844      --     19,610
   Interest expense...................    (7,970)   (26,323)     --    (34,293)
                                       ---------  ---------  ------- ---------
   (Loss) income before provision for
    taxes.............................  (114,331)   195,193      --     80,862
   Provision for (recovery of) income
    taxes.............................   (16,405)    41,314      --     24,909
   Extraordinary item.................       --     113,358      --    113,358
                                       ---------  ---------  ------- ---------
   Net income (loss)..................   (97,926)   267,237      --    169,311
                                       =========  =========  ======= =========
   Depreciation and amortization......    84,330    108,856      --    193,186
   Capital expenditures...............     5,818      6,303      --     12,121
   Segment assets..................... 1,048,153  1,123,777  310,944 2,482,874
   Long lived assets..................    43,580     45,939      --     89,519
</TABLE>

                                     F-17
<PAGE>

                TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                 June 30, 1999
                      Expressed in United States dollars

  In 1998, contract revenue and sales of approximately $355,000 of the
scrubber segment and $534,000 of the nozzle segment were to customers in the
U.S. The remainder of the consolidated revenues were primarily from customers
in Canada [$843,000] with lesser amounts from Asia [$120,000], Mexico and the
Caribbean [$135,000] and South America [$106,000]. The long-lived assets of
the nozzle segment are located in the United States while the remainder of the
Company's assets including those of the scrubber segment are located in
Canada. One customer in fiscal 1998 represented 10% of total revenues.

<TABLE>
<CAPTION>
                               Scrubber   Nozzle
                               Systems    Systems   Other    Total
                               --------  ---------  ------ ----------
                                  $          $                 $
   <S>                         <C>       <C>        <C>    <C>
   1998
   Contract revenue and sales
     Evaporative gas cooling.       --   1,595,195     --   1,595,195
     Dust suppression........       --      58,971     --      58,971
     Other nozzle systems....       --     410,779     --     410,779
     Wet scrubber systems....   783,617        --      --     783,617
                               --------  ---------  ------ ----------
   Total contract revenue and
    sales....................   783,617  2,064,943     --   2,848,560
                               --------  ---------  ------ ----------
   Income (loss) from
    operations...............  (333,201)  (735,514)        (1,068,715)
   Interest income...........     4,251     17,529             21,780
   Interest expense..........    (5,145)    (3,740)            (8,885)
   Other income..............       --         --
                               --------  ---------  ------ ----------
   (Losses) before provision
    for taxes................  (334,095)  (721,725)        (1,055,820)
   (Recovery of) income
    taxes....................   (13,925)       --             (13,925)
                               --------  ---------  ------ ----------
   Net income (loss).........  (320,170)  (721,725)        (1,041,895)
                               ========  =========  ====== ==========
   Depreciation and
    amortization.............    69,688    201,047     --     270,735
   Capital expenditures......    13,701     33,693     --      47,394
   Segment assets............   978,480  1,373,068  69,277  2,420,825
   Long lived assets.........    50,000     63,489     --     113,489
</TABLE>

17. COMPARATIVE FIGURES

  Certain of the prior year comparative figures have been reclassified to
conform with the current year's presentation.

                                     F-18