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UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION

FORM 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2006 
Commission file number 0-21832

TURBOSONIC TECHNOLOGIES, INC.

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


550 Parkside Drive, Suite A-14, 
Waterloo, Ontario, Canada 
N2L 5V4 (Address of principal executive offices)

(519) 885-5513 (Issuer's telephone number)

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

None

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

Common Stock (Title of Class)

Check whether the Issuer is not required to file reports
pursuant to Section 13 or 15 (d) of the Exchange Act.

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 past 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 in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will 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.  

Indicate by check mark whether the Issuer is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes No x

Issuer's revenues for its most recent fiscal year:    
$16,047,140

Aggregate market value of the Issuer's common stock held by
non-affiliates of the Issuer as of September 18, 2006:    
$17,085,575

The number of shares outstanding of the Issuer's common stock
as of September 18, 2006:     14,635,053

Transitional Small Business Disclosure Format (check one):
Yes No x

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PART IITEM 1: DESCRIPTION OF BUSINESS
a)     Business DevelopmentTurboSonic Technologies, Inc.,
directly and through subsidiaries, designs and markets integrated air pollution
control and liquid atomization technology, including industrial gas
cooling/conditioning systems, to ameliorate or abate industrial environmental
problems. We were incorporated in the State of Delaware in April 1961. Our
executive offices are located at 550 Parkside Drive, Suite A-14, Waterloo,
Ontario, Canada N2L 5V4; our telephone number is (519) 885-5513. Our website is
located at www.turbosonic.com. The information on our website is not part of
this annual report.b)     Our Business
IntroductionOur proprietary technology is
designed to control a wide variety of air pollution control problems for
industries including pulp and paper, wood products, metallurgical (non-ferrous
and iron and steel), chemical and mineral processing (including cement), ethanol
production, industrial/medical and municipal solid waste (MSW) incineration, and
power generation. We believe our products, which are designed to meet the
strictest emission regulations for gaseous and particulate emissions, afford
economic and technical advantages over competitive air pollution equipment.
Certain of our products and systems
employ proprietary nozzles to atomize liquids passing through the nozzles,
resulting in the liquid stream being converted into fine droplets. Controlling
the liquid and gas pressures applied to the nozzle can modulate droplet sizes
and liquid flow rates. We have sold atomizing nozzles for many years.
The following table reflects the
approximate percentages of our revenue derived from our principal customer
categories during the fiscal years indicated:

|                                  | Year Ended
|--------------------------------- | ----------
|                                  | June 30   
|                                  | 2006      
|Waste Incineration, including MSW | 6%        
|Chemical and Mineral Processing   | 13%       
|Metallurgical Processing          | 9%        
|Pulp and Paper                    | 5%        
|Wood Products                     | 55%       
|Ethanol Production                | 3%        
|Textiles                          | 6%        
|Other                             | 3%        
|                                  | 100%      

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

We perform all process engineering,
including but not limited to, the determination of the size, geometry and
structural characteristics of the particular system needed for gaseous, mist or
particulate removal, and performs the detailed design of, and develops
specifications for, all applicable structural, electrical, mechanical and
chemical components of such system. We, historically, have not manufactured or
fabricated our own products or systems. Rather, we purchase components
consisting of both off the shelf items and items, such as our atomizing nozzles,
scrubber vessels, wet electrostatic precipitator tubes and internals, cooling
towers and structural steel, which are made to our design and specifications by
third party manufacturers and fabricators, enter into subcontracts for field
construction, which we supervise, and manage all technical, physical and
commercial aspects of the performance of our contracts.

Products and Systems

We offer a range of products and
systems, incorporating diverse technologies, to address the industrial
processing, air pollution control and other environmental management needs of
our customers. Many of such customers have historically purchased individual
products or systems from us that, in many instances, operate in conjunction with
products and systems supplied by others. We emphasize the marketing of custom
engineered air pollution control systems that may provide combinations of our
own products and systems, alone or in combination with complementary equipment
specified or supplied by alliance partners, as an integrated environmental
management solution.

2

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

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

|                                                 | Year Ended
|------------------------------------------------ | ----------
|                                                 | June 30   
|                                                 | 2006      
|Evaporative Gas Cooling and Conditioning Systems | 14%       
|Wet Electrostatic Precipitator Systems (WESPs)   | 56%       
|Wet Scrubber Systems                             | 19%       
|Semi-dry Scrubber Systems                        | 5%        
|Other Nozzle Products                            | 6%        
|                                                 | 100%      

Our products are utilized in many
industries including pulp and paper, wood products, chemical and mineral
processing (including cement), metallurgical (non-ferrous and iron and steel),
ethanol production, industrial, medical and municipal solid waste (MSW)
incineration, and power generation.

The principal products and systems
offered by us are described below:

SoniCool Evaporative Gas Cooling and Conditioning Systems

Through the use of our atomizing
nozzles, SoniCool Evaporative Gas Cooling and Conditioning Systems accurately
control temperature and humidity of high-temperature gas streams, such as those
emanating from cement kilns, non-ferrous smelters and steel mill Electric Arc
Furnaces (EAF) or Basic Oxygen Furnaces (BOF). The result is gas temperatures
that do not damage equipment and ductwork, smaller gas volumes, and improved
efficiency of downstream air pollution control equipment.

We are an internationally known
leader in gas cooling and conditioning with many installations throughout the
world.

SonicKleen Wet Electrostatic Precipitation Systems (WESP)

The SonicKleen WESP removes
sub-micron particulate, heavy metals, dioxins and furans, mists, and fumes from
process gas streams. Removal efficiencies can be achieved at much lower
operating costs than with scrubbers. While there are many variations of
electrostatic precipitators on the market, the SonicKleen design is recognized
as a proven approach that exceeds requirements for meeting government removal
targets while keeping operating and maintenance costs to a minimum.

Currently, the U.S. Environmental
Protection Agency is tightening certain emission standards, thereby forcing a
number of industries to adopt technologies, such as WESPs, in order to meet
emissions targets that more traditional technologies, such as scrubbers, will
not be able to meet effectively. Our WESP is capable of achieving these higher
standards and efficiently capturing sub-micron particulates.

SonicKleen WESP systems have been
sold for use in waste incinerators, ceramic refractory production, ethanol
production, OSB (oriented-strand board) facilities and industrial power boilers.
Our WESP technology is used in industries such as wood products, waste
incineration, metallurgical and chemical processing, and power generation
industries.

SonicBURN Waste Fuel Combustion

SonicBURN systems are used to
introduce any fuel into combustion chambers for better combustion, resulting in
higher production efficiencies. Employing our Turbotak atomizing nozzles made
from stainless steels, ceramic, or other durable materials and a process
developed by us, SonicBURN atomizes viscous, dirty, or waste fuels into fine
droplets for efficient combustion. The durability of the nozzles allows longer
production runs, less maintenance, and reduced costs compared to other designs.

Many of our nozzles and systems are
in use for waste fuel combustion in hazardous waste incinerators and cement
kilns.

Turbotak, TurboVenturi and TurboSorb Scrubbers

The Turbotak Scrubber treats
industrial process gas streams, removing sub-micron and larger particulate, acid
gases, odors, fumes and vapors. By employing our proprietary atomizing nozzles,
the scrubber is able to more effectively remove multiple contaminants than
competing technologies, resulting in lower maintenance and operating costs.

The TurboVenturi Scrubber treats
industrial process exhaust gas streams primarily for removal of particulate. The
system operates by forcing the gas stream across a pressure drop in order to
generate a fine stream of liquid droplets for very high efficiency particulate
removal. The TurboVenturi Scrubber has a relatively low capital cost due to its
inherent simplicity.

The TurboSorb Semi-Dry Scrubber
treats industrial process gas streams, removing acid gases such as SO2
(sulfur dioxide) and HCI (hydrochloric acid). By spraying an alkali reagent, the
TurboSorb system can achieve higher removal efficiencies of SO2 and
HCl than traditional "dry" scrubbers. Unlike "wet" systems, with the TurboSorb
semi-dry scrubber all water is evaporated so there is no liquid waste stream
generated.

- 3 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

We have installed many of our
scrubbers to solve a wide variety of air pollution control problems. Our
equipment, designed to meet the most stringent regulations limiting gaseous and
particulate emissions, has also been retrofitted into competing technologies to
improve their performance.

Air Pollution Control System Upgrades

Using our atomizing nozzles, venturi
scrubber and wet electrostatic precipitator technologies and years of experience
in the air pollution control industry, we are able to retrofit existing air
pollution control equipment to consistently improve performance. An equipment
upgrade is significantly less expensive than purchasing new equipment, with
lower maintenance requirements. We have upgraded many air pollution control
systems.

Atomizing Nozzles and Spare Parts

Used in a wide variety of industrial
applications, our Turbotak atomizing nozzles atomize liquids to extremely small
droplets. The nozzles feature a two-phase design for superior control over
droplet size and distribution. The combination of the small droplets, and the
distribution pattern provide unique results that other nozzles do not have.
Designs range from small, single-orifice nozzles to large, multi-orifice
nozzles. This makes them ideal for evaporative gas cooling, spray drying, wet
and semi-dry scrubbing, performance enhancement of air pollution control
systems, as well as combustion and incineration. Our SoniCore nozzle design has
unique aspects to the droplet size, spray pattern and very low flow rates that
make it ideal for applications such as dust suppression and humidification.

With thousands of nozzles sold, the
SoniCore nozzles and the patented Turbotak Atomizing nozzles are at the heart
of many of our air pollution control systems and are recognized by industry as
superior.

We also provide replacement and spare
parts for both our industrial gas processing and air pollution control systems.
We believe 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 creates additional demand for our products.

Contractual Liabilities

Our standard contractual terms with
respect to the sale of our products and systems disclaim any liability for
consequential or indirect losses or damages stemming from any failure of our
products or systems or any component thereof. We customarily seek contractual
indemnification from our subcontractors for any loss, damage or claim arising
from the subcontractor's failure of performance, negligence or malfeasance. It
is possible, however, that a customer's inability to comply with applicable
pollution control laws or regulations stemming from the failure or
non-performance of our products or systems may subject us 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

Our marketing efforts are technical
in nature and currently involve our senior management and technical
professionals, supported by independent sales representatives. Our contractual
arrangements with our 18 current independent sales representatives accord each a
defined territory within which to sell some or all of our products and systems,
provide for the payment of agreed-upon sales commissions and are terminable at
will by either ourselves or the representative upon relatively short prior
notice. None of such representatives have authority to execute contracts on our
behalf. A significant portion of our sales are made through the recommendation
of engineering firms, which play a significant role in the specification and
implementation of air pollution control solutions and in customers' selection of
the vendors of air pollution control systems.

Our sales representatives assist us
in consummating sales of our products and services, serve an ongoing liaison
function between us and our customers during the sales process and address
customers' questions or concerns arising thereafter. The sales representatives
are selected by us based upon industry reputation, prior sales performance and
the breadth of territorial coverage, among other criteria.

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

We seek to obtain repeat business
from our customers, although we do not depend upon any single customer to
maintain our level of activity from year to year; however, one or more different
customers may be expected to account for greater than 10% of our net revenues in
any consecutive twelve month period. Three customers accounted for 34%, 8% and
7% respectively, of our net revenues during the fiscal year ended June 30, 2006.
During the fiscal year ended June 30, 2005, three different customers accounted
for 37%, 7% and 6% respectively, of our net revenues.

Backlog

At June 30, 2006, the amount of our
contract backlog was approximately $10,000,000 compared to $10,200,000 at June
30, 2005. Backlog represents work for which we have entered into a signed
agreement or has received an order to proceed. Completion of 100% of our current
backlog is anticipated to occur prior to June 30, 2007.

- 4 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

Product Development

We have 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. Expenditures for research and development activities, net
of customer and government support, were $54,681 and $39,049 for the fiscal
years ended June 30, 2006 and 2005, respectively.

Proprietary Protection

We rely on a combination of patents,
trade and service marks, trade secrets and know-how to protect our proprietary
technology and rights. We own or have licensed rights to over 24 international
patents and patents pending relating to a variety of air pollution control
applications.

We have registered servicemarks or
trademarks in the United States and certain foreign countries for several
identifying names which we use with our products and systems including SoniCore®,
Dry Fog® and TurboSOx®.

Suppliers and Subcontractors

Like other companies in the air
pollution control industry, we have historically relied on third parties to
manufacture and fabricate our products and to supply parts and components for
our systems in accordance with our specifications. In those instances in which
our scope of work includes installation of equipment, we select and supervise
subcontractors for this work. To date, we have not experienced difficulties
either in obtaining fabricated components and other materials and parts used in
any of our products and systems or in obtaining qualified subcontractors. Our
vendor sources for various components, materials and parts used in our systems,
including our atomizing nozzle and other components, include more than 100
firms. We do not depend on any one of the vendors to a material extent, and in
any event we believe that alternative vendors would be available if needed. With
respect to fabricators, we have satisfactory relationships with more than ten
fabricators. Similarly, with respect to subcontractors for installation work, we
have satisfactory relations with more than three firms. On the basis of the
number of vendors, fabricators and subcontractors which we utilize and the
availability of alternative sources, we do not believe that the loss of our
relationship with any one firm would have a material adverse effect on our
business.

Bonding and Insurance

While we generally have not been
required 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 completion of the contract. Past coverage
for these requirements has been provided using cash reserves and guarantees from
a Canadian crown corporation.

We currently maintain different types
of insurance, including directors and officers liability, general liability,
property coverage, professional and product liability insurance, with respect to
the engineering and products we sell to our customers. A successful claim or
claims in an amount in excess of our insurance coverage or for which there is no
coverage could have a material adverse effect on us.

Government Regulation

Stringent environmental laws have
been enacted in the United States and other nations in response to public
concern about the environment. The need to comply with these laws creates demand
for our products. 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 market for our air pollution
control products and systems is directly dependent upon the existence and
enforcement of laws and regulations which limit the release of pollutants into
the atmosphere and impose substantial penalties for non-compliance. The
Government can change environmental regulations at any time, which could have
positive or negative effects upon our future revenues and prospects of
profitability. Currently, the U.S. Environmental Protection Agency is tightening
certain emission standards, thereby forcing a number of industries to adopt
technologies, such as WESPs, in order to meet emissions targets that more
traditional technologies, such as scrubbers, will not be able to meet
effectively.

Competition

We face substantial competition in
each of our principal markets from numerous competitors. We compete primarily on
the basis of price as well as our engineering and technological expertise, and
quality of our products, systems and service. Additionally, we believe that the
successful performance of our installed products and systems is a key factor in
dealing with our customers, which typically prefer to make significant purchases
from a known company with a solid performance history.

Virtually all contracts for our
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 may be 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, 2006, we employed 37
full time persons, including 6 engineers, 11 salespersons, and 10 technical
support persons. None of our employees are represented by a labor union. We
believe that our relationship with our employees is satisfactory.

- 5 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

Financial Information about Foreign
and Domestic Operations and Export Sales

U.S. and Canadian customers
collectively accounted for approximately 90% and 82% of our sales during the
fiscal years ended June 30, 2006 and 2005. Revenue derived from export sales is
transacted in U.S. Dollars and Euro.

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

|                          | Year Ended
|------------------------- | ----------
|                          | June 30   
|                          | 2006      
|United States             | 71%       
|Canada                    | 19%       
|South and Central America | 4%        
|Europe                    | 2%        
|Far East                  | 3%        
|Other                     | 1%        
|                          | 100%      

Risks and Uncertainties

Forward-looking statements in this
report, including without limitation, statements relating to our 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:



We are dependent on environmental
regulation.

Our revenue is concentrated among a
few customers who vary from year to year. Sales to three customers accounted
for 49% of our net revenues in the fiscal year ended June 30, 2006. Three
different customers accounted for 50% of our net revenues in the prior fiscal
year. Our inability to retain or replace these customers could materially and
adversely affect future revenue and profitability.

Our proprietary technology and rights
has limited protection. We rely on a combination of patents, trade and
service marks, trade secrets and know-how to protect our proprietary technology
and rights. There can be no assurance that our patents will not be infringed
upon, that we would have adequate remedies for any such infringement, or that
our 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 us will be upheld, if challenged, or
that the protections afforded thereby will not be circumvented by others.
Litigation may be necessary to defend our proprietary rights, which would result
in significant cost to us and a diversion of effort of our personnel.

Our foreign sales are subject to
certain inherent risks. Approximately 10% and 18%, respectively, of our
revenues during the fiscal years ended June 30, 2006 and 2005 were derived from
sales made outside of the United States and Canada. Foreign sales are subject to
certain inherent risks, including unexpected changes in regulatory and other
legal requirements, tariffs and other trade barriers, greater difficulty in
collection of accounts receivable and potentially adverse tax consequences.
There can be no assurance that these factors will not have an adverse impact on
our future foreign sales and, consequently, on our operating results.

Permits, which are required by some
projects, may cause extended delay or cancellation of one or more of our large
projects. Some of our projects require permits to be issued by one or more
governmental agencies prior to the commencement of both construction and
operation. Issuance of such permits could be delayed by political and other
considerations. Permitting delays could cause extended delay or cancellation of
one or more of our large projects, which would adversely impact our future
revenues.

Since we do not manufacture or
fabricate our own products or systems, we are dependent on the services of third
party manufacturers and fabricators. We do not manufacture or fabricate our
own products or systems, relying instead upon the services of third party
manufacturers and fabricators. We also do not engage in the field construction
of our systems but rely on field construction subcontractors operating under the
supervision of our 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 us. Given the number of
manufacturers, fabricators and subcontractors which we utilize and the
availability of alternative sources, we do not believe that the loss of our
relationship with any one firm would have a material adverse effect on our
business.

- 6 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

The markets for environmental control products is
very competitive. The markets for environmental control products are
characterized by substantial competition based primarily on engineering and
technological expertise and quality of service. Because virtually all contracts
for our 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 we believe that we compete on the basis of our technical
expertise and reputation for service, there can be no assurance that we will
maintain our competitive position in our principal markets.

Our fixed price contracts may result in losses.
Our receipt of a fixed price contract as a consequence of being the lowest
competitive bidder carries the inherent risk that our actual performance costs
may exceed the estimates upon which our bid for such contract was based. To the
extent that contract performance costs exceed projected costs, our profitability
could be materially adversely affected.

Risks
Related to our Common Stock

Our stock price can be extremely volatile. Our
common stock is traded on the OTC Bulletin Board. There can be no assurance that
an active public market will continue for the common stock, or that the market
price for the common stock will not decline below our current price. The price
of our common stock may be influenced by many factors, including, but not
limited to, investor perception of our company and our industry and general
economic and market conditions. The trading price of our common stock could be
subject to wide fluctuations in response to announcements of our business
developments or our competitors, quarterly variations in operating results, and
other events or factors. In addition, stock markets have experienced extreme
price volatility in recent years. This volatility has had a substantial effect
on the market prices of companies, at times for reasons unrelated to their
operating performance. Such broad market fluctuations may adversely affect the
price of our common stock.

Our common stock is subject to the "Penny Stock"
rules of the SEC and the trading market in our securities is limited, which
makes transactions in our stock cumbersome and may reduce the value of an
investment in our stock. The SEC has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the rules require:

- that a broker or dealer approve a person's account
  for transactions in penny stocks; and
- the broker or dealer receive from the investor a
  written agreement to the transaction, setting forth the identity and quantity
  of the penny stock to be purchased.

In order to approve a person's account for
transactions in penny stocks, the broker or dealer must:

- obtain financial information and investment
  experience and objectives of the person; and
- make a reasonable determination that the
  transactions in penny stocks are suitable for that person and the person has
  sufficient knowledge and experience in financial matters to be capable of
  evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any
transaction in a penny stock, a disclosure schedule prescribed by the SEC
relating to the penny stock market, which, in highlight form:

- sets forth the basis on which the broker or dealer
  made the suitability determination; and
- that the broker or dealer received a signed,
  written agreement from the investor prior to the transaction.

Generally, brokers may be less willing to execute
transactions in securities subject to the "penny stock" rules. This may make it
more difficult for investors to dispose of our common stock and cause a decline
in the market value of our stock.

Disclosure also has to be made about the risks of
investing in penny stocks in both public offerings and in secondary trading and
about the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and the rights and
remedies available to an investor in cases of fraud in penny stock transactions.
Finally, monthly statements have to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.

ITEM 2: DESCRIPTION OF PROPERTY

We lease approximately 11,800 square feet of
executive and administrative offices and shop space in Waterloo, Ontario, Canada
at an annual rent of approximately $69,000. Insurance and utilities are paid
separately. This lease expires on June 30, 2008.

We lease 640 square feet for a sales office in
Parsippany, New Jersey at an annual rental of approximately $14,000. The lease
expires on August 31, 2007.

ITEM 3: LEGAL PROCEEDINGS

Not applicable.

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

No matters were submitted for a vote to our security
holders during the fourth quarter of our fiscal year ended June 30, 2006.

- 7 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

PART II

ITEM 5: MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is quoted on the OTC Bulletin Board under the symbol "TSTA".

The following table sets forth the range of the bid quotations for our Common
Stock for the periods shown, as furnished by The Nasdaq Stock Market.

|                                 | Common Stock (1)
|-------------------------------- | ----------------
|                                 | High            
|Fiscal Year Ended June 30, 2005: |                 
|First Quarter                    | $0.352          
|Second Quarter                   | $0.392          
|Third Quarter                    | $0.600          
|Fourth Quarter                   | $0.656          
|Fiscal Year Ended June 30, 2006: |                 
|First Quarter                    | $0.950          
|Second Quarter                   | $1.500          
|Third Quarter                    | $1.440          
|Fourth Quarter                   | $1.840          
|__________                       |                 

> (1)   The above
>   quotations represent prices between dealers and do not include retail mark up,
>   markdown or commissions. They do not necessarily represent actual
>   transactions. The prices reflect a 5-for-4 stock split, effected on July 22,
>   2005.

As of June 30, 2006, there were 366 holders of record and
approximately 900 beneficial holders of the Common Stock. This number of
beneficial holders represents the number of actual holders of our Common Stock,
including an estimate of the beneficial owners of shares held in "nominee" or
"street" name. We do not know the actual number of beneficial owners.

We do not anticipate paying any cash dividends in the
foreseeable future, as it is the current policy of our Board of Directors to
retain any earnings to finance our future operations and expand our business.

ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION

General

TurboSonic Technologies, Inc., directly and through
subsidiaries, designs and markets integrated air pollution control and liquid
atomization technology, including industrial gas cooling/conditioning systems,
to ameliorate or abate industrial environmental problems.

Our proprietary technology is designed to control a wide
variety of air pollution control problems for industries including pulp and
paper, wood products, metallurgical (non-ferrous and iron and steel), chemical
and mineral processing (including cement), ethanol production, hazardous and
municipal solid waste (MSW) incineration, and power generation. We believe our
products, which are designed to meet the strictest emission regulations for
gaseous and particulate emissions, afford economic and technical advantages over
competitive air pollution equipment.

We seek to obtain repeat business from our customers,
although we do not depend upon any single customer to maintain our level of
activity from year to year; however, one or more different customers may be
expected to account for greater than 10% of our net revenues in any consecutive
twelve month period. Sales to three customers accounted for 49% of our net
revenues in the fiscal year ended June 30, 2006. Three different customers
accounted for 50% of our net revenues in the prior fiscal year. Our inability to
retain or replace these customers could materially and adversely affect future
revenue and profitability.

Stringent environmental laws have been enacted in the United
States and other nations in response to public concern about the environment. We
believe that the need to comply with these laws creates demand for our products.
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.

- 8 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

The market for our air pollution control products and systems
is directly dependent upon the existence and enforcement of laws and regulations
that limit the release of pollutants into the atmosphere and impose substantial
penalties for non-compliance. The Government can change environmental
regulations at any time, which could have positive or negative effects upon our
future revenues and prospects of profitability. Currently, the U.S.
Environmental Protection Agency is tightening certain emission standards,
thereby forcing a number of industries to adopt technologies, such as WESPs, in
order to meet emissions targets that more traditional technologies, such as
scrubbers, will not be able to meet effectively.

In this annual report, we state our beliefs of future events
and of our future financial performance. In some cases, you can identify those
so-called "forward-looking statements" by words such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of those words and other comparable
words. These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from historical results or
those we anticipate. Factors that could cause actual results to differ from
those contained in the forward-looking statements include those factors set
forth under the section in this annual report captioned "Item 1: Description of
Business  Risks and Uncertainties" as well as other factors discussed in this
annual report. Statements included in this annual report are based upon
information known to us as of the date that this annual report, and we assume no
obligation to update or alter our forward-looking statements made in this annual
report, whether as a result of new information, future events or otherwise,
except as otherwise required by applicable federal securities laws.

Critical Accounting Policies and Estimates

Discussion of our financial conditions and results of
operation is an analysis of the Consolidated Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"), consistently applied. The preparation of
these Consolidated Financial Statements requires our management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and related contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to
construction-type contracts, intangible assets, bad debts, inventories, warranty
obligations, income taxes, and contingencies and litigation. We base our
estimates on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgements about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates.

We believe the following critical accounting policies affect
the more significant judgements and estimates used in the preparation of our
Consolidated Financial Statements:

Revenue
Recognition

We derive revenue from long-term contracts which require
performance [i.e., design, construction and performance testing] over a time
span which may extend beyond one or more accounting periods. For long-term
contracts, we employ two methods of recognition  the percentage of completion
method for virtually all of such projects being undertaken, and the completed
contract method for contracts with significant uncertainty, such as the use of
new technology. For contracts of shorter duration, revenue is recorded when
products are shipped, services are performed or billings rendered, which
approximate actual performance.

The percentage-of-completion is determined by best available
engineering estimates by our project managers. Engineering progress is measured
upon completion progress relative to the overall project design. Material
progress is determined by the degree of completeness or progress of the
components individually and as a whole of the project. When included in the
scope of the work, installation work completeness is based upon work completed
relative to the overall scope. Monthly revenue recognition reflects the degree
of completeness based upon review of project drawings, project schedule,
progress of actual fabrication and installation, and further validated by visual
observation by the project manager, quality inspectors, and the construction
advisor, if applicable. When the current estimated costs to complete indicate a
loss, such losses are recognized immediately for accounting purposes.

If the conditions of work to be performed change, or the
estimated costs are not accurately projected, the gross profit from
construction-type contracts may vary significantly in future periods..

Goodwill

The goodwill impairment test was completed at April 1, 2006
for the Aftermarket business segment, as required by SFAS No. 142. The
conclusion reached was that there has not been an impairment of goodwill
associated with the Aftermarket segment for the year ended June 30, 2006.

We assesses the impairment of goodwill by reporting unit
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable, in whole or part. Some factors we consider to be important
and which could trigger an impairment review between annual tests include the
following:

- significant underperformance relative to expected
  historical or projected future operating results;
- significant changes in the manner of our use of the
  acquired assets or the strategy for our overall business;
- significant negative industry or economic trends;
- significant decline in our stock price for a sustained
  period, and our market capitalization relative to net book value.

Results of Operation

Our business is primarily driven by government regulations
and related compliance timeframes. Our focus has been to offer solutions
relative to such regulations and current growth in revenue can, in part, be
attributed to our efforts over the past five years in sales & marketing, product
development, and participation in international alliances.

- 9 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

We have placed an emphasis on product development, to reduce
product costs and offer competitive solutions in anticipation of growth in
opportunities. To accommodate this emphasis, we have hired additional staff to
support our project management, customer service and product development
efforts. While these investments impacted present earnings, the effectiveness of
management's planning is evidenced by increasing revenues and margins, as well
as increased visibility in the marketplace and a growing international presence,
all resulting in improved returns to the shareholders. These improvements have
made a significant improvement in year on year results, with a record backlog
entering the 2006 fiscal year and continuing into fiscal 2007.

During fiscal 2005 and 2006, the OEM systems business segment
experienced significant bookings, in particular in the wood products industry,
while the order levels for the Aftermarket business segment have continued
relatively constant. Strong bookings have been experienced in the wood products
industry as the result of new OSB plants being built to meet current and
anticipated future demand for their products, and our strategic partner who is
well positioned in that market.

Twelve Months Ended June 30, 2006 Compared with Twelve Months Ended June 30,
2005

OEM systems revenue increased by $4,226,197 (55%) to
$11,946,392 for the twelve-month period ended June 30, 2006 from $7,720,195 for
the same period in fiscal 2005. The increase is primarily the result of an
increase in large system sales in the period, and in particular, those of Wet
Electrostatic Precipitators ("WESP") and wet scrubbers to the wood products
industry.

Aftermarket revenue increased by $725,366 (21%) to $4,100,748
for the twelve months ended June 30, 2006 from $3,375,382 for the same period in
fiscal 2005. Increased revenue from evaporative cooling components and spare
parts in fiscal 2006, primarily by customers in the mineral processing industry,
together with increased WESP and wet scrubber spare parts and service in the
wood products industry, has been the prime cause of this positive increment.

Cost of OEM systems increased by $2,965,811 (43%) to
$9,903,428 for the twelve-month period ended June 30, 2006 from $6,937,617 for
the same period in fiscal 2005. The higher costs are the result of the increased
volume of OEM systems work, as discussed above. As a percentage of OEM systems
revenue, the cost of OEM systems was 83% for the twelve-month period ended June
30, 2006 and 90% for the same period in fiscal 2005. The lower percentage to
revenue for the OEM systems is the result of higher than anticipated costs on
certain projects during the 2005 fiscal year than in fiscal 2006.

Aftermarket costs increased by $358,472 (16%) to $2,543,235
for the twelve-month period ended June 30, 2006 from $2,184,763 for the same
period one year earlier. The increased costs are the result of the increased
sales volume discussed above. As a percentage of aftermarket revenue, the
aftermarket costs were 62% versus 65% for the same period in fiscal 2005. The
decreased ratio of aftermarket costs to revenue was the result of increased
parts revenue in fiscal 2006, which typically has a higher ratio than component
orders.

Selling, general and administrative expenses increased
$536,338 (25%) to $2,696,677 for the twelve-month period ended June 30, 2006
from $2,160,339 for the same period in fiscal 2005. Increased selling, general
and administrative expenses resulted from additional personnel, increased sales
travel expense and professional fees. As a percentage of total revenue, selling,
general and administrative expenses were 17% for the fiscal year ended June 30,
2006 and 19% for the same period a year earlier. This decrease in percent to
revenue is the direct result of the increased volume of revenue for the current
period. Also included in total expenses in the current year were stock-based
compensation expense ($31,250 vs. $2,268 in fiscal 2005)[see note 12 to the
Consolidated Financial Statements] together with increased depreciation expense
($93,897 vs. $65,303 in fiscal 2005).

Income before tax in fiscal 2006 increased $1,067,156 to
income before taxes of $821,258, from a loss before taxes of $245,898 for the
same period in fiscal 2005. Income tax provision for fiscal 2006 was $5,408
compared to a recovery of $18,702 in 2005. The tax recovery relates to
carry-back of the 2004 tax loss to 2001. The future benefit of US tax losses has
not been recorded in the financial statements, as discussed in note 13 to the
Consolidated Financial Statements.

"Other comprehensive income" of $144,195 was recorded for the
twelve-months ended June 30, 2006, as compared to "other comprehensive income"
of $131,951 for the same period in fiscal 2005. The "other comprehensive income"
in the current period was the result of the increase in the value of the
Canadian dollar compared to the US dollar from June 30, 2005 to June 30, 2006,
and the resulting changes in our balance sheet relative to Canadian
dollar-denominated accounts.

Liquidity and Capital Resources

On an overall basis, we had net cash provided of $4,228,226
for fiscal 2006 as compared to net cash provided of $1,058,679 during the same
period in 2005. The fiscal 2006 net cash provided figure included cash provided
by operating activities of $3,228,859. This increase in overall cash flow is the
result of the operating income, the decrease in retentions receivable, increases
in accrued charges and unearned revenue and contract advances, partially offset
by increased deferred contract costs and unbilled revenue.

At June 30, 2006, we had positive working capital (total
current assets less total current liabilities) of $2,276,455 as compared to
positive working capital of $370,644 at June 30, 2005, an increase of
$1,905,811. Our current ratio (current assets divided by current liabilities)
was 1.42 and 1.13 at June 30, 2006 and June 30, 2005, respectively.

Our contracts typically provide for progress payments based
upon the achievement of performance milestones or the passage of time. Our
contracts often provide for our customers to retain a portion of the contract
price until the achievement of performance guarantees has been demonstrated. We
attempt to have our progress billings exceed our 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, 2006
and June 30, 2005, "Unearned revenue and contract advances" exceeded "Deferred
contract costs and unbilled revenue" with the result that cash flow was
positively affected by $3,216,981 and $673,138, respectively.

- 10 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

Our backlog as at June 30, 2006 was approximately
$10,000,000, all of which is expected to be shipped during the 2007 fiscal year,
compared to the June 30, 2005 backlog of $10,200,000.

At June 30, 2006, the cash balance was $5,506,643, which is
an increase of $1,080,550 compared to March 31, 2006, and an increase of
$4,228,226 compared to June 30, 2005. During fiscal 2006, we did a private
placement of 1,000,000 shares which netted cash of $1,037,385 [see note 12 to
the Consolidated Financial Statements]. We have no outstanding debt. Based upon
the current cash position, expected revenue for fiscal 2007 of at least $10.0
million based upon orders in-house at June 30, 2006, anticipated new OEM orders
and a steady stream of Aftermarket orders, we believe that projected cash
generated from operations will be sufficient to meet our cash needs through the
end of the fiscal year ended June 30, 2007.

Quantitative and Qualitative Information About Market Risk

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

ITEM 7: FINANCIAL STATEMENTS

Reference is made to pages F-1 through F-17 comprising a
portion of this Annual Report on Form 10-KSB.

ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 8A: CONTROLS AND PROCEDURES

Our management has carried out an evaluation, with the
participation of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of June 30, 2006.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in reports that we file
or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the Securities and Exchange Commission.

There has not been any change in our internal control over
financial reporting in connection with the evaluation required by Rule 13a-15(d)
under the Exchange Act that occurred during the quarter ended June 30, 2006 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

ITEM 8B: OTHER INFORMATION

On September 20, 2006, we issued a press release announcing
our financial results for the year ended June 30, 2006. A copy of the press
release is being furnished as Exhibit 99.1 to this report and incorporated
herein by reference.

PART III

ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Our executive officers and directors are as follows:

|Name                         | Age | Positions and Offices                                                     
|---------------------------- | --- | --------------------------------------------------------------------------
|                             |     |                                                                           
|Edward F. Spink              | 52  | Chairman of the Board
    and Chief Executive Officer                     
|Egbert Q. van
    Everdingen | 45  | President,
    Secretary-Treasurer and Director                           
|Richard H. Hurd              | 69  | Director                                                                  
|Dr. Donald R. Spink,
    Sr. | 83  | Director                                                                  
|Julien Hradecky              | 48  | Director                                                                  
|Glen O. Wright               | 57  | Director                                                                  
|Andrew T. Meikle             | 42  | Director                                                                  
|Robert A. Allan              | 64  | Vice President
    Engineering                                            
|Ronald A. Berube             | 59  | Vice President
    Marketing & Sales  Gas Conditioning and Nozzle Systems
|David J. Hobson              | 58  | Vice President Finance
    and Administration                             
|Richard C. Gimpel            | 58  | Vice President
    Marketing & Sales                                      

Edward F. Spink served as our President and a director
from August 27, 1997, the date upon which Turbotak Technologies and Sonic
Environmental Systems were consolidated to form our current company, until June
15, 1999. On June 15, 1999, Mr. Spink was elected our Chairman of the Board of
Directors and Chief Executive Officer. From 1995 to 1997, he was President and a
director of Turbotak. Mr. Spink was Vice President  Operations of Turbotak from
1989 to 1995. He joined Turbotak in 1982.

- 11 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

Egbert Q. van Everdingen has served as our President,
Secretary-Treasurer and as a director, since June 2006. Prior thereto and from
August 1997, Mr. van Everdingen served as our Vice President Marketing & Sales,
Air Pollution Control Systems. Prior thereto and from 1986, he served as project
manager and in various product development, sales and marketing positions with
Turbotak. From August 2003 until June 2006, he was Executive Vice President,
with responsibility for all sales, marketing, design and project engineering.

Richard H. Hurd served as our President from August 1993
to August 1997 and Treasurer from April 1994 to August 1997. He has been a
director since February 1993. Mr. Hurd has been President and sole owner of RHB
Capital Company Inc., a financial consulting company since 1987. He also acts as
a Special Assistant to the Treasurer of the State of New Jersey.

Dr. Donald R. Spink, Sr. served as our Chairman of the
Board of Directors from August 27, 1997 until June 15, 1999. He continues to
serve as a director and has agreed to provide us with technical advice. Prior
thereto and from 1976 he was President and Chairman of Turbotak.

Julien J. Hradecky has been a director since December 9,
2004. Mr. Hradecky, a Professional Engineer, has served since 1991 as Chief
Executive Officer of R&J Engineering Corporation, a world leader in the
manufacture of pharmaceutical hard gelatin capsule production machinery and
related equipment. Since 1994, Mr. Hradecky has served as Secretary and as a
director of Meikle Automation Inc., a major manufacturer of industrial
automation systems. He is also the President of Epicenter Inc., a private
investment company with a broad range of holdings.

Glen O. Wright has been a director of our company since
December 2005. Mr. Wright founded Wright, Mogg and Associates Ltd., a pension
and benefits consulting firm, served as our Chief Executive Officer from 1980 to
1986, and our Chairperson and Chief Executive Officer until 1996. It was sold in
2000 to Cowan Insurance Group and he continued as Chairman of the Cowan
Insurance Group until October 2002. He served as the Chairman of the Workplace
Safety and Insurance Board in Ontario from June 1996 to February 2004 and served
as Chairman of Hydro One, the agency responsible for electric transmission in
Ontario from June 2002 to May 2003. Since February 2004, he has been working on
a number of consulting projects through GPark Consulting Ltd., of which he is
President. He is currently a director of PrinterOn Corporation and LeanCor
Logistics LLC, and was formerly a director for the Institute for Work and
Health, Gore Mutual Insurance and the Canadian Broadcasting Corporation, a
member of the Wilfrid Laurier University Foundation and a member of the Council
for Canadian Unity.

Andrew T. Meikle has been a director of our company since
December 2005. Mr. Meikle, a member of the Professional Engineers of Ontario, is
the founder of Meikle Automation, established in 1994, and has since then held
the position of President and Chief Executive Officer. Meikle Automation,
employs over 350 people in seven divisions across Canada, the US and Mexico with
annual sales in excess of CAD 50 million.

Robert A. Allan has served as our Vice President
Engineering since August 27, 1997, and joined Turbotak as Manager of Engineering
in 1990. Prior thereto and from 1979, he was a Manager of Engineering with Joy
Technologies Canada, an air pollution control company. Prior to 1979 and from
1972, he was a technical advisor with Flakt Canada, specifically on pollution
control processes. He also held various senior project management engineering
positions in Quebec and Sweden with AB Svenska Flaktfabriken. He is a
professional engineer and holds a Master's degree in Mechanical Engineering from
the University of Waterloo.

Ronald A. Berube has served as our Vice President
Marketing & Sales, Gas Conditioning and Nozzle Systems since August 27, 1997.
Prior thereto and from 1993, he held the same position with Turbotak. Mr. Berube
had an extensive background in marketing and sales prior to joining Turbotak. He
holds a Bachelor of Science in Chemical Engineering from the University of
Waterloo.

David J. Hobson has served as our Vice President Finance
and Administration since August 27, 1997. Prior thereto and from 1996, he held
the position of Controller with Turbotak. Mr. Hobson has over twenty years of
finance and accounting, human resources management and project management
experience in the capital equipment sector, most of it gained in the air
pollution control field with a division of Joy Technologies Canada.

Richard C. Gimpel was appointed our Vice President,
Marketing and Sales in May 2006. Prior thereto and from 1999, he held the
position of Sales Director for air pollution control systems in the US. Prior to
joining us, he had held a number of senior management positions including
Director  Industrial Sales with Crowder Construction. He holds degrees in
Industrial Engineering and Criminal Justice.

Edward Spink is the son of Dr. Donald Spink, Sr.

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. Section 16(a) of the Securities
Exchange Act of 1934 requires our directors and executive officers and persons
who own beneficially more than 10% of our common stock to file reports of
ownership and changes in ownership of such common stock with the SEC, and to
file copies of such reports with us. Based solely upon a review of the copies of
such reports filed with us, we believe that during the year ended June 30, 2006
such reporting persons complied with the filing requirements of said Section
16(a), except that

- Edward F. Spink, our Chairman and Chief Executive Officer,
  did not file on a timely basis one Form 4 reflecting one transaction;
- Richard H. Hurd, a director of our company, did not file on
  a timely basis one Form 4 reflecting one transaction;
- Dr. Donald R. Spink, Sr., a director of our company, did
  not file on a timely basis two Form 4s each reflecting one transaction;
- Glen O. Wright, a director of our company, did not file on
  a timely basis a Form 3 and one Form 4 reflecting one transaction;

- 12 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

- 

Ronald A. Berube, a director of our
  company, did not file on a timely basis one Form 4 reflecting one transaction;

Richard C. Gimpel, a director of our
  company, did not file on a timely basis a Form 3; and

Patrick J. Forde, a former president
  and a former director of our company, did not file on a timely basis three
  Form 4s each reflecting one transaction.

Each of the delinquent Form 3s and Form 4s were subsequently filed with the
SEC.

Our audit committee consists of three directors, Richard H.
Hurd as chairperson, Glen O. Wright and Andrew T. Meikle. The Board of Directors
has determined that each member of the Audit Committee meets the Nasdaq
Marketplace Rule definition of "independent" for audit committee purposes. The
Board of Directors has also determined that Richard Hurd meets the SEC
definition of an "audit committee financial expert."

Our Audit Committee has adopted a Code of Ethics applicable
to all of our employees, including our Principal Executive Officer, Principal
Financial Officer and Principal Accounting Officer, as well as the members of
our board of directors. The Code of Ethics was filed as Exhibit 14 to the Form
10-KSB for the year ended June 30, 2004.





- 13 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

ITEM 10: EXECUTIVE COMPENSATION

Summary Compensation

Set forth below is the aggregate compensation for services
rendered in all capacities to us during our fiscal years ended June 30, 2006,
2005 and 2004 by our chief executive officer and by executive officers receiving
annual compensation exceeding $100,000 during our fiscal year ended June 30,
2006 (collectively the "Named Officers").

|                                   |            | Annual Compensation | Long-term Compensation Awards
|---------------------------------- | ---------- | ------------------- | -----------------------------
|Name and                           | Year Ended | Salary              | Bonus                        
|Principal Position                 | June 30    |                     |                              
|                                   |            |                     |                              
|Edward F. Spink, CEO               | 2006       | $154,814 (1)        | -- (1)                       
|                                   | 2005       | $139,994 (1)        | -- (1)                       
|                                   | 2004       | $130,275 (1)        | -- (1)                       
|                                   |            |                     |                              
|Egbert Q. van Everdingen,          |            |                     |                              
|President, Secretary-Treasurer (3) | 2006       | $132,698 (4)        | -- (4)                       
|                                   | 2005       | $119,995 (4)        | -- (4)                       
|                                   | 2004       | $111,664 (4)        | -- (4)                       
|                                   |            |                     |                              
|Ronald A. Berube, VP              |            |                     |                              
|Nozzles Sales & Marketing          | 2006       | $ 39,809            | --                           
|                                   | 2005       | $ 35,999            | --                           
|                                   | 2004       | $ 33,499            | --                           
|_________                          |            |                     |                              

(1)   Effective July 1,
2002, Mr. Spink's compensation was revised to CAD 175,000 (USD 139,994 in 2005,
USD 130,275 in 2004) of salary, together with a $20,000 bonus to be based upon
meeting the earnings before tax target in our business plan. Effective August 1,
2005, Mr. Spink's compensation was revised to CAD 180,250 (USD 154,814 in 2006)
together with a $20,000 bonus to be based upon meeting the earnings before tax
target in our business plan. For the fiscal years ended June 30, 2004, 2005 and
2006, he was not entitled to any bonus payment due to our performance over that
period.

(2)   Represents
commission on orders received prior to fiscal 2003. Effective July 1, 1999, Mr.
Spink's compensation was revised to include a sales commission on Scrubber
System sales rather than the previous discretionary bonus.

(3)   Mr. van Everdingen
served as Executive Vice President for each of the years ended June 30, 2004 and
2005. He served as Executive Vice President in fiscal 2006 until he became
President and Secretary-Treasurer in June 2006

(4)   Effective July 1,
2003, Mr. van Everdingen's compensation was revised to CAD 150,000 (USD 119,995
in 2005, USD 111,664 in 2004) of salary, together with a $10,000 bonus to be
based upon meeting the earnings before tax target in our business plan.
Effective August 1, 2005, Mr. van Everdingen's compensation was increased to CAD
154,500 (USD 132,698 in 2006), together with a $10,000 bonus to be based upon
meeting the earnings before tax target in our business plan. For the fiscal
years ended June 30, 2004, 2005 and 2006, he was not entitled to any bonus
payment due to our performance over that period.

(5)  
Represents commission on orders received prior to fiscal 2004.

(6)  
Represents commission on orders received.

Option Grants in Fiscal 2006

|                         | Number of Shares | % of Total      |          |           
|------------------------ | ---------------- | --------------- | -------- | ----------
|                         | Underlying       | Options Granted | Exercise | Expiration
|                         | Options Granted  | to Employees    | Price    | Date      
|                         |                  |                 |          |           
|Edward F. Spink          | 35,000           | 19.7%           | $0.75    | 10/31/2010
|Egbert Q. van Everdingen | 15,000           | 8.4%            | $0.75    | 10/31/2010
|Ronald A. Berube         | 12,500           | 7.0%            | $0.75    | 10/31/2010

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values

|                         |                 |           | Number of
    Securities   |                             |            
|------------------------ | --------------- | --------- | -------------------------- | --------------------------- | -----------
|                         | Number of       |           | Underlying
    Unexercised | Value of
    Unexercised   
|                         | Shares Acquired | Value     | Options                    | In-The-Money
    Options at
|                         | On Exercise     | Received  | at Fiscal Year End (1)     | Fiscal Year End (1)        
|                         |                 |           | Exercisable                | Unexercisable               | Exercisable
|                         |                 |           |                            |                             |            
|Edward F. Spink          | 12,500          | $4,000.00 | 135,000                    | --                          | $84,625.00 
|Egbert Q. van Everdingen | 0               | $0.00     | 52,500                     | --                          | $34,500.00 
|Ronald A. Berube         | 0               | $0.00     | 50,000                     | --                          | $33,625.00 

(1) The exercise price of the
unexercised options was below $1.102, the fair market value of our common stock
on June 30, 2006.

- 14 -

---



|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

Employment Agreements

None of our current executive officers are employed pursuant
to an employment agreement with us.

Compensation of Directors

During the fiscal year ended June 30, 2006, our directors
were each paid $500 for each board meeting attended. Our directors are
periodically granted stock options, typically on a yearly basis. Non-employee
directors receive reimbursement of out-of-pocket expenses incurred for each
board meeting or committee meeting attended. During the fiscal year ended June
30, 2006, there was a grant of 20,000 options to each director which vested
immediately, had an exercise price of $0.75 and an expiry date of October 31,
2010.

ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of August 31, 2006 the
shares of our Common Stock beneficially owned by each person who, to our
knowledge, is the holder of 5% or more of our Common Stock, by each of our
directors, by the Named Officers and by all of our executive officers and
directors as a group.

|Name and Address of
    Beneficial Owner or                      | Number of Shares         | Approximate Percentage
|---------------------------------------------------------------- | ------------------------ | ----------------------
|Identity or Group                                                | Beneficially Owned (1)   | of Class              
|Dr. Donald R. Spink, Sr. (a)                                     | 3,015,790 (2) (3) (4)    | 18.8%                 
|Edward F. Spink (a)                                              | 561,048
    (2) (5)      | 3.5%                  
|Egbert Q. van
    Everdingen (a)                                 | 372,141
    (2) (6) (10) | 2.3%                  
|Richard H. Hurd (b)                                              | 228,673
    (7) (11)     | 1.4%                  
|Julien J. Hradecky (a)                                           | 204,423
    (8) (12)     | 1.3%                  
|Glen O. Wright (a)                                               | 20,000
    (8)           | 0.1%                  
|Andrew T. Meikle (a)                                             | 20,000
    (8)           | 0.1%                  
|Ronald A. Berube (a)                                             | 193,581
    (2) (9)      | 1.2%                  
|Dynamis Advisors, LLC
    (c)                                    | 1,701,500 (14)           | 10.9%                 
|Heartland Advisors,
    Inc.(d)                                  | 1,250,000 (15)           | 7.8%                  
|Bard Associates, Inc.
    (e)                                    | 1,200,625 (16)           | 7.5%                  
|Sprott Asset
    Management, Inc.(f)                             | 1,000,000 (17)           | 6.2%                  
|All Executive Officers
    and Directors as a group (11 persons) | 4,904,443 (13)           | 30.5%                 
|__________                                                       |                          |                       

(a)   
The address of each beneficial owner is c/o TurboSonic Technologies, Inc. 550
Parkside Drive, Suite A-14, Waterloo, Ontario, N2L 5V4, Canada.

(b)   
The address of each beneficial owner is c/o TurboSonic Technologies, Inc. 239
New Road, Building B, Suite 205, Parsippany, NJ 07054.

(c)   
The address of the beneficial owner is 310 4th St., Suite 101,
Charlottesville, VA 22902.

(d)   
The address of the beneficial owner is 789 North Water St., Milwaukee, WI 53202.

(e)   
The address of the beneficial owner is 135 South LaSalle St., Suite 2320,
Chicago, IL 60603.

(f)   
The address of the beneficial owner is Suite 2700, South Tower, Royal Bank
Plaza, PO Box 27, Toronto, ON M5J 2J1, Canada.

(1)   
Unless otherwise indicated, all persons named below have sole voting and
investment power over listed shares.

(2)   
Includes shares of TurboSonic Canada Inc., a wholly owned subsidiary of our
company, which by their terms are convertible at any time into a like number of
shares of Common Stock of our company ("TurboSonic Canada Shares").

(3)   
Includes 2,548,609 TurboSonic Canada Shares owned by Canadian numbered
corporation, over which shares Dr. Spink exercises voting control.

(4)   
Includes 32,500 shares issuable upon exercise of vested options.

(5)   
Includes 135,000 shares issuable upon exercise of vested options.

(6)   
Includes 52,500 shares issuable upon exercise of vested options

- 15 -

---



|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

(7)   
Includes 51,250 shares issuable upon exercise of vested options.

(8)   
Includes 20,000 shares issuable upon exercise of vested options.

(9)   
Includes 50,000 shares issuable upon exercise of vested options.

(10)  Includes 12,500 shares
owned by Mr. van Everdingen's spouse, as to which Mr. van Everdingen disclaims
any beneficial ownership.

(11)  Includes 1,494 shares
owned by Mr. Hurd's spouse, as to which Mr. Hurd disclaims any beneficial
ownership.

(12)  Includes 13,280 shares
owned by Mr. Hradecky's spouse, as to which Mr. Hradecky disclaims any
beneficial ownership

(13)  Includes 439,375 shares
issuable upon exercise of vested options.

(14)  Pursuant to a Schedule
13-G filed on September 8, 2006 and information available to us, Frederic S.
Bocock, Alexander H. Bocock and John H. Bocock, have shared power to direct the
disposition of, and the vote of, 1,701,500 shares.

(15)  Pursuant to a Schedule
13-G filed on February 3, 2006, Heartland Advisors, Inc. and William J.
Nasgovitz have shared power to direct the disposition of, and the vote of,
1,250,000 shares.

(16)  Pursuant to a Schedule
13-G filed on February 9, 2006, Bard Associates, Inc. has the sole power to
direct the disposition of 1,200,625 shares and the sole power to direct the vote
of 103,750 shares.

(17)  Pursuant to a Schedule
13-G filed on April 10, 2006, Sprott Asset Management, Inc. has the sole power
to direct the disposition of 1,000,000 shares and the sole power to direct the
vote of 1,000,000 shares.



Securities Authorized for Issuance Under Equity Compensation Plans (3):

The following table provides information as of June 30, 2006 about our equity
compensation plans:

|                                                                |                         |                      | Number of      
|--------------------------------------------------------------- | ----------------------- | -------------------- | ---------------
|                                                                | Number of Securities to | Weighted Average    | Securities     
|                                                                | be Issued upon Exercise | Exercise Price of    | Remaining      
|                                                                | of Outstanding Options, | Outstanding Options, | Available for  
|Plan Category                                                   | Warrants and Rights     | Warrants and Rights  | Future Issuance
|                                                                |                         |                      |                
|Equity compensation plans approved by
    security holders: -   | 151,500                 | $0.653               | 372,500        
|- 2003 Stock Plan                                               |                         |                      |                
|Equity compensation plans not approved by
    security holders: |                         |                      |                
|- 2000 Stock Plan                                               | 621,438                 | $0.469               | 3,875          
|Total                                                           | 772,688                 | $0.5052              | 376,375        

We instituted the 2000 Stock Plan [the "2000 Plan"] with the
express purpose of encouraging key employees, as well as other individuals who
render services to us, by affording such persons with opportunities to
participate in equity ownership of our company. The 2000 Plan provides for the
grant of non-qualified options, stock awards and stock purchase
rights. Collectively, these are referred to as stock rights.

The 2000 Plan, adopted by us on February 9, 2000, is
administered by the Board of Directors, which determines to whom such stock
rights may be granted, at which times the stock rights shall be granted and the
time or times when each option shall become exercisable and the duration of the
exercise period. The exercise price per each non-qualified option granted under
the 2000 Plan shall be not less than the fair market value per share of common
stock on the date of such grant. The stock, subject to stock rights, shall be
authorized but unissued shares of our common stock or shares of common stock
reacquired by us in any manner. The aggregate number of shares that may be
issued, pursuant to the 2000 Plan, is 937,500, of which 621,438 have been
granted and remain outstanding, and 312,187 have been granted and exercised.

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

- 16 -

---



|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

PART IV

ITEM 13: EXHIBITS

The following exhibits, which are numbered in accordance with Item 601 of
Regulation S-B, are filed herewith or, as noted, incorporated by reference
herein:

|Exhibit Number | Exhibit Description                                                                                                                                                                                                                                                                          
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |                                                                                                                                                                                                                                                                                              
|3.1            | Certificate of Incorporation of the Company (1)                                                                                                                                                                                                                                              
|3.2            | Certificate of Amendment of Certificate of Incorporation of the Company (2)                                                                                                                                                                                                                  
|3.3            | Certificate of Correction of Certificate of Amendment of the Company (3)                                                                                                                                                                                                                     
|3.4            | Certificate of Designation, Number, Powers, Preferences and Relative,
    Participating, Optional, and other Special Rights and the Qualifications,
    Limitations, Restrictions, and other distinguishing characteristics of
    Special Voting Preferred Stock (2).                       
|3.5            | By-laws, as amended, of the Company (2)                                                                                                                                                                                                                                                      
|4.1            | Form
    of certificate evidencing share of common stock (2)                                                                                                                                                                                                                                 
|10.1 *         | 2000
    Stock Plan (4)                                                                                                                                                                                                                                                                      
|10.2 *         | 2003
    Stock Plan (5)                                                                                                                                                                                                                                                                      
|10.3           | Securities Purchase Agreement dated April 21, 2006 among ourselves and two
    institutional investors, inclusive of Exhibit A and B thereto, being,
    respectively, a Registration Rights Agreement among ourselves and such
    investors and a form of Common Stock Purchase Warrant (6)
|14             | Code
    of Ethics (6)                                                                                                                                                                                                                                                                       
|21.1           | Subsidiaries of the Company                                                                                                                                                                                                                                                                  
|23.1           | Consent of Mintz & Partners LLP                                                                                                                                                                                                                                                              
|31.1           | Rule
    13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                                                  
|32.1           | Section 1350 Certifications                                                                                                                                                                                                                                                                  
|99.1           | Full Year Operating Results Press
    Release issued September 20, 2006                                                                                                                                                                                                                      

*

(1) Filed on April
9, 1993, as an exhibit to our Registration Statement on Form S-1 (File Number
33-60856) and incorporated herein by reference.

(2) Filed on
November 18, 1997 as an exhibit to our Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1996 and incorporated herein by reference.

(3) Filed on
September 30, 2002 as an exhibit to our Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2002 and incorporated herein by reference.

(4) Filed on March
19, 2001 as an exhibit to our Registration Statement on Form S-8 (File Number
333-57248) and incorporated herein by reference.

(5) Filed on
November 12, 2002 as an exhibit to our proxy statement for the 2002 annual
meeting, and incorporated herein by reference.

(6) Filed on April
25, 2005 as an exhibit to our Current Report on Form 8-K dated April 24, 2006
and incorporated herein by reference.

(7) Filed on
September 28, 2004 as an exhibit to our Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2004, and incorporated herein by reference.

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees for professional services provided by our independent auditors in each
of the last two fiscal years, in each of the following categories are as
follows:

|Fees billed by
    Ernst & Young LLP: | 2006    | 2005   
|------------------------------------- | ------- | -------
|                                      |         |        
|Audit fees                            | --      | $ 6,690
|Audit-related fees                    | $ 4,161 | $10,704
|Tax fees                              | --      | --     
|All other fees                        | --      | --     
|                                      | $ 4,161 | $17,394

- 17 -

---



|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES        
|----------- | ------------------------------------------------------
|            | Incorporated Under the Laws of Delaware, United States

|                                         |         |        
|---------------------------------------- | ------- | -------
|Fees billed by
    Mintz & Partners LLP: | 2006    | 2005   
|                                         |         |        
|Audit fees                               | $55,828 | $36,798
|Audit-related fees                       | $ 8,589 | --     
|Tax fees                                 | $ 5,583 | $ 5,200
|All other fees                           | $14,112 | $ 9,600
|                                         | $84,112 | $51,598

Audit fees services include fees associated with the annual
audit, the reviews of our quarterly reports on Form 10-QSB, assistance with and
review of documents filed with the Securities and Exchange Commission and
comfort letters. Audit-related fees principally consist of audit-related
consultation. Tax fees include tax compliance and tax consultations. All other
fees include quarterly reviews of our 10-QSB filings and general accounting
consultations.

The audit committee has adopted a policy that requires
advance approval of all audit, audit-related, tax and other services performed
by the independent auditor. The policy provides for pre-approval by the audit
committee of specifically defined audit and non-audit services. Unless the
specific service has been previously pre-approved with respect to that year, the
audit committee must approve the permitted service before the independent
auditor is engaged to perform it.



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Directors and Shareholders of
TurboSonic Technologies, Inc.
We have audited the accompanying consolidated balance sheets
of TurboSonic Technologies, Inc. and Subsidiaries as of June 30,
2006 and 2005 and the related consolidated statements of income (loss) and
comprehensive income (loss), shareholders' equity and cash flows for the year
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 the standards of
the Public Company Accounting Oversight Board (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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of TurboSonic Technologies, Inc. and Subsidiaries as of June 30, 2006
and 2005, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States.

|Toronto, Canada,    | /s/ Mintz &
    Partners LLP
|------------------- | ----------------------------
|September 14, 2006. | Mintz & Partners LLP        
|                    | Chartered Accountants       

F-1

---



|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

CONSOLIDATED BALANCE SHEETS

|As at June
    30                                                 | [expressed in United States dollars]            
|----------------------------------------------------------------- | ------------------------------------------------
|                                                                  |                                                 
|                                                                  |                                                 
|                                                                  |                                                 
|                                                                  |                                                 
|ASSETS                                                            |                                                 
|Current                                                           |                                                 
|Cash and
    cash equivalents                                     | 5,506,643                                       
|Accounts
    receivable [note 4]                                  | 1,347,381                                       
|Retentions
    receivable                                         | 61,112                                          
|Inventories [note 5]                                              | 111,958                                         
|Deferred
    contract costs and unbilled revenue [note 6]         | 588,126                                         
|Other current assets                                              | 101,520                                         
|Total current assets                                              | 7,716,740                                       
|Property
    and equipment,less accumulated depreciation          |                                                 
|and amortization [note 7]                                         | 377,562                                         
|Goodwill
    [note 8]                                             | 398,897                                         
|Other assets                                                      |                                                 
|                                                                  |                                                 
|Total assets                                                      |                                                 
|                                                                  |                                                 
|LIABILITIES AND SHAREHOLDERS' EQUITY                              |                                                 
|Current                                                           |                                                 
|Accounts
    payable                                              | 1,079,559                                       
|Accrued
    charges [note 9]                                      | 542,690                                         
|Obligations under capital leases, current portion [note 10]       | 4,775                                           
|Income
    taxes payable                                          | 8,154                                           
|Unearned revenue and contract advances
    [note 6]               | 3,805,107                                       
|Total current liabilities                                         | 5,440,285                                       
|Obligations under capital leases,
    long-term portion [note 10] | --                                              
|                                                                  |                                                 
|Commitments and contingencies [note 11]                           |                                                 
|Shareholders' equity[note 12]                                     |                                                 
|Share capital                                                     |                                                 
|Authorized                                                        |                                                 
|30,000,000                                                        | common shares, par
    value $0.10 per share    
|1,500                                                             | preferred shares, no
    par value              
|Issued                                                            |                                                 
|11,971,614                                                        | common shares [2005 
    7,982,290]            
|2,566,564                                                         | common shares reserved
    for the conversion of
|                                                                  | the subsidiary's Class
    B exchangeable shares
|                                                                  | [2005  5,151,706]                              
|Additional paid-in capital                                        | 3,102,229                                       
|                                                                  |                                                 
|Accumulated other comprehensive income                            | 402,662                                         
|Accumulated deficit                                               | (2,928,409)                                     
|Total shareholders' equity                                        | 3,066,740                                       
|Total liabilities and shareholders'
    equity                    | 8,507,025                                       

See accompanying notes

F-2

---



|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

CONSOLIDATED STATEMENTS OF INCOME (LOSS) 
AND COMPREHENSIVE INCOME (LOSS)

|Years ended June 30                                               | [expressed in United States dollars]
|----------------------------------------------------------------- | ------------------------------------
|                                                                  |                                     
|                                                                  | 2006                                
|                                                                  | $                                   
|                                                                  |                                     
|CONTRACT REVENUE
    AND SALES                                    |                                     
|OEM systems revenue                                               | 11,946,392                          
|Aftermarket revenue                                               | 4,100,748                           
|                                                                  | 16,047,140                          
|                                                                  |                                     
|CONTRACT COSTS AND
    COST OF SALES                              |                                     
|OEM systems contract
    costs and costs of sales                 | 9,903,428                           
|Aftermarket contract costs and cost of
    sales                  | 2,543,235                           
|                                                                  | 12,446,663                          
|Gross margin                                                      | 3,600,477                           
|                                                                  |                                     
|EXPENSES                                                          |                                     
|Selling, general and
    administrative                           | 2,696,677                           
|Stock-based
    compensation expense [note 12]                    | 31,250                              
|Depreciation & amortization                                       | 93,897                              
|                                                                  | 2,821,824                           
|                                                                  |                                     
|Income (loss) from
    operations                                 | 778,653                             
|Interest income                                                   | 43,733                              
|Interest (expense)                                                | (1,128)                             
|Income (loss) before provision for
    (recovery of) income taxes | 821,258                             
|Provision for (recovery of) income
    taxes [note 13]            | 5,408                               
|Net income (loss)                                                 | 815,850                             
|Other comprehensive
    income:                                   |                                     
|Foreign currency
    translation adjustment                       | 144,195                             
|Comprehensive income (loss)                                       | 960,045                             
|                                                                  |                                     
|Basic earnings
    (loss) per share[note 15]                      | $0.06                               
|Diluted earnings per share[note 15]                               | $0.06                               
|                                                                  |                                     
|Basic weighted average
    number of shares [note 15]             | 13,505,474                          
|Diluted weighted average number of
    shares [note 15]           | 14,039,339                          

See accompanying notes

F-3

---



|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|Years ended June 30 | [expressed in United States dollars]
|------------------- | ------------------------------------

|                                      |                      |            |             |               |               |          
|------------------------------------- | -------------------- | ---------- | ----------- | ------------- | ------------- | ---------
|                                      |                      |            |             |               | Accumulated   |          
|                                      | Exchangeable
    and | Additional |             | other         | Total        
|                                      | common shares        | paid-in    | Accumulated | comprehensive | shareholders'
|                                      | Shares               | Amount     | capital     | deficit       | Income (loss) | equity   
|                                      | #                    | $          | $           | $             | $             | $        
|                                      |                      |            |             |               |               |          
|Balance  June 30, 2004               | 10,507,031           | 2,349,818  | 2,022,655   | (3,517,063)   | 126,516       | 981,926  
|Net (loss)                            |                     |           |            | (227,196)     |              | (227,196)
|Stock-based compensation[note 12]     |                     |           | 2,268       |              |              | 2,268    
|Translation adjustment                |                     |           |            |              | 131,951       | 131,951  
|Stock Split [note 12]                 | 2,626,799            |           |            |              |              |         
|Purchase of small-lot shares[note 12] | (27)                 |           | (14)        |              |              | (14)     
|                                      |                      |            |             |               |               |          
|Balance  June 30, 2005               | 13,133,803           | 2,349,818  | 2,024,909   | (3,744,259)   | 258,467       | 888,935  
|Net income                            |                     |           |            | 815,850       |              | 815,850  
|Stock-based compensation[note 12]     |                     |           | 31,250      |              |              | 31,250   
|Translation adjustment                |                     |           |            |              | 144,195       | 144,195  
|Sale of shares [note 12]              | 1,404,375            | 140,440    | 1,046,070   |              |              | 1,186,510
|                                      |                      |            |             |               |               |          
|Balance  June 30, 2006               | 14,538,178           | 2,490,258  | 3,102,229   | (2,928,409)   | 402,662       | 3,066,740

See accompanying notes

F-4

---



|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES            
|----------- | ----------------------------------------------------------
|            | Incorporated Under the Laws of
    Delaware, United States

CONSOLIDATED STATEMENTS OF CASH FLOWS

|Years ended June 30 | [expressed in United States dollars]
|------------------- | ------------------------------------

|                                                                                  |           |          
|--------------------------------------------------------------------------------- | --------- | ---------
|                                                                                  | 2006      | 2005     
|                                                                                  | $         | $        
|                                                                                  |           |          
|OPERATING ACTIVITIES                                                              |           |          
|Net income (loss)                                                                 | 815,850   | (227,196)
|Add charges to operations not requiring a
    current cash payment:               |           |          
|Stock-based compensation expense [note 12]                                        | 31,250    | 2,268    
|Depreciation and
    amortization [note 7]                                        | 93,897    | 65,303   
|                                                                                  | 940,997   | (159,625)
|Net change in non-cash assets and liabilities related to operations [note
    16] | 2,287,862 | 1,152,095
|Cash provided by operating activities                                             | 3,228,859 | 992,470  
|                                                                                  |           |          
|INVESTING ACTIVITIES                                                              |           |          
|Purchase of property and equipment                                                | (350,546) | (47,305) 
|Cash (applied to) investing activities                                            | (350,546) | (47,305) 
|                                                                                  |           |          
|FINANCING ACTIVITIES                                                              |           |          
|(Repayment) of obligations under capital
    leases                               | (7,148)   | (9,956)  
|Proceeds from issuance of common shares                                           | 1,186,510 | ()       
|Cash provided by (applied to) financing activities                                | 1,179,362 | (9,956)  
|                                                                                  |           |          
|Effect of exchange rate changes on cash                                           | 170,551   | 123,470  
|                                                                                  |           |          
|Net cash provided during year                                                     | 4,228,226 | 1,058,679
|Cash and cash equivalents, beginning of year                                      | 1,278,417 | 219,738  
|Cash and cash equivalents, end of year                                            | 5,506,643 | 1,278,417
|                                                                                  |           |          
|Supplemental cash flow information:                                               |           |          
|Interest paid                                                                     | 1,128     | 1,429    
|Interest received                                                                 | 43,733    | 9,244    
|Income taxes paid                                                                 | 570       | 947      

See accompanying notes



---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

1. ORGANIZATION AND BUSINESS DESCRIPTION

TurboSonic Technologies, Inc., directly and through subsidiaries, designs and
markets integrated air pollution control and liquid atomization technology,
including industrial gas cooling/conditioning systems, to ameliorate or abate
industrial environmental problems.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of consolidation

The consolidated financial statements include the accounts of our company and
our wholly-owned and majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated on 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

Under Statement of Financial Accounting Standard ["SFAS"]
No.142, goodwill is no longer amortized but is subject to an annual impairment
review [or more frequently if deemed appropriate]. Since the adoption of SFAS
No. 142 as at July 1, 2001, we have completed the transitional impairment test
as at July 1, 2001 and annual impairment tests as at April 1, 2002, 2003, 2004,
2005 and 2006, to identify if there is any impairment to the goodwill using a
fair value methodology by reporting unit [note 8].

Property and equipment

Property and equipment are recorded at cost. Depreciation and amortization
are calculated on the straight-line method over the estimated useful lives of
the assets as follows:

|Office equipment       | 2  5 years                 
|---------------------- | ----------------------------
|Other equipment        | 5  10 years                
|Leasehold improvements | lease term [5  6
    years]

Revenues and long-term contracts

We derive 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. For long-term contracts, we employ two methods
of recognition  the percentage of completion method for virtually all of such
projects being undertaken, and the completed contract method for contracts with
significant uncertainty, such as the use of new technology. For contracts of
shorter duration, revenue is recorded when products are shipped, services are
performed or billings are rendered, which approximates actual performance.

The percentage-of-completion is determined by best available engineering
estimates. Engineering progress is measured upon completion progress relative to
the overall project design. Material progress is determined by the degree of
completeness or progress of the components individually and as a whole of the
project. When included in the scope of the work, installation work completeness
is based upon work completed relative to the overall scope. Monthly revenue
recognition reflects the degree of completeness based upon review of project
drawings, project schedule, progress of actual fabrication and installation, and
further validated by visual observation by the project manager, quality
inspectors, and the construction advisor, if applicable.

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.

Contract change orders are routinely negotiated with the customer prior to
any work proceeding on the requested scope revision. Upon approval by both
parties, contract price and costs are adjusted to reflect the revised scope and
price.

Contract claims against the customer are recorded as revenue
only upon award or settlement. The amounts recorded, if material, are disclosed
in the notes to the consolidated financial statements. Costs attributable to
claims are treated as costs of contract performance, as incurred.

Cash and cash equivalents

We consider all highly liquid temporary cash investments with a maturity of
three months or less when purchased, to be cash equivalents.

Allowance for doubtful accounts

An allowance for doubtful accounts, if any, is established on
a case-by-case basis after careful review of the outstanding receivable amounts
and the probability of collection within a reasonable period of time. Losses due
to non-payment of accounts receivable have been negligible over the past number
of years, due in part to the high quality of the customer base.

F-6

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

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 consolidated statement of loss 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 operations as a reduction of expenses. Tax credits earned with
respect to capital expenditures are applied to reduce the cost of the related
capital 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

We account for income taxes in accordance with
the provisions of SFAS 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
consolidated 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 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 $70,863 in 2006
[$48,933 in 2005].

Stock-based compensation

Financial Accounting Standards Board ["FASB"] SFAS No. 123, Accounting for Stock-Based Compensation, provides an alternative to APB
Opinion No. 25. We follow APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for stock-based compensation issued to employees.
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 our fair value based accounting
for those arrangements.

Pro forma information regarding net income and earnings per
share is required by SFAS No. 123 and has been determined as if we had accounted
for our employee, director and adviser stock options under the fair value method
of that statement. The fair value of options granted in fiscal 2004 was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions: risk-free interest rate of 4.0%, dividend yield of
0.0%, volatility factor of the expected market price of our common stock of
1.045, and a weighted-average expected life of the options of 5.0 years. The
average fair value of options granted in fiscal 2004 was $0.28.

For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the vesting period. Our pro
forma information is as follows:

|                                                     | 2006     | 2005     
|---------------------------------------------------- | -------- | ---------
|                                                     | $        | $        
|                                                     |          |          
|Net income (loss)                                    | 815,850  | (227,196)
|Stock-based compensation expense under APB
    No.25 | (88,150) | 2,268    
|Stock-based compensation expense under SFAS No.123   | --       | (4,250)  
|Pro forma income (loss)                              | 727,700  | (229,178)
|                                                     |          |          
|Pro forma income per share:                          |          |          
|Basic                                                | $0.05    | $(0.02)  
|Diluted                                              | $0.05    | --       

Effective the January 2006 quarter of fiscal 2006, we are required to adoptStatement of Financial Accounting Standards (SFAS) No. 123(R), "Share-Based
Payment", which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation", and supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25). Under the modified
prospective method, the Statement applies to new awards and to awards modified,
repurchased or cancelled after the effective date. Additionally, compensation
cost for the unvested portion of awards as of the effective date is required to
be recognized as the awards vest after the effective date. For existing awards,
we do not expect the requirements of this Statement will have a significant
impact on our results of operations or financial position as all awards are
currently vested.

F-7

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

Warranty

We carry a reserve based upon historical warranty claims
experience. Additionally, warranty accruals are established on the basis of
anticipated future expenditures as specific warranty obligations are identified,
and are expensed directly to cost of sales. Expenditures exceeding such accruals
are expensed direct to cost of sales.

Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net
earnings (loss) available to common shareholders by the weighted average number
of common shares outstanding during the year. In computing the earnings (loss)
per share, the TurboSonic Canada Inc. Class B exchangeable shares, disclosed in
note 12, are considered outstanding common shares of TurboSonic
Technologies, Inc. Diluted earnings per share reflects the per share amount
under the treasury stock method that would have resulted if dilutive potential
common stock had been converted to common stock, as prescribed by SFAS 128, Earnings Per Share. Diluted loss per share is not calculated when the effect
of conversion is anti-dilutive.

Foreign currency translation

We maintain our accounts in United States dollars and in
Canadian dollars for Canadian-based subsidiaries, their functional currency. The
consolidated financial statements have been translated into United States
dollars in accordance with SFAS 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.

Use of estimates

The preparation of the consolidated financial statements, in
accordance with United States generally accepted accounting principles, requires
management to make estimates and assumptions that affect the amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expense during the period. Actual results could differ from those estimates.

Impact of recently issued accounting standards

Share Based Payments

In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123(R),
"Share-Based Payment", which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation", and supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25). The Statement requires
that the cost resulting from all share-based payment transactions be recognized
in the financial statements. The Statement also establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees, except for
equity instruments held by employee share ownership plans. The Statement is
effective for us beginning the January 2006 quarter of fiscal 2006, and is
required to be adopted using a "modified prospective" method. Under the modified
prospective method, the Statement applies to new awards and to awards modified,
repurchased or cancelled after the effective date. Additionally, compensation
cost for the unvested portion of awards as of the effective date is required to
be recognized as the awards vest after the effective date. For existing awards,
we does not expect the requirements of this Statement will have a significant
impact on our results of operations or financial position as all awards are
currently vested. We expect that this new pronouncement will have a material
impact on our results of operation for future employee stock options granted.

Inventory Pricing

In November 2004, the FASB issued SFAS No. 151, "Inventory
Costs" (SFAS No. 151), which amends the guidance in Accounting Research Bulletin
No. 43, Chapter 4, "Inventory Pricing". The Statement requires that the
accounting for abnormal amounts of idle facility expense, freight handling
costs, and wasted material (spoilage) be recognized as current-period charges.
In addition, the Statement requires that the allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the
production facilities. The Statement is effective for us for inventory costs
incurred beginning July 1, 2005. We do not expect the requirements of this
Statement will have any impact on our results of operations or financial
position.

Exchange of Nonmonetary Assets

In December 2004, the FASB issued SFAS No. 153, "Exchange of
Nonmonetary Assets, an amendment of APB Opinion No. 29" (SFAS No. 153), which
addresses the measurement of exchanges of nonmonetary assets. The Statement
eliminates the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchange of nonmonetary assets that
do not have commercial substance. It also specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The Statement is effective for
us beginning July 1, 2005. We do not expect the requirements of the Statement
will have a significant impact on our results of operations or financial
position.

Accounting Change and Error Corrections

FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3",
which is effective for fiscal years beginning after December 15, 2005. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. We do not expect
the requirements of the Statement will have a significant impact on our results
of operations or financial position.

F-8

---

TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES
    Notes to Consolidated Financial StatementsFORM 10-KSB
    Year ended June 30, 2006

3. FINANCIAL INSTRUMENTS

Fair value of financial instruments

The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, retentions receivable, accounts payable,
accrued charges and obligations under capital leases approximate fair value
based on the short-term maturity of these instruments.

Credit risk

Trade accounts receivable potentially subjects us to credit risk. Sales are
made to end users of all sizes located primarily in North America. We provide an
allowance for doubtful accounts equal to the estimated losses expected to be
incurred in the collection of accounts receivable. As at June 30, 2006, we had
three customers that comprised 41% of the total trade receivable balance and had
three different customers that comprised 50% of the total trade receivable
balance at June 30, 2005. Our cash balances are maintained in one United States
chartered bank, which is an AA rated financial institution. Our cash balances
for the Canadian-based subsidiaries are maintained in three Canadian chartered
banks, which are AA rated financial institutions.

4. ACCOUNTS RECEIVABLE

|                                                                              | 2006         | 2005        
|----------------------------------------------------------------------------- | ------------ | ------------
|                                                                              | $            | $           
|                                                                              |              |             
|Trade accounts receivable                                                     | 1,354,242    | 1,142,953   
|Allowance for doubtful accounts                                               | (6,861)      |            
|                                                                              | 1,347,381    | 1,142,953   
|                                                                              |              |             
|Bad debt expense was nil in 2005 and nil in
    2006.                         |              |             
|                                                                              |              |             
|5. INVENTORIES                                                                |              |             
|                                                                              | 2006         | 2005        
|                                                                              | $            | $           
|                                                                              |              |             
|Finished goods                                                                | 127,183      | 95,468      
|Reserve for obsolescence                                                      | (15,225)     | (15,889)    
|                                                                              | 111,958      | 79,579      
|                                                                              |             
|6. COST AND ESTIMATED EARNINGS
    ON UNCOMPLETED CONTRACTS                  
|                                                                              | 2006         | 2005        
|                                                                              | $            | $           
|                                                                              |              |             
|Costs incurred on uncompleted contracts                                       | 15,513,587   | 9,490,859   
|Estimated earnings                                                            | 2,155,467    | 1,067,972   
|                                                                              | 17,669,054   | 10,558,831  
|Less billings to date                                                         | (20,886,035) | (11,231,969)
|                                                                              | (3,216,981)  | (673,138)   
|                                                                              |              |             
|Included in the accompanying
    balance sheets under the following captions:
|                                                                              | 2006         | 2005        
|                                                                              | $            | $           
|                                                                              |              |             
|Deferred contract costs and unbilled revenue                                  | 588,126      | 460,739     
|Unearned revenue and contract advances                                        | (3,805,107)  | (1,133,877) 
|                                                                              | (3,216,981)  | (673,138)   

As the result of the financial difficulties experienced by
one of our subcontractors during prior years, the estimated completion costs for
a project were revised upward by $317,000 in the consolidated financial
statements. Recovery, in whole or part, of these increased costs may be possible
through the liquidation of the assets of the subcontractor. To date, recovery of
$13,619 has been recorded. The liquidation process was not complete at June 30,
2006.

F-9

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

7. PROPERTY AND EQUIPMENT

|                       |           | Accumulated  | Net Book
|---------------------- | --------- | ------------ | --------
|                       | Cost      | Depreciation | Value   
|2006                   | $         | $            | $       
|                       |           |              |         
|Office equipment       | 777,606   | 700,799      | 76,807  
|Other equipment        | 748,480   | 459,583      | 288,897 
|Leasehold improvements | 62,656    | 50,798       | 11,858  
|                       | 1,588,742 | 1,211,180    | 377,562 
|                       |           |              |         
|                       |           | Accumulated  | Net Book
|                       | Cost      | Depreciation | Value   
|2005                   | $         | $            | $       
|                       |           |              |         
|Office equipment       | 660,455   | 606,532      | 53,923  
|Other equipment        | 446,041   | 414,253      | 31,788  
|Leasehold improvements | 57,561    | 41,569       | 15,992  
|                       | 1,164,057 | 1,062,354    | 101,703 

Total depreciation and amortization incurred during fiscal 2006 was $93,897
[2005 - $65,303].

The total depreciation, included in the above amounts, for assets under
capital leases during fiscal 2006 was $6,692 [2004  $10,515].

The purchase of certain property and equipment was made through the use of
capital leases. Property and equipment under capital leases, grouped as office
equipment, at June 30 are as follows:

|                                                                   |             | Accumulated  | Net Book
|------------------------------------------------------------------ | ----------- | ------------ | --------
|                                                                   | Cost        | Depreciation | Value   
|2006                                                               | $           | $            | $       
|                                                                   |             |              |         
|                                                                   | 149,000     | 139,710      | 9,290   
|                                                                   |             |              |         
|                                                                   |             | Accumulated  | Net Book
|                                                                   | Cost        | Depreciation | Value   
|2005                                                               | $           | $            | $       
|                                                                   |             |              |         
|                                                                   | 135,722     | 127,260      | 8,462   
|                                                                   |             |              |         
|8. GOODWILL                                                        |             |              |         
|The changes in the carrying
    amount of goodwill are as follows: |             |             
|                                                                   | OEM Systems | Aftermarket  | Total   
|                                                                   | $           | $            | $       
|                                                                   |             |              |         
|Balance as of June 30, 2004                                        |            | 398,897      | 398,897 
|Impairment loss recognized in operating income                     |            |             |        
|Balance as of June 30, 2005                                        |            | 398,897      | 398,897 
|Impairment loss recognized in operating income                     |            |             |        
|Balance as of June 30, 2006                                        |            | 398,897      | 398,897 

We completed our goodwill impairment testing as at April 1,
2006, as required by SFAS No. 142. We reports on two business segments  OEM
systems and Aftermarket. We had concluded that the $398,897 of goodwill
associated with the OEM business segment should be expensed in the period ended
June 30, 2003. We have concluded that there has not been impairment associated
with the Aftermarket segment to the period ended June 30, 2006.

9. WARRANTY

As part of the normal sale of scrubber and nozzle systems, we
have provided our customers with product warranties. The warranties generally
extend for twelve months from the date of start-up or eighteen months after
shipment to the customer. The following summarizes the accrual of product
warranties that is recorded as part of accrued charges in the accompanying
consolidated balance sheet as at June 30th:

|                           | 2006     | 2005    
|-------------------------- | -------- | --------
|                           | $        | $       
|                           |          |         
|Balance, beginning of year | 83,318   | 60,442  
|Payments made              | (44,188) | (28,804)
|Provisions made            | 50,728   | 51,680  
|Balance, end of year       | 89,858   | 83,318  

F-10

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

10. OBLIGATIONS UNDER CAPITAL LEASES

We have entered into certain capital leases for computer hardware and
software, with interest rates at approximately 10%.

The following is a schedule of the future minimum lease payments:

|                                  | $    
|--------------------------------- | -----
|                                  |      
|2007                              | 4,775
|Total minimum lease payments      | 4,775
|Less amount representing interest | 207  
|                                  | 4,568
|Less current portion              | 4,568
|Long-term portion                 | --   

11. COMMITMENTS AND CONTINGENCIES

[a] Operating leases

We have entered into operating leases, expiring
through 2010, for office equipment and premises. Total minimum annual payments
under these leases for the years after June 30, 2006 are as follows:

|                    | $      
|------------------- | -------
|                    |        
|2007                | 72,981 
|2008                | 56,383 
|2009                | 9,191  
|2010                | 426    
|2011 and thereafter | --     
|                    | 138,981

Rental expense for office equipment and premises was
$109,908 in 2006 [$100,716 in 2005].

[b] Contingencies

General

Our standard contractual terms with respect to the
sale of our products and systems disclaim any liability for consequential or
indirect losses or damages stemming from any failure of our products or systems
or any component thereof. We customarily seeks contractual indemnification from
our subcontractors for any loss, damage or claim arising from the
subcontractor's failure of performance, negligence or malfeasance. It is
possible, however, that a customer's inability to comply with applicable
pollution control laws, or regulations stemming from the failure or
non-performance of our products or systems, may subject us 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.

On October 6, 2005 a statement of claim was filed
against us in the Ontario Superior Court of Justice (Canada) by Abuma
Manufacturing Limited, one of our vendors, in which they claim additional
charges for work performed and refute the our claim for back charges on a
specific project. The claim is for CAD 95,647 in respect of unpaid accounts, CAD
50,000 for aggravated, punitive and/or exemplary damages, interest on the past
due accounts and costs of the action. It is our position that the claims are
without merit and we have filed a statement of defense and counter-claim. We
recently received the claimant's Affidavit of Documents, a request for discovery
and an offer to settle for CAD 79,757. We will respond to the request for our
Affidavit of Documents and discovery. It is still our position that the claims
are without merit.

12. SHAREHOLDERS' EQUITY

Common shares

On April 21, 2006, we privately sold an aggregate of 1,000,000 shares of
common stock at a price of $1.15 per share, representing approximately 6.9% of
our issued and outstanding common stock after giving effect to this sale,
together with three-year options to acquire up to an aggregate of 500,000 shares
of our common stock at an initial exercise price of $1.40 per share, subject to
adjustment, for an aggregate of $1,150,000. The purchasers were two
institutional investors, each an "accredited investor" as such term is defined
in rule 501, promulgated under the Securities Act of 1933, as amended. As part
of the transaction, two firms were compensated for their involvement. The
placement agent was paid $69,000 and issued 60,000 two-year warrants at the sale
price of $1.15 and a finder was issued 110,000 two-year warrants at the same
price.

We announced on July 6, 2005 that we had declared a 5-for-4 stock split of
our shares of common stock. Each shareholder, as of the record date of July 15,
2005 was to receive one (1) share for each four (4) shares of TurboSonic Common
Stock held. The payment date was July 22, 2005. In accordance with Staff
Accounting Bulletin Topic 4.C, the change has been given retroactive effect in
the June 30, 2005 balance sheet. The change in shares outstanding is shown as a
transaction occurring just prior to the end of the latest period presented.

F-11

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

12. SHAREHOLDERS' EQUITY continued

Common shares continued

We have total authorized share capital of 30,000,000 shares.
In connection with our consolidation with Turbotak Technologies Inc., on August
27, 1997, the shareholders of Turbotak Technologies Inc. exchanged their shares
for the Class B exchangeable shares of a wholly owned subsidiary of our company.
These shares are exchangeable, at any time, at the election of the holders of
such shares, into an equivalent number of common shares of our company. The
Class B exchangeable shares have voting rights through a trustee. During fiscal
2006, 2,585,142 Class B exchangeable shares [1,030,341 in 2005] were exchanged
for our common shares, leaving 2,566,564 Class B exchangeable shares outstanding
as of June 30, 2006 [5,151,706 at June 30, 2005 after the July 2005 5-for-4
split].

In fiscal 2004, the board of directors approved the re-purchase of small-lot
shares when we are approached by shareholders to purchase such shares. A total
of 33 shares [26 shares before the stock split] were re-purchased at an average
cost of $0.40 per share during fiscal 2004 and 34 [27 shares before the stock
split] in fiscal 2005 at an average price of $0.40 per share [$0.50 per share
before the stock split].

At the end of fiscal 2006, a total of 11,971,614 of our common shares and
2,566,564 Class B exchangeable shares of the subsidiary were outstanding [after
the July 2005 5-for-4-split].

Stock-based compensation

We instituted the 2000 stock plan [the "2000 Plan"] with the
express purpose of encouraging our key employees, as well as other individuals
who render services to us, by providing opportunities to participate in the
ownership of our company. The Plan provides for the grant of
non-qualified options, stock awards and stock purchase rights. Collectively,
these are referred to as stock rights.

A stock plan [the "2003 Plan"] was approved at a shareholders vote at our
annual meeting held December 10, 2002. The 2003 Plan is essentially on the same
basis as the 2000 Plan [collectively the "Plans"].

The Plans are administered by the Board of Directors or a committee
established by the Board of Directors. The Board [or committee] shall determine
to whom such stock rights may be granted, determine at which times the stock
rights shall be granted and determine the time or times when each option shall
become exercisable and the duration of the exercise period. The exercise price
per each stock option granted under the Plans shall be not less than the fair
market value per share of common stock on the date of such grant.

The stocks, subject to stock rights, shall be authorized but unissued shares
of our common stock or shares of common stock reacquired by us in any manner.
The aggregate number of shares that may be issued, pursuant to the Plans, is
937,500 [after the July 2005 5-for-4 stock split] under the 2000 Plan and
625,000 under the 2003 Plan, subject to certain adjustments.

As a result of Board actions and Plan amendments in the 2000 and 2001 fiscal
years, certain options which were issued in the prior years are accounted for as
"variable plan options" in accordance with FIN 28, Accounting for Stock
Appreciation Rights, and other variable stock option or award plans. In 2006, no
expense [2005 - $2,268] was recorded in connection with these options.

In July and December 2001, eight of our directors and advisers were granted
options to purchase 12,500 common shares each at an exercise price of $0.64. The
options expire five years from the grant date, and vested on October 15, 2004.

In June 2002, eight of our directors and advisers were each granted options
to purchase 12,500 common shares each at an exercise price of $0.36. The options
expire five years from the grant date, and vested on June 30, 2005.

In December 2003, eight of our directors and advisers were each granted
options to purchase 12,500 common shares at an exercise price of $0.28. These
options vested immediately at grant, and expire in five years. Further, each
committee member will receive options for 6,250 shares and the chairperson will
receive options for an additional 6,250 shares as compensation for the time
devoted to our business.

At the October 31, 2005 board meeting, 100,000 stock options were awarded to
the current directors from the 2003 Stock Plan and 40,000 stock options were
reserved for new directors. These stock options were subsequently awarded to new
directors at the November 21st and December 8th board meetings. Additionally,
178,000 stock options were awarded to current employees from the 2000 Stock
Plan. These options have an exercise price of $0.75 [Black-Scholes fair value
$0.42], which was the market value at the close of business on October 28, 2005,
will vest immediately and are exercisable for five years from the date of grant.
With this grant, there remain 372,500 options in the 2003 Stock Plan and 3,875
options in the 2000 Stock Plan available for future issuance.

A summary of the option activity since June 30, 2004 is shown below:

|                          | Number of shares | Weighted | Number of shares   
|------------------------- | ---------------- | -------- | -------------------
|                          | to be issued     | average  | available for      
|                          | upon exercise    | exercise | future issuance    
|                          | of outstanding   | price    | excluding options  
|                          | options          | $        | already outstanding
|Balance, June 30, 2004    | 977,813          | 0.3508   | 575,625            
|Forfeited during the year | (118,750)        | 0.3537   | 118,750            
|Balance, June 30, 2005    | 859,063          | 0.3504   | 694,375            
|Granted during the year   | 318,000          | 0.7500   | (318,000)          
|Forfeited during the year | --               | 0.0000   | --                 
|Exercised during the year | (404,375)        | 0.3688   | --                 
|Balance, June 30, 2006    | 772,688          | 0.5052   | 376,375            

F-12

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|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

12. SHAREHOLDERS' EQUITY continued

Stock-based compensation continued

The weighted average characteristics of options outstanding at June 30, 2006
are as follows:

|Options outstanding |          | Options exercisable
|------------------- | -------- | -------------------
|                    |          | Weighted           
|                    | Weighted | average            
|                    | average  | remaining          
|Exercise            | exercise | contractual        
|price               | price    | life               
|$                   | $        | [years]            
|0.2800              | 0.2800   | 2.5                
|0.3200              | 0.3200   | 0.2                
|0.3600              | 0.3600   | 1.0                
|0.4500              | 0.4500   | 0.3                
|0.6400              | 0.6400   | 0.3                
|0.7500              | 0.7500   | 4.3                
|                    | 0.5052   |                    

Warrants

We have in the past granted detachable warrants for 500,000 common shares to
debt holders as an inducement to advance funds to us. 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 was amortized over the remaining period to the original maturity
dates.

As an inducement to extend the maturity dates of the loans, we modified the
exercise price of the detachable stock purchase warrants as follows: for three
years after the initial date of the respective loan at a price of $0.40 per
share, for a period of two years following the initial three year period at a
price of $0.60 per share, and for an additional period of one year at a price of
$0.80 per share. Additionally, warrants to acquire another 500,000 common shares
were granted in aggregate to the lenders, at a price of $0.45 per share,
commencing on the first day of the extension of their loan for a period of two
years. The expiry of both sets of warrants is now stated to be the earlier of
the specified expiry date, or ninety days after the date that the common shares
in us stock have closed at a trading price above $1.20 for 30 consecutive
trading days. The new warrants and the modification of existing warrants were
recorded at fair value as debt modification costs [$75,240] in October 2000 and
were amortized using the interest method over the new term of the debt.

The second set of warrants expired during fiscal 2004, and the first set
expired during fiscal 2005.

In July 2005, we issued 125,000 warrants to purchase our common stock at a
price of $0.584 to Capstone Investments as part of the investment banking
agreement signed by the two parties. The warrants will expire in July 2008.
Based upon the Black-Scholes calculation, stock-based compensation expense was
recorded in the first quarter for $31,250.

In April 2006, we issued a total of 500,000 warrants to purchase our common
stock at a price of $1.40 to Dynamis Energy LLP and Dynamis Energy Ltd. as part
of a private placement of 1,000,00 shares. The warrants expire April 2009. As
well, a total of 170,000 warrants to purchase our common stock at a price of
$1.15 were issued to Capstone Investments and Bristol Capital for their role in
the private placement. The warrants expire April 2008. Based upon the Black-Scholes
calculation, a charge against paid-in capital was recorded in the fourth quarter
of fiscal 2006 for $92,004.

A summary of the warrant activity since June 30, 2004 is shown below:

|                          | Number of shares | Weighted
|------------------------- | ---------------- | --------
|                          | to be issued     | average 
|                          | upon exercise    | exercise
|                          | of outstanding   | price   
|                          | warrants         | $       
|Balance, June 30, 2004    | 0                | 0.0000  
|Granted during the year   | 0                | 0.0000  
|Balance, June 30, 2005    | 0                | 0.0000  
|Granted during the year   | 795,000          | 1.2182  
|Forfeited during the year | --               | 0.0000  
|Exercised during the year | --               | 0.0000  
|Balance, June 30, 2006    | 795,000          | 1.2182  

F-13

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|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

12. SHAREHOLDERS' EQUITY continued

Warrants continued

The weighted average characteristics of warrants outstanding at June 30, 2006
are as follows:

|Warrants outstanding |          | Warrants exercisable
|-------------------- | -------- | --------------------
|                     |          | Weighted            
|                     | Weighted | average             
|                     | average  | remaining           
|Exercise             | exercise | contractual         
|price                | price    | life                
|$                    | $        | [years]             
|0.5840               | 0.5840   | 2.0                 
|1.1500               | 1.1500   | 1.8                 
|1.4000               | 1.4000   | 2.8                 
|                     | 1.2182   |                     

13. INCOME TAXES

Details of the (recovery of) provision for income taxes are as follows:

|                                |                | 2006     | 2005    
|------------------------------- | -------------- | -------- | --------
|                                |                | $        | $       
|                                |                |          |         
|Current:                        | - U.S.         | 510      | 406     
|                                | - Canadian     | 4,898    | (19,108)
|Total current taxes             | 5,408          | (18,702)
|Deferred:                       | - U.S.         |         |        
|                                | -
    Canadian |         |        
|Total deferred taxes            |               |        
|Income tax provision (recovery) | 5,408          | (18,702)

The following is a summary of the statutory income tax rates used:

|                                                     | 2006    | 2005     
|---------------------------------------------------- | ------- | ---------
|                                                     | %       | %        
|                                                     |         |          
|U.S.                                                 | 34.0    | 34.0     
|Canadian federal                                     | 22.1    | 22.1     
|Canadian provincial                                  | 14.0    | 14.0     
|                                                     |         |          
|Income (loss) before provision for income
    taxes: |         |          
|                                                     | 2006    | 2005     
|                                                     | $       | $        
|                                                     |         |          
|U.S.                                                 | 325,842 | (100,004)
|Canadian                                             | 495,416 | (145,894)
|Income before provision for income taxes             | 821,258 | (245,898)

F-14

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|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

13. INCOME TAXES continued

Income taxes paid are as follows:

|                                            | 2006  | 2005  
|------------------------------------------- | ----- | ------
|                                            | $     | $     
|                                            |       |       
|Canadian federal                            |      | 541   
|Canadian provincial                         |      |      
|U.S. federal                                |      |      
|U.S. state                                  | 570   | 406   
|                                            | 570   | 947   
|                                            |       |       
|Income tax refunds received are as follows: |       |       
|                                            | 2006  | 2005  
|                                            | $     | $     
|                                            |       |       
|Canadian federal                            |      | 19,649
|Canadian provincial                         | 3,192 |      
|U.S. federal                                |      |      
|U.S. state                                  | 60    |      
|                                            | 3,252 | 19,649

We have unutilized operating losses in the United States of approximately
$2,195,000 available for carry forward to reduce income taxes otherwise payable
in future years. This amount includes purchased loss carry forwards of
approximately $672,000, which, if not utilized, will expire in 2012. A total of
$317,184 relating to prior year purchased operating losses was available to
apply against current year income.

In Canada, we have unutilized operating losses of approximately $0 federally
and $0 in Ontario. During the year, losses in the amount of $269,371 [$0 federal
and $0 Ontario in 2005] were utilized.

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

|                                            | 2006      | 2005       
|------------------------------------------- | --------- | -----------
|                                            | $         | $          
|                                            |           |            
|Accounting under tax net book value         | 7,330     | 17,452     
|Reserves not currently deductible           | 32,457    | 30,095     
|Net operating loss carryforward             | 746,305   | 973,999    
|Total deferred tax assets                   | 786,092   | 1,021,546  
|Valuation allowance for deferred tax assets | (786,092) | (1,021,546)
|Net deferred tax asset (liabilities)        |          |           
|                                            |           |            
|14. RESEARCH AND DEVELOPMENT EXPENSES       |           |            
|                                            | 2006      | 2005       
|                                            | $         | $          
|                                            |           |            
|Expenses incurred                           | 54,681    | 56,583     
|Tax recovery                                | --        | (17,534)   
|                                            | 54,681    | 39,049     

F-15

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|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

15. EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of earnings (loss) per share.
The effect of dilutive securities is included only when dilutive.

|                                                             | 2006       | 2005      
|------------------------------------------------------------ | ---------- | ----------
|                                                             | $          | $         
|Numerator                                                    |            |           
|Net
    income (loss)                                        | 815,850    | (227,196) 
|Denominator                                                  |            |           
|Denominator for earnings (loss) per share -                  |            |           
|weighted average shares outstanding                          | 13,505,474 | 13,134,030
|Denominator for diluted earnings (loss) per share -          |            |           
|adjusted weighted average shares and assumed
    conversions | 14,039,339 | 13,134,030
|Basic earnings (loss) per share                              | $0.06      | $(0.02)   
|Diluted earnings per share                                   | $0.06      | --        

For 2005, all warrants and options were anti-dilutive and therefore excluded
from this calculation.

16. SUPPLEMENTARY INFORMATION ON CASH FLOWS

|                                                                      | 2006      | 2005     
|--------------------------------------------------------------------- | --------- | ---------
|                                                                      | $         | $        
|                                                                      |           |          
|Changes in non-cash assets and liabilities
    related to operations: |           |          
|(Increase) decrease in accounts receivable                            | (89,808)  | 204,729  
|Decrease (increase) in retentions receivable                          | 83,665    | (56,036) 
|(Increase) in inventories                                             | (23,755)  | (23,899) 
|(Increase) in deferred contract costs and
    unbilled revenue        | (82,919)  | (414,008)
|(Increase) decrease in other current assets                           | (25,016)  | 2,032    
|Decrease in other assets                                              | 8,500     | 32       
|(Decrease) increase in accounts payable                               | (362,001) | 742,589  
|Increase (decrease) in accrued charges                                | 183,887   | (55,996) 
|Increase in unearned revenue and contract
    advances                | 2,587,433 | 752,652  
|Increase in income taxes payable                                      | 7,876     | --       
|                                                                      | 2,287,862 | 1,152,095

17. SEGMENTED INFORMATION

We offer a range of products and systems, incorporating
diverse technologies, to address the industrial process, air pollution control
and other environmental management needs of our customers. We report to
shareholders on the two business segments into which management classifies the
business  OEM systems and Aftermarket.

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

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.

Contract revenue and sales are broken down geographically as follows:

|              | 2006       | 2005      
|------------- | ---------- | ----------
|              | $          | $         
|              |            |           
|United States | 11,426,000 | 4,340,000 
|Canada        | 3,049,000  | 4,785,100 
|Asia          | 513,000    | 445,100   
|Europe        | 289,000    | 333,800   
|South America | 321,000    | 890,300   
|Other         | 449,140    | 301,277   
|              | 16,047,140 | 11,095,577

The long-lived assets of the two business segments are
primarily located in Canada, except for the wet electrostatic precipitator and
certain nozzle technologies. For the year ended June 30, 2006, three customers
represented 49% of total revenues [in fiscal 2005, three different customers
represented 50% of total revenues]. At June 30, 2006, we had three customers
that comprised 41% of the total trade receivable balance and had three different
customers that comprised 50% of the total trade receivable balance at June 30,
2005.

F-16

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|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|FORM 10-KSB                                        | Year ended June 30, 2006                  

17. SEGMENTED INFORMATION continued

Industry segments

|                                 | OEM        |             |            |           
|-------------------------------- | ---------- | ----------- | ---------- | ----------
|                                 | Systems    | Aftermarket | Other      | Total     
|2006                             | $          | $           | $          | $         
|                                 |            |             |            |           
|Contract revenue and sales       |            |             |            |           
|OEM systems                      | 11,946,392 |            |           | 11,946,392
|Aftermarket                      |           | 4,100,748   |           | 4,100,748 
|Total contract revenue and sales | 11,946,392 | 4,100,748   |           | 16,047,140
|Income from operations           | 334,026    | 444,627     |           | 778,653   
|Interest income                  | 32,557     | 11,176      |           | 43,733    
|Interest expense                 | (840)      | (288)       |           | (1,128)   
|Income before provision          |            |             |            |           
|for income taxes                 | 365,744    | 455,514     |           | 821,258   
|Provision for income taxes       | 4,026      | 1,382       |           | 5,408     
|Net income                       | 361,718    | 454,132     |           | 815,850   
|                                 |            |             |            |           
|Depreciation and amortization    | 53,722     | 40,175      |           | 93,897    
|Capital expenditures             | 316,571    | 33,975      |           | 350,546   
|Segment assets                   | 1,850,066  | 1,150,316   | 5,506,6431 | 8,507,025 
|Property and equipment           | 356,022    | 21,540      |           | 377,562   
|Goodwill                         |           | 398,897     |           | 398,897   

1

|                                 | OEM       |             |            |           
|-------------------------------- | --------- | ----------- | ---------- | ----------
|                                 | Systems   | Aftermarket | Other      | Total     
|2005                             | $         | $           | $          | $         
|                                 |           |             |            |           
|Contract revenue and sales       |           |             |            |           
|OEM systems                      | 7,720,195 |            |           | 7,720,195 
|Aftermarket                      |          | 3,375,382   |           | 3,375,382 
|Total contract revenue and sales | 7,720,195 | 3,375,382   |           | 11,095,577
|(Loss) income from operations    | (565,092) | 310,379     |           | (254,713) 
|Interest income                  | 7,128     | 3,116       |           | 10,244    
|Interest expense                 | (994)     | (435)       |           | (1,429)   
|(Loss) income before provision   |           |             |            |           
|for income taxes                 | (558,959) | 313,061     |           | (245,898) 
|(Recovery) of income taxes       | (13,013)  | (5,689)     |           | (18,702)  
|Net (loss) income                | (545,946) | 318,750     |           | (227,196) 
|                                 |           |             |            |           
|Depreciation and amortization    | 32,652    | 32,651      |           | 65,303    
|Capital expenditures             | 23,653    | 23,652      |           | 47,305    
|Segment assets                   | 1,620,868 | 789,469     | 1,278,4171 | 3,688,754 
|Property and equipment           | 50,852    | 50,851      |           | 101,703   
|Goodwill                         |          | 398,897     |           | 398,897   

1  Cash and cash equivalents are not allocated between
business segments.

18. COMPARATIVE FIGURES

The comparative consolidated financial statements have been reclassified from
statements previously presented to conform to the presentation of the current
year consolidated financial statements.

F-17

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

TURBOSONIC
      TECHNOLOGIES, INC.By:
      /s/ Edward F. SpinkEdward F. SpinkChief Executive
      Officer


Date: September 22, 2006

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

|Signatures                   | Capacity                                     | Date              
|---------------------------- | -------------------------------------------- | ------------------
|                             |                                              |                   
|/s/ Edward F. Spink          | Chairman of the Board of Directors and       | September 22, 2006
|Edward F. Spink              | Chief Executive Officer (Principal Executive |                   
|                             | Officer and Principal Financial Officer)     |                   
|                             |                                              |                   
|/s/ Egbert Q. van Everdingen | President, Secretary, Treasurer and Director | September 22, 2006
|Egbert Q. van Everdingen     |                                              |                   
|                             |                                              |                   
|/s/ David J. Hobson          | VP Finance & Administration                  | September 22, 2006
|David J. Hobson              | (Principal Accounting Officer)               |                   
|                             |                                              |                   
|/s/ Richard H. Hurd          | Director                                     | September 22, 2006
|Richard H. Hurd              |                                              |                   
|                             |                                              |                   
|/s/ Donald R. Spink, Sr.     | Director                                     | September 22, 2006
|Dr. Donald R. Spink, Sr.     |                                              |                   
|                             |                                              |                   
|/s/ Julien J. Hradecky       | Director                                     | September 22, 2006
|Julien J. Hradecky           |                                              |                   
|                             |                                              |                   
|/s/ Glen O. Wright           | Director                                     | September 22, 2006
|Glen O. Wright               |                                              |                   
|                             |                                              |                   
|/s/ Andrew T. Meikle         | Director                                     | September 22, 2006
|Andrew T. Meikle             |                                              |                   

---