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SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, DC 20549

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, 2004

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, including area code)

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 (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  No
>   Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
>   S-B is not contained in this form, and will not be contained, to the best of
>   the Issuer's knowledge, in definitive proxy or information statements
>   incorporated by reference in Part III of this Form 10-KSB or any amendment to
>   this Form 10-KSB.
>   Issuer's revenues for its most recent fiscal year: $4,722,557
>   Aggregate market value of the Issuer's common stock held by non-affiliates
>   of the Issuer as of September 17, 2004: $1,579,620
>   The number of shares outstanding of the Issuer's common stock as of
>   September 17, 2004: 10,507,224
>   Transitional Small Business Disclosure Format (check one): Yes No

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PART I

ITEM 1: DESCRIPTION OF BUSINESS

a) Business Development

> TurboSonic Technologies, Inc., (the "Company"), directly and through
>   subsidiaries, designs and markets integrated pollution control and industrial
>   gas cooling/conditioning systems including liquid atomization technology and
>   dust suppression systems to ameliorate or abate industrial environmental
>   problems.
>   The Company was incorporated in the State of Delaware in April 1961. The
>   executive offices of the Company are located at 550 Parkside Drive, Suite
>   A-14, Waterloo, Ontario, Canada N2L 5V4; its telephone number is (519)
>   885-5513. The Company's website is located at www.turbosonic.com. The
>   information on the Company's website is not part of this annual report.
>   Unless the context indicates to the contrary, references to the Company
>   herein include both the Company and its majority and wholly-owned
>   subsidiaries.

b) Business of Company

Introduction

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

Certain of the Company's products and systems employ proprietary nozzles to
  atomize liquids passing through the nozzles, resulting in the liquid being
  converted into fine droplets. Controlling the liquid and gas pressures applied
  to the nozzle can modulate droplet sizes and liquid flow rates. The Company
  has sold the atomizing nozzles for many years.

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

|                                      | Year Ended
|------------------------------------- | ----------
|                                      | June 30   
|                                      | 2004      
|Hazardous Waste Incineration          | 8%        
|Solid
      Waste Incineration        | 20%       
|Chemical
      and Mineral Processing | 18%       
|Metallurgical Processing              | 25%       
|Pulp and
      Paper                  | 22%       
|Wood
      Products                   | 2%        
|Grain
      Processing                | 2%        
|Other                                 | 3%        
|                                      | 100%      

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

The Company performs all process engineering, including but not limited to,
  the determination of the size, geometry and structural characteristics of the
  particular system needed for gaseous, 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. The Company, historically, has not manufactured or fabricated its own
  products or systems. Rather, it purchases components consisting of both
  off-the-shelf items and items, such as its atomizing nozzles, which are made
  to its design and specifications by third party manufacturers and fabricators,
  enters into subcontracts for field construction, which it supervises, and
  manages all technical, physical and commercial aspects of the performance of
  its contracts.

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> Products and Systems
>   
>   The Company offers a range of products and systems, incorporating diverse
>   technologies, to address the industrial processing, air pollution control and
>   other environmental management needs of its customers. Many of such customers
>   have historically purchased individual products or systems from the Company
>   that, in many instances, operate in conjunction with products and systems
>   supplied by others. The Company emphasizes the marketing of custom engineered
>   air pollution control systems that may provide combinations of its own
>   products and systems as an integrated environmental management solution.
>   The following table reflects the approximate percentages of the Company's
>   revenue derived from its principal products and systems during the fiscal
>   years indicated below:
>   Year EndedJune 302004
>       2003Evaporative Gas Cooling and
>       Conditioning Systems
>       39%
>       19%Wet Electrostatic Precipitator
>       Systems (WESPs)
>       13%
>       36%Wet Scrubber Systems
>       23%
>       21%Semi-dry Scrubber Systems
>       11%
>       18%Dust Suppression
>       5%
>       4%Other Nozzle Systems
>       9%
>       2%100%
>       100%The Company's products are utilized in many industries including pulp and
>   paper, wood products, chemical and minerals processing (including cement),
>   metallurgical (non-ferrous and iron and steel), grain processing, hazardous
>   and municipal solid waste (MSW) incineration, and power generation.
>   The principal products and systems offered by the Company are described
>   below:
>   SoniCool® Evaporative Gas Cooling and Conditioning Systems
>   
>   Through the use of the Company's 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.
>   The Company is an internationally known leader in gas cooling and
>   conditioning with over 450 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. The
>   Company's WESP is capable of achieving these higher standards and efficiently
>   capturing sub-micron particulates.
>   Fifteen SonicKleen WESP systems have been sold for use in incinerators, a
>   ceramic refractory plant, a hospital medical waste facility, corn fibre dryer,
>   OSB (oriented-strand board) facility and a number of pulp and paper
>   manufacturing facilities. The Company's WESP technology can be used in many
>   industries including wood products, waste incineration, metallurgical and
>   chemical processing, and power generation industries.
>   TurboSOx SO2 Recovery Systems
>   
>   Developed in conjunction with The Dow Chemical Company, the TurboSOx SO2
>   Recovery System is a new process that recovers pure Sulfur Dioxide (SO2) (a
>   major contributor to "acid rain") as a usable by-product, thereby providing a
>   return on investment from its reuse or sale. The patented process uses the TurboSOx Amine, a proprietary solvent developed and exclusively supplied to
>   the Company by The Dow Chemical Company. TurboSOx provides a 25% saving over
>   the capital costs of traditional mineral-based Flue Gas Desulfurization (FGD)
>   systems. SO2 removal efficiencies of greater than 99% have been achieved in
>   pilot tests at commercial plants of prospective customers, thereby
>   demonstrating regulatory requirements.
>   Any company with a gaseous source of SO2 is a potential customer for the TurboSOx technology. The Company is currently working with several companies
>   who have expressed an interest in the TurboSOx SO2 Recovery System, although
>   no sales of such systems have been made as of September 1, 2004.

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SonicBURN Waste Fuel Combustion

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

Over 25 of the Company's nozzles and systems are in use for waste fuel
  combustion in hazardous waste incinerators and cement kilns.

Turbotak Wet, TurboVenturi and TurboSorb Semi-Dry Scrubbers

The Turbotak Wet Scrubber treats industrial process gas streams, removing
  sub-micron and larger particulate, acid gases, odors, fumes and vapors. By
  employing the Company's 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, as well as acid gases. 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
  contacting. 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 and HCI. By spraying alkalis such as calcium,
  potassium and sodium-based slurries or solutions, the TurboSorb system can
  achieve higher removal efficiencies of SO2 and HCI 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.

The Company has installed over 150 of its scrubbers to solve a wide variety
  of air pollution control problems. Its equipment, designed to meet the most
  stringent regulations limiting gaseous and particulate emissions, has also
  been retrofitted into competing technologies to improve their performance.

Dry Fog® Dust Control and Suppression Systems

The Company is a leader in dust control with its Dry Fog® dust suppression
  systems which control virtually all types of respirable and larger airborne
  dust. Operating costs for the Dry Fog® dust control and suppression systems,
  which use the Company's atomizing nozzles, are significantly lower than for
  ventilation type control systems, which consume as much as 20 times the
  energy. A Dry Fog® system can be installed for as little as 40% of the cost of
  a conventional bag filter type system.

The Company is an internationally known leader in dust control with over
  400 systems throughout the world. Dry Fog® systems are used in industries such
  as cement, limestone, aggregates, metallurgical, mining, and materials
  handling.

Air Pollution Control System Upgrades

Using the Company's atomizing nozzles and venturi scrubber
  technologies and years of experience in the air pollution control industry,
  the Company is 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.
  The Company has upgraded hundreds of air pollution control systems.

Atomizing Nozzles and Spare Parts

Used in a wide variety of industrial applications, the Company's 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. The Company's SoniCore® nozzle design has
  different 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 the Company's air pollution
  control systems and are recognized by industry as superior.

The Company also provides replacement and spare parts for both its
  industrial gas processing and air pollution control systems. The Company
  believes that in view of the extreme conditions under which industrial process
  and air pollution control systems operate that there is an ongoing requirement
  for spare parts that should create additional demand for the Company's
  products.

Contractual Liabilities

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

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Marketing and Sales

The Company's marketing efforts are technical in nature and currently
  involve its senior management and technical professionals, supported by
  independent sales representatives. The Company's contractual arrangements with
  its 12 current independent sales representatives accord each a defined
  territory within which to sell some or all of the Company's products and
  systems, provide for the payment of agreed-upon sales commissions and are
  terminable at will by either the Company or the representative upon relatively
  short prior notice. None of such representatives have authority to execute
  contracts on the Company's behalf. A significant portion of the Company's
  sales are made through the recommendation of engineering firms, which play a
  significant role in the specification and implementation of air pollution
  control solutions and in customers' selection of the vendors of air pollution
  control systems.

In August 2001, the Company entered into a strategic alliance with Hamon
  Research-Cottrell, Inc., a global leader in air pollution control technology.

This strategic alliance enables Hamon Research-Cottrell to market the
  Company's products, including the SonicKleen Wet Electrostatic Precipitator (WESP),
  through its expanding worldwide sales and distribution channels. Further, the
  Company may access Hamon Research-Cottrell's air pollution control
  technologies, including their NOx control systems, as well as fabric filters
  and dry electrostatic precipitators (ESP). The strategic alliance with Hamon
  Research-Cottrell is actively pursuing industrial opportunities in several
  geographic areas.

The Company's sales representatives assist the Company in consummating
  sales of its products and services, serve an ongoing liaison function between
  the Company and its customers during the sales process and address customers'
  questions or concerns arising thereafter. The sales representatives are
  selected by the Company 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 the
  Company's sales and engineering personnel who jointly prepare either a budget
  for the customers' future planning or a final bid. The period between initial
  customer contact and issuance of an order varies widely, but is generally
  between 6 and 24 months.

The Company seeks to obtain repeat business from its customers, although it
  does not depend upon any single customer to maintain its level of activity
  from year to year; however, one or more different customers may be expected to
  account for greater than 10% of the Company's net revenues in any consecutive
  twelve month period. Three customers accounted for 9%, 8% and 7% respectively,
  of the Company's net revenues during the fiscal year ended June 30, 2004.
  During the fiscal year ended June 30, 2003, three customers accounted for 13%,
  16% and 16% respectively, of the Company's net revenues.

Backlog

At June 30, 2004, the amount of the Company's contract
  backlog was approximately $5,325,000 compared to $1,086,000 at June 30, 2003.
  Backlog represents work for which the Company has entered into a signed
  agreement or has received an order to proceed. Completion of the Company's
  entire backlog is anticipated to occur prior to June 30, 2005.

Product Development

The Company has an ongoing program for the development and
  commercialization of new industrial processing and air pollution control
  products, systems and technologies, and the enhancement of existing products
  and systems. Expenditures for research and development activities, net of
  customer and government support, aggregated $64,803 and $20,089 for the fiscal
  years ended June 30, 2004 and 2003, respectively.

Proprietary Protection

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

The Company has registered servicemarks or trademarks in the United States
  and certain foreign countries for several identifying names which it uses with
  its products and systems including SoniCool®, SoniCore®, SonicKleen and Dry
  Fog®.

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

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Suppliers and Subcontractors

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

Bonding and Insurance

While the Company generally has 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.

The Company currently maintains different types of insurance, including
  general liability, property coverage, professional and product liability
  insurance with respect to the engineering and products it sells to its
  customers. A successful claim or claims in an amount in excess of the
  Company's insurance coverage or for which there is no coverage could have a
  material adverse effect on the Company. The Company also maintains directors
  and officers liability coverage.

Government Regulation

Stringent environmental laws have been enacted in the United States and
  other nations in response to public concern about the environment. The Company
  believes that the need to comply with these laws creates demand for the
  Company's products. 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 the Company's 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 the Company's future revenues and prospects of profitability.

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

Competition

The Company faces substantial competition in each of its principal markets
  from numerous competitors. The Company competes primarily on the basis of
  price as well as its engineering and technological expertise, and quality of
  its products, systems and service. Additionally, the Company believes that the
  successful performance of its installed products and systems is a key factor
  in dealing with its customers, which typically prefer to make significant
  purchases from a company with a solid performance history.

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

Employees

As of June 30, 2004, the Company employed 31 full time
  persons, including 8 engineers, 9 salespersons, and 6 technical support
  persons. None of the Company's employees are represented by a labor union. The
  Company believes that its relationship with its employees is satisfactory.

Financial Information about Foreign and Domestic Operations and Export
  Sales

U.S. and Canadian customers collectively accounted for approximately 71%
  and 88%, respectively, of the Company's sales during the fiscal years ended
  June 30, 2004 and 2003. Revenue derived from export sales is transacted in
  U.S. dollars and Euros.

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

|                                | Year Ended
|------------------------------- | ----------
|                                | June 30   
|                                | 2004      
|United
      States             | 47%       
|Canada                          | 24%       
|South
      and Central America | 6%        
|Europe                          | 11%       
|Far East                        | 11%       
|Other                           | 1%        
|                                | 100%      

Risks and Uncertainties

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

- 

Revenue Concentration. Sales to
    three customers accounted for 24% of the Company's net revenues in the
    fiscal year ended June 30, 2004. Three different customers accounted for 45%
    of the Company's net revenues in the prior fiscal year. The Company's
    inability to retain or replace these customers could materially and
    adversely affect future revenue and profitability.











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Fixed
    Price Contracts May Result in Losses. The Company's receipt of a fixed
    price contract as a consequence of being the lowest competitive bidder
    carries the inherent risk that the Company's actual performance costs may
    exceed the estimates upon which its bid for such contract was based. To the
    extent that contract performance costs exceed projected costs, the Company's
    profitability could be materially adversely affected.ITEM 2: DESCRIPTION OF PROPERTYThe Company leases 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.
The Company has leased approximately 3,360 square feet of
office and shop space in East Hanover, New Jersey at an annual rental of
approximately $36,000. In addition, the Company must pay annual cost of living
increases (not to exceed 4% per year) based upon changes in the Consumer Price
Index, taxes, insurance and utilities. This lease expired on August 30, 2004,
and was not renewed. The Company has entered a one year lease for a sales office
of 640 square feet commencing September 1, 2004 at an annual rental of
approximately $14,000.ITEM 3: LEGAL PROCEEDINGSNot applicable.ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matters were submitted for a vote to the Company's security holders during
the fourth quarter of the Company's fiscal year ended June 30, 2004.

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PART II
ITEM 5: MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIESThe Company's 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 the
Company's Common Stock for the periods shown, as furnished by The Nasdaq Stock
Market.

> Common Stock (1)High
>       LowFiscal Year Ended
>       June 30, 2004:First Quarter
>       $0.510
>       $0.250Second Quarter
>       $0.570
>       $0.300Third Quarter
>       $0.550
>       $0.270Fourth Quarter
>       $0.400
>       $0.210Fiscal Year Ended
>       June 30, 2003:First Quarter
>       $0.500
>       $0.330Second Quarter
>       $0.500
>       $0.210Third Quarter
>       $0.350
>       $0.250Fourth Quarter
>       $0.500
>       $0.250(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.

As of June 30, 2004, there were 445 holders of record and
approximately 1,600 beneficial holders of the Common Stock. This number of
beneficial holders represents the number of actual holders of the Company's
Common Stock, including an estimate of the beneficial owners of shares held in
"nominee" or "street" name. The Company does not know the actual number of
beneficial owners.

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

ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION

General

TurboSonic Technologies, Inc., (the "Company"), directly and
through subsidiaries, designs and markets integrated pollution control and
industrial gas cooling/conditioning systems including liquid atomization
technology and dust suppression systems to ameliorate or abate industrial
environmental problems.

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

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

Stringent environmental laws have been enacted in the United
States and other nations in response to public concern about the environment.
The Company believes that the need to comply with these laws creates demand for
the Company's products. 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 the Company's 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 the Company's 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.

- 9 -

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Prior to fiscal 2004, the Company had two reportable business segments -
nozzle systems and scrubber systems. During fiscal 2004, the Company realigned
its business activities on the basis of long-term contracts and components/spare
parts. Internal reporting to support decision-making regarding the allocation of
resources and evaluation of activities was realigned to be consistent with the
alignment of the business. As such the Company has commenced reporting to
shareholders on the two business segments into which management now classifies
the business - Original Equipment ("OEM") systems and Aftermarket . The previous
scrubber systems segment is closely aligned with the OEM systems segment and the
previous nozzle system segment is closely aligned with the Aftermarket segment.
The comparative segment information has been reclassified to be consistent with
this presentation.
Forward-looking statements in this report, including without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that such forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed therein. In evaluating these statements, you should specifically
consider the risks discussed in this Form 10-KSB for the year ended June 30,
2004 and other reports or documents that we have filed from time to time with
the SEC.

Critical Accounting Policies and Estimates

Our 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

The Company derives revenue from long-term contracts which require
performance [i.e., design, construction and performance testing] over a time
span which may extend beyond one or more accounting periods. For long-term
contracts, two methods of recognition are employed by the Company - 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. 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.

As discussed in note 6 to the Consolidated Financial Statements, a
subcontractor of the Company experienced financial difficulties resulting in an
increase in estimated completion costs for a project to a total of $317,000.
Recovery, in whole or part, of these increased costs may be possible through the
liquidation of the assets of the subcontractor, although, due to the
uncertainty, no recovery has been recorded. The liquidation process was not
complete at June 30, 2004.

Goodwill

We had adopted SFAS No. 142 effective July 1, 2001, under
which goodwill is no longer amortized but is subject to an annual impairment
review (or more frequently if deemed appropriate). We previously completed the
transitional impairment test to identify any impairment to the goodwill of the
nozzle and scrubber systems business segments as at July 1, 2001 and the annual
tests as at April 1, 2002 and 2003 using a fair value methodology, in accordance
with SFAS No. 142. Due to deferred demand in the capital good markets relative
to the status of environmental regulatory changes, the scrubber systems business
segment had experienced depressed revenue levels and losses from operations.
These conditions have created uncertainty regarding the forecasted future cash
flows required to support the goodwill associated with the scrubber business
segment under the rules of SFAS No. 142. We concluded that there was impairment
relative to the scrubber systems business segment as at April 1, 2003, and
accordingly determined that $398,897 of goodwill associated with this business
segment should be written off in the year ended June 30, 2003.

We completed the goodwill impairment test as at April 1, 2004 for the
Aftermarket business segment, as required by SFAS No. 142. We have concluded
that there has not been an impairment of goodwill associated with the
Aftermarket segment for the year ended June 30, 2004.

- 10 -

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We assess 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 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 TurboSonic's stock price for a sustained period,
  and our market capitalization relative to net book value.Results of Operation

Due to deferred purchase plans by several of the industry
groups served by TurboSonic, including pulp and paper and wood products, as the
result of the delayed timing of US environmental regulatory changes, the OEM
systems business segment has experienced depressed revenue levels in fiscal 2003
and 2004 for large systems orders whereas our order levels for the Aftermarket
business segment have remained largely constant.
In the fourth quarter of fiscal 2004, the OEM systems
business segment experienced significant bookings whereas our order levels for
the Aftermarket business segment have continued relatively constant. Although
there can be no assurances that this trend of increased OEM system orders will
continue, these new OEM systems order placements are expected to have a positive
revenue impact in all quarters of fiscal 2005.
Twelve Months Ended June 30, 2004 Compared with Twelve Months Ended June 30,
2003

OEM systems revenue decreased by $1,618,815 (43%) to
$2,107,618 for the twelve-month period ended June 30, 2004 from $3,726,433 for
the same period in fiscal 2003. The decrease is primarily the result of a
decrease in large system sales in the period for the reasons discussed above,
and in particular, those of Wet Electrostatic Precipitators ("WESP").
Aftermarket revenue increased by $241,631 (10%) to $2,614,939
for the twelve months ended June 30, 2004 from $2,373,308 for the same period
one year earlier. Increased revenue for WESP and scrubber parts in
fiscal 2004, due to an increase in maintenance activities by customers in the
wood products and mineral processing industries, has primarily resulted in this
positive increment.
Cost of OEM systems decreased by $1,482,336 (46%) to
$1,750,940 for the twelve-month period ended June 30, 2004 from $3,233,276 for
the same period in fiscal 2003. The lower costs are the result of the decreased
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, 2004 and 87% for the same period in fiscal 2003. The lower percentage to
revenue for the OEM systems is the result of the inclusion of a higher
proportion of design work of certain projects in progress in fiscal 2004 than in
fiscal 2003.
Aftermarket costs increased by $197,558 (15%) to $1,523,210
for the twelve-month period ended June 30, 2004 from $1,325,652 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 58% versus 56% for the same period in fiscal 2003. The
increased ratio of aftermarket costs to revenue was the result of a one-time
favourable contract settlement recorded in fiscal 2003, that was not duplicated
in fiscal 2004.
Selling, general and administrative expenses increased
$410,521 (24%) to $2,202,144 for the twelve-month period ended June 30, 2004
from $1,791,623 for the same period in fiscal 2003. Increased selling, general
and administrative expenses included sales travel expense, additional sales
personnel and increased insurance premiums. As a percentage of total revenue,
selling, general and administrative expenses were 47% for the fiscal period
ended June 30, 2004 and 29% for the same period a year earlier. This increase in
percent to revenue is the direct result of the decreased volume of revenue for
the current period. As discussed in note 8 to the Consolidated Financial
Statements, the goodwill impairment loss ($398,897) is the result of the
conclusion that the goodwill associated with the Scrubber systems business
segment should be written off in fiscal 2003. Also included in total expenses in
the current year were stock-based compensation expense ($6,619 vs.$7,758 in
fiscal 2003)[see note 13 to the Consolidated Financial Statements].
Loss before tax increased $134,641 to a loss before taxes of
$817,723, from a loss before taxes of $683,082 for the same period in fiscal
2003. Income taxes for fiscal 2004 decreased $36,729, to a recovery of $36,116
from an expense in 2003 of $613. The tax recovery relates to carry-back of the
2003 tax loss to 2001 and 2002. The future benefit of US tax losses has not been
recorded in the financial statements, as discussed in note 14 to the
Consolidated Financial Statements. An "other comprehensive income" of $17,862
was recorded for the twelve-months ended June 30, 2004, as compared to "other
comprehensive income" of $186,183 for the same period in fiscal 2003. The "other
comprehensive income" in the current period was the result of the increase in
the value of the Canadian dollar opposite the US dollar from June 30, 2003 to
June 30, 2004, and the resulting changes in our balance sheet relative to
Canadian-denominated accounts.
Liquidity and Capital Resources

On an overall basis, the Company had net cash applied of
$964,147 for fiscal 2004 as compared to net cash provided of $343,220 during the
same period in 2003. The fiscal 2004 net cash applied figure included cash
applied to operating activities of $902,118. This decrease in overall cash flow
is the result of the operating loss, and the increase in accounts receivable
only partially offset by increases in accounts payable and unearned revenue and
contract advances.

- 11 -

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At June 30, 2004, the Company had positive working capital of
$460,577 as compared to positive working capital of $1,230,598 as at June 30,
2003, a decrease of $770,021. The Company's current ratio (current assets
divided by current liabilities) was 1.37 and 2.39 at June 30, 2004 and June 30,
2003, respectively.
The Company's contracts typically provide for progress
payments based upon the achievement of performance milestones or the passage of
time. The Company's contracts often provide for the Company's customers to
retain a portion of the contract price until the achievement of performance
guarantees has been demonstrated. The Company attempts to have its progress
billings exceed its costs and estimated earnings on uncompleted contracts;
however, it is possible, at any point in time, that costs and estimated earnings
can exceed progress billings on uncompleted contracts, which would negatively
impact cash flow and working capital. At June 30, 2004 and June 30, 2003,
"Unearned revenue and contract advances" exceeded "Deferred contract costs and
unbilled revenue" with the result that cash flow was negatively affected by
$302,075 and $156,738, respectively.
The Company's backlog as at June 30, 2004 was approximately $5,325,000, all
of which should be shipped during the 2005 fiscal year.
Between cash on hand, initiatives to lower operating
expenses, OEM system orders received and new orders anticipated and the
anticipated receipt of a line of
credit backed by such new orders, the Company expects to have enough cash to
fund its operations over the next twelve-month period. The cost reduction
initiatives include lowering the office staff head count (completed), downsizing
of the New Jersey office (completed), consolidation of all project management
activities in head office (completed) and implementing further cost and
expenditure controls and monitoring (ongoing). As at June 30, 2004 the cash
balance was $219,738, which is a decrease of $60,804 compared to March 31, 2004,
and a decrease of $964,147 compared to June 30, 2003. Our cash position as at
September 1, 2004 was approximately $750,000. The Company
has received new OEM systems orders valued at over $5 million in the second and
third quarters of calendar 2004, with positive revenue impact commencing late in
the fourth quarter of fiscal 2004 and into fiscal 2005. The Company is also
pursuing a line of credit on the basis of current and future projects. TurboSonic has no outside debt. The Company has not yet addressed the prospects
of shareholder loans or equity financing. Based upon the current cash position
and confirmed revenue for the fiscal 2005 year of $6.9 million and a steady
stream of Aftermarket orders, the Company believes that projected cash generated
from operations will be sufficient to meet its cash needs through the end of the
fiscal year ended June 30, 2005.
Quantitative and Qualitative Information About Market Risk

The Company does not engage in trading market risk sensitive
instruments and does not purchase hedging instruments or "other than trading"
instruments that are likely to expose the Company to market risk, whether
interest rate, foreign currency exchange, commodity price or equity price risk.
The Company has not entered into forward or future contracts, purchased options
or entered into swaps. The Company has no bank borrowing facility that could
subject it to the risk of interest rate fluctuations.ITEM 7: FINANCIAL STATEMENTSReference is made to pages F-1 through F-23 comprising a portion of this
Annual Report on Form 10-KSB.ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURENone.ITEM 8A: CONTROLS AND PROCEDURESManagement of the Company carried out an evaluation, with the
participation of its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures as of June 30,
2004. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
it in reports that the Company files or submits 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 the Company's 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, 2004 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.ITEM 8B: OTHER INFORMATIONNot applicable.

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PART III
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERSThe Company's executive officers and directors are as follows:

|Name                         | Age | Positions and Offices                                             
|---------------------------- | --- | ------------------------------------------------------------------
|                             |     |                                                                   
|Edward F. Spink              | 50  | Chairman of the Board
    and CEO                                 
|Patrick J. Forde             | 71  | President,
    Secretary/Treasurer and Director                   
|Richard H. Hurd              | 67  | Director                                                          
|Dr. Donald R. Spink,
    Sr. | 81  | Director                                                          
|Jonathan R. Lagarenne        | 44  | Director                                                          
|Frederick G. Berlet          | 76  | Director                                                          
|Michael J. Widico            | 52  | Director                                                          
|Egbert Q. van
    Everdingen | 43  | Executive VP                                                      
|Robert A. Allan              | 62  | VP Engineering                                                    
|Ronald A. Berube             | 57  | VP Marketing & Sales
    -
    Gas Conditioning and Nozzle Systems
|David J. Hobson              | 56  | VP Finance and
    Administration                                 

Edward F. Spink has served as President of the Company
from August 27, 1997, the date upon which Turbotak Technologies and Sonic
Environmental Systems were consolidated to form the Company (the "consolidation
date"), until June 15, 1999. On June 15, 1999, the Board of Directors elected
him Chairman of the Board and Chief Executive Officer. Prior thereto and from
1995, he was President and a director of Turbotak. Mr. Spink was Vice President
- Operations of Turbotak from 1989 to 1995. He joined Turbotak in 1982.

Patrick J. Forde has been Secretary/Treasurer of the
Company since the consolidation date. He was elected President of the Company on
June 15, 1999. Prior thereto and from 1986 he was a director of Turbotak. Mr.
Forde has served as Vice President - Corporate Planning for Turbotak since 1996.
He was Chairman and Chief Executive Officer of Borg Textile Corporation, which
manufactured and sold deep-pile fabric to garment producers, from 1982 to 1995.
He is president and owner of Glencree Investments, Inc.

Richard H. Hurd served as President of the Company from
August 1993 to August 1997 and Treasurer of the Company from April 1994 to
August 1997. He has been a director of the Company since February 1993. Mr. Hurd
has been President and sole owner of RHB Capital Company Inc., a financial
consulting company since 1987 and is Co-Managing Director of Genuine Article
Publishing Group, LLC, a publisher of children's books. He also acts as a
Special Assistant to the Treasurer of the State of New Jersey.

Dr. Donald R. Spink, Sr. had served as Chairman of the Company since the
consolidation date until June 15, 1999. He remains as a director and has agreed
to provide the Company with technical advice. Prior thereto and from 1976 he was
Chairman of Turbotak.

Jonathan R. Lagarenne was elected to the Board of
Directors at the July 30, 2001 meeting. He is presently engaged in providing
executive consulting services focused on the areas of claims management and risk
management. Prior to launching his consulting practice in July 2003, Mr.
Lagarenne served as Chief Executive Officer of Hamon Corporation from May 2000,
and as its Chief Operating Officer and General Counsel from July 1998.

Frederick G. Berlet has served as President of S.W.O.
Management Consultants since 1967. Between 1960 and 1994 he also held several
positions with Fleck Manufacturing Inc., a major auto parts manufacturing
company, including its Deputy Chairman, President and Chief Executive Officer.
He is a Certified Management Accountant (CMA) and has served on numerous boards
of directors of private and public companies. He is currently a director of
Timberland Ltd., a specialty hoist and winch manufacturing company. He is also
involved with several charitable organizations. Since 1997 he has been an
advisor to our Board, and was elected to our board on December 10, 2002.

Michael J. Widico
is Executive Vice President of Hamon Research-Cottrell, which provides
engineering, manufacturing and contracting of air pollution control equipment
for power and energy-intensive industries, and has held the position since
January 2003. Before joining Hamon Research-Cottrell, he was President of
Procedair Industries in Montreal, which provides gas cleaning equipment and
systems to heavy industrial customers. Prior to this appointment, Mr. Widico
served as Vice President and General Manager of Procedair from September 1996 to
April 2000. He was elected to our board of directors on December 11, 2003.

Egbert Q. van Everdingen 
has served as VP Marketing & Sales, Air
Pollution Control Systems of the Company since the consolidation date. Prior
thereto and from 1986, he served as project manager and in various product
development, sales and marketing positions with Turbotak. Effective August 5,
2003, he was appointed Executive VP, with responsibility for all sales,
marketing, design and project engineering.

Robert A. Allan has served as VP Engineering of the
Company since the consolidation date, 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.

- 13 -

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Ronald A. Berube has served as VP Marketing & Sales, Gas
Conditioning and Nozzle Systems of the Company since the consolidation date.
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 VP Finance and
Administration of the Company since the consolidation date. 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.

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

The Company has agreed to cause the election of one director
designated by Hamon Research-Cottrell, so long as Hamon Research-Cottrell
continues to own at least 5% of the Company's outstanding common stock. In
accordance with this agreement, Michael J. Widico has been designated by Hamon
Research-Cottrell as its representative on the Company's board of directors.

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

Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons that
no such forms were required for those persons, the Company believes that during
the fiscal year ended June 30, 2004, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with.

The Company's audit committee consists of three directors,
Frederick G. Berlet, Richard H. Hurd and Jonathan R. Lagarenne. 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 Frederick G. Berlet
meets the SEC definition of an "audit committee financial expert."

The Company's Audit Committee has adopted a Code of Ethics
applicable to all of the Company's employees, including its Principal Executive
Officer, Principal Financial Officer and Principal Accounting Officer, as well
as the members of the Company's board of directors. The Code of Ethics is filed
as Exhibit 14 to this Form 10-KSB.

ITEM 10: EXECUTIVE COMPENSATION

Summary Compensation

Set forth below is the aggregate compensation for services
rendered in all capacities to the Company during its fiscal years ended June 30,
2004, 2003 and 2002 by its chief executive officer. Executive officers receiving
compensation exceeding $100,000 during its fiscal year ended June 30, 2004 (the
"Named Officers") included the Company's Executive Vice President and the Vice
President - Nozzle Sales & Marketing:

- 14 -

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|                          |            | Annual Compensation |        | Long-term Compensation Awards
|------------------------- | ---------- | ------------------- | ------ | -----------------------------
|Name and                  | Year Ended | Salary              | Bonus  | Other Annual                 
|Principal Position        | June 30    |                     |        | Compensation                 
|                          |            |                     |        |                              
|Edward F. Spink, CEO      | 2004       | $130,275 (1)        | -- (1) | $ 375 (2)(3)                 
|                          | 2003       | $115,000 (1)        | -- (1) | $ 13,603 (2)(3)              
|                          | 2002       | $ 63,752            | --     | $ 10,671 (2)                 
|                          |            |                     |        |                              
|Egbert Q. van Everdingen, |            |                     |        |                              
|Executive Vice President  | 2004       | $111,664 (4)        | -- (4) | $ 18,703 (5)                 
|                          | 2003       | $ 29,784            | --     | $ 40,737 (5)                 
|                          | 2002       | $ 28,688            | --     | $ 10,671 (5)                 
|                          |            |                     |        |                              
|Ronald A. Berube, VP -    |            |                     |        |                              
|Nozzles Sales & Marketing | 2004       | $ 33,499            | --     | $ 66,693 (6)                 
|                          | 2003       | $ 29,784            | --     | $ 57,055 (6)                 
|                          | 2001       | $ 28,688            | --     | $ 70,715 (6)                 

> (1) Effective July 1, 2002, Mr. Spink's compensation was
>   revised to CAD 175,000 (USD 130,275 in 2004, USD 115,000 in 2003) of salary,
>   together with a $20,000 bonus to be based upon meeting the earnings before tax
>   target in the Company's 2003 business plan. For the fiscal years ended June
>   30, 2003 and 2004, Mr. Spink was not entitled to any bonus payment due to the
>   performance of the Company over that period.
>   (2) 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) Represents commission on orders received prior to fiscal
>   2003.
>   (4) Effective July 1, 2003, Mr. Van Everdingen's compensation
>   was revised to CAD 150,000 (USD 111,664 in 2004) of salary, together with a
>   $10,000 bonus to be based upon meeting the earnings before tax target in the
>   Company's 2004 business plan. For the fiscal year ended June 30, 2004, Mr. Van Everdingen was not entitled to any bonus payment due to the performance of the
>   Company over that period.
>   (5) Represents commission on orders received prior to fiscal
>   2004.
>   (6) Represents commission on orders received.

|Option Grants in
    Fiscal 2004 |                  |                 |          |                      
|-------------------------------- | ---------------- | --------------- | -------- | ---------------------
|                                 | Number of Shares | % of
    Total  |          |                      
|                                 | Underlying       | Options Granted | Exercise | Expiration           
|                                 | Options Granted  | to Employees    | Price    | Date                 
|                                 |                  |                 |          |                      
|Edward F. Spink                  | 10,000           | *               | 0.3500   | December
    11, 2008
|Egbert Q. van
    Everdingen     | --               | --              | --       | --                   
|Ronald A. Berube                 | --               | --              | --       | --                   

> (*) options granted for services as a director, rather than as an
>   employee..

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

|                             |                 |          | Number of Securities   | Value of Unexercised
|---------------------------- | --------------- | -------- | ---------------------- | --------------------
|                             | Number of       |          | Underlying Unexercised | In-The-Money Options
|                             | Shares Acquired | Value    | Options or Warrants at | or Warrants at      
|                             | On
    Exercise | Received | Fiscal Year End        | Fiscal Year End (1) 
|                             |                 |          | Exercisable            | Unexercisable       
|                             |                 |          |                        |                     
|Edward F. Spink              | 0               | $0.00    | 46,000                 | 44,000              
|Egbert Q. van
    Everdingen | 0               | $0.00    | 12,000                 | 18,000              
|Ronald A. Berube             | 0               | $0.00    | 12,000                 | 18,000              
|                             |                 |          |                        |                     

> (1) The per share exercise price of each of the unexercised options or
>   warrants exceed $0.25, the fair market value of the Company's common stock on
>   June 30, 2004.

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Employment Agreements

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

During the fiscal year ended June 30, 2004, the Company's directors were each
paid $500 for each board meeting attended. The Company's directors are
periodically granted stock options, typically on a yearly basis. During the
fiscal year ended June 30, 2004, (a) each of the Company's eight directors was
granted options to purchase 10,000 shares of common stock, (b) each member of
the Company's audit committee and compensation committee were granted options to
purchase 5,000 shares of common stock and (c) the chairpersons of the Company's
audit committee and compensation committee each received options to purchase
5,000 shares of common stock. The options are exercisable at $0.35 per share,
vested on the date of grant and expire five years from the date of grant.
Non-employee directors receive reimbursement of out-of-pocket expenses incurred
for each board meeting or committee meeting attended.ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERSThe following table sets forth, as of June 30, 2004 the
shares of the Company's Common Stock beneficially owned by each person who, to
the knowledge of the Company, is the holder of 5% or more of the Common Stock of
the Company, by each director of the Company, by the Named Officers and by all
of the executive officers and directors of the Company as a group.

|Name and Address of
    Beneficial       | Number of Shares Beneficially Owned | Approximate Percentage of Class
|---------------------------------------- | ----------------------------------- | -------------------------------
|Owner or Identity or Group               | (1)                                 |                                
|                                         |                                     |                                
|Dr. Donald R. Spink,
    Sr. *           | 3,121,432                           | (2) (3)
    (6)                
|Edward F. Spink *                        | 496,838                             | (2) (8)                        
|Patrick J. Forde *                       | 799,158                             | (2) (4)
    (6) (14)           
|Richard H. Hurd **                       | 146,938                             | (5) (9)                        
|Jonathan R. Lagarenne
    *              | 15,000                              | (11)                           
|Frederick G. Berlet *                    | 281,010                             | (7)                            
|Michael J. Widico***                     | 0                                   |                                
|Egbert Q. van
    Everdingen *           | 267,713                             | (2)
    (12)                   
|Ronald A. Berube*                        | 157,965                             | (2)
    (12)                   
|Hamon
    Research-Cottrell, Inc.***     | 960,000                             | (10)                           
|Bard Associates, Inc.
    ****           | 1,095,100                           | (15)                           
|All Executive Officers
    and Directors | 5,521,051                           | (2) -
    (14)                 
|as a group (13
    persons)              |                                     |                                

> * c/o TurboSonic Technologies, Inc. 550 Parkside Drive, Suite
>   A-14, Waterloo, Ontario, N2L 5V4, Canada
>   ** c/o TurboSonic Technologies, Inc. 239 New Road, Building B,
>   Suite 205, Parsippany, NJ 07054
>   *** c/o Hamon Corporation, 58-72 East Main Street, Somerville,
>   NJ 08876
>   **** Bard Associates, Inc., 135 South Lasalle St., Suite 2320,
>   Chicago, IL 60603
>   (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 the Company, which by their terms are convertible at any time
>   into a like number of shares of Common Stock of the Company ("TurboSonic
>   Canada Shares").
>   (3) Includes 2,762,687 TurboSonic Canada Shares owned by
>   Canadian numbered corporation, over which shares Dr. Spink exercises voting
>   control.
>   (4) Includes 507,642 TurboSonic Canada Shares owned by the
>   Patrick and Joan Forde Family Trust
>   (5) Includes 1,195 shares owned by Mr. Hurd's spouse, as to
>   which Mr. Hurd disclaims any beneficial ownership.
>   (6) Includes warrants to purchase 100,000 common shares and
>   35,000 shares issuable upon exercise of vested options.
>   (7) Includes warrants to purchase 100,000 common shares and
>   40,000 shares issuable upon exercise of vested options.
>   (8) Includes 46,000 shares issuable upon exercise of vested
>   options.
>   (9) Includes 35,000 shares issuable upon exercise of vested
>   options.
>   (10) Includes 10,000 shares issuable upon exercise of vested
>   options.
>   (11) Includes 15,000 shares issuable upon exercise of vested
>   options.

- 16 -

---



(12) Includes 12,000 shares issuable upon exercise of vested options.

(13) Includes 93,067 shares owned by an executive officer's
  spouse, as to which the executive officer disclaims any beneficial ownership.

(14) Includes 12,000 shares owned by Mr. Forde's spouse, as to
  which Mr. Forde disclaims any beneficial ownership.

(15) As identified in a Schedule 13-G filing made on February
  5, 2004, which indicated that Bard Associates, Inc. had sole power to dispose
  or direct the disposition of 1,095,100 common shares, and the sole power to
  direct the vote of 96,000 common shares;

Securities Authorized for Issuance Under 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 (1) | 120,000             | $0.350                  | 380,000             
|Equity compensation plans not approved
    by security holders |                     |                         |                     
|-                                                              | Options
    (2)     | 742,250                 | $0.462               | 500          
|-                                                              | Warrants            | 400,000                 | $1.000               |             
|                                                               | Total               | 1,262,250               | $0.691               | 380,500      

(1) 2003 Stock Plan. 
  (2) 2000 Stock Plan.

The Company instituted the 2000 Stock Plan [the "2000 Plan"] with the express
purpose of encouraging key employees of the Company, as well as other
individuals who render services to the Company, by providing opportunities to
participate in the ownership of the Company.

The 2000 Plan provides for the grant of options as non-qualified options,
awards of capital stock in the Company and opportunities to make direct
purchases of capital stock in the Company. Collectively, these are referred to
as stock rights. The 2000 Plan, adopted by the Company 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 common stock of the Company or shares of
common stock reacquired by the Company in any manner. The aggregate number of
shares that may be issued, pursuant to the 2000 Plan, is 750,000.

In July and December 2001, eight Company directors and advisers were granted
options pursuant to the 2000 Plan to purchase 10,000 common shares each at an
exercise price of $0.80. The options expire five years from the grant date, and
vest July 30, 2006.

In June 2002, eight Company directors and advisers were granted options
pursuant to the 2000 Plan to purchase 10,000 common shares each at an exercise
price of $0.45. The options expire five years from the grant date, and vest June
30, 2005.

In 1998, as an inducement to advance loans by two directors, and two
shareholders, the lenders were granted detachable warrants to purchase an
aggregate of 400,000 common shares of the Company on terms that were
subsequently modified as disclosed below.

On July 10, 2000, officers, directors and shareholders agreed to extend the
maturity dates of their respective loans by an additional year. As an inducement
to extend the maturity dates of the loans, the Company 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 $0.50 per share, for
a period of two years following the initial three year period at a price of
$0.75 per share and for an additional period of one year at a price of $1.00.
Additionally, warrants to acquire another 400,000 common shares were granted in
aggregate to the lenders, at a price of $0.5625 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 after the date that the common shares in the Company stock have closed
at a trading price above $1.50 for 30 consecutive trading days.

During the year ended June 30, 2002, all of the shareholder loans were repaid
in full on or prior to the due date [see note 9 to the Consolidated Financial
Statements].

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

- 17 -

---

PART IV
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K

a)
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)                                                                                                       
|14             | Code of
      Ethics                                                                                                            
|21.1           | Subsidiaries of the Company                                                                                                     
|23.1           | Consent
      of Ernst & Young LLP                                                                                              
|31.1           | Rule
      13a-14(a)/15d-14(a) Certifications                                                                                   
|32.1           | Section
      1350 Certifications                                                                                               

_______________
* Compensatory Plan

(1) Filed on April 9, 1993, as an exhibit to the Company's
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 the Company's
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 the Company's
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 the Company's
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 the Company's
proxy statement for the 2002 annual meeting.

b)

During the quarter ended June 30, 2004, the Company filed or furnished no
  current reports on Form 8-K with the Securities and Exchange Commission.

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees for professional services provided by the Company's 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:
>       2004
>       2003Audit fees
>       $51,450
>       $46,422Audit-related fees
>       $ 1,806
>       --Tax fees
>       $13,706
>       $10,112All other fees
>       --
>       --$63,035
>       $56,534

- 18 -

---

Audit fees services include fees associated with the annual
audit, the reviews of the Company's 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.
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.
- 19 -
REPORT OF INDEPENDENT REGISTERED PUBLIC 
ACCOUNTING FIRM
To 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, 2004 and 2003 and the related consolidated statements of loss and
  comprehensive loss, shareholders' equity and cash flows for the years then
  ended. These consolidated financial statements are the responsibility of the
  Company's management. Our responsibility is to express an opinion on these
  consolidated financial statements based on our audits.
  We conducted our audits in accordance with 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 audits provide a
  reasonable basis for our opinion.
  In our opinion, the financial statements referred to above
  present fairly, in all material respects, the consolidated financial position
  of TurboSonic Technologies, Inc. and Subsidiaries as of June 30, 2004 and
  2003, and the consolidated results of their operations and their cash flows
  for the years then ended, in conformity with United States generally accepted
  accounting principles.
  The accompanying financial statements have been prepared
  assuming that TurboSonic Technologies, Inc. will continue as a going concern.
  As more fully described in Note 2, the Company has incurred losses over the
  past three years, which have significantly reduced cash reserves and depleted
  shareholders' equity. These conditions raise substantial doubt about the
  Company's ability to continue as a going concern. Management's plans in regard
  to these matters are also described in Note 2. The financial statements do not
  include any adjustments to reflect the possible future effects on the
  recoverability and classification of assets or the amounts and classification
  of liabilities that may result from the outcome of this uncertainty.

|Kitchener, Canada,     | /s/ Ernst + Young LLP | 
|---------------------- | --------------------- | 
|August
      27, 2004. | Ernst + Young LLP     | 
|                       | Chartered Accountants | 

F-1

---



TurboSonic Technologies, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS 
(see note 2 - Going Concern)

|As at June 30 | [expressed in United States dollars]
|------------- | ------------------------------------

|                                                          | 2004      | 2003     
|--------------------------------------------------------- | --------- | ---------
|                                                          | $         | $        
|                                                          |           |          
|ASSETS                                                    |           |          
|Current                                                   |           |          
|Cash and cash
    equivalents                             | 219,738   | 1,183,885
|Accounts receivable [note 5]                              | 1,249,721 | 612,261  
|Retentions receivable                                     | 71,347    | 148,358  
|Inventories [note
    6]                                  | 52,514    | 57,198   
|Deferred contract
    costs and unbilled revenue [note 7] | 38,233    | 64,524   
|Other current assets                                      | 66,808    | 47,206   
|Total current assets                                      | 1,698,361 | 2,113,432
|Capital assets,less
    accumulated amortization [note 8] | 111,230   | 95,593   
|Goodwill [note 9]                                         | 398,897   | 398,897  
|Other assets                                              | 21,827    | 19,409   
|                                                          | 531,954   | 513,899  
|Total assets                                              | 2,230,315 | 2,627,331

See accompanying notes

F-2

---



|                                                                  |                                                    |             |          
|----------------------------------------------------------------- | -------------------------------------------------- | ----------- | ---------
|                                                                  |                                                    | 2004        | 2003     
|                                                                  |                                                    | $           | $        
|                                                                  |                                                    |             |          
|LIABILITIES AND SHAREHOLDERS' EQUITY                              |                                                    |            
|Current                                                           |                                                    |             |          
|Accounts
    payable                                              | 528,928                                            | 293,053    
|Accrued
    charges [note 10]                                     | 359,675                                            | 339,198    
|Obligations under capital leases, current portion [note 11]       | 8,873                                              | 9,955      
|Unearned
    revenue and contract advances [note 7]               | 340,308                                            | 221,262    
|Income taxes payable                                              |                                                   | 19,366     
|Total current liabilities                                         | 1,237,784                                          | 882,834    
|Obligations under capital leases,
    long-term portion [note 11] | 10,605                                             | 5,432      
|                                                                  |                                                    | 1,248,389   | 888,266  
|Commitments and contingencies [note 12]                           |                                                    |            
|Shareholders' equity[note 13]                                     |                                                    |            
|Share capital                                                     |                                                    |             |          
|Authorized                                                        |                                                    |             |          
|21,800,000                                                        | common
    shares, par value $0.10 per share       |             |          
|8,200,000                                                         | Class B
    exchangeable shares, par value         |             |          
|                                                                  | $0.10 per
    share                                |             |          
|1,500                                                             | preferred
    shares, no par value                 |             |          
|Issued                                                            |                                                    |             |          
|6,385,859                                                         | common
    shares [2003 - 6,055,885]               |             |          
|4,121,365                                                         | Class B
    exchangeable shares [2003 - 4,451,365] | 2,349,818   | 2,349,821
|Additional
    paid-in capital                                    | 2,022,655                                          | 2,016,046  
|                                                                  |                                                    | 4,372,473   | 4,365,867
|Accumulated other comprehensive income                            | 126,516                                            | 108,654    
|Accumulated deficit                                               | (3,517,063)                                        | (2,735,456)
|Total
    shareholders' equity                                    | 981,926                                            | 1,739,065  
|Total
    liabilities and shareholders' equity                    | 2,230,315                                          | 2,627,331  

F-3

---

TurboSonic Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF LOSS AND 
COMPREHENSIVE LOSS 
(see note 2 - Going Concern)

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

|                                                           |            |           
|---------------------------------------------------------- | ---------- | ----------
|                                                           | 2004       | 2003      
|                                                           | $          | $         
|                                                           |            |           
|CONTRACT REVENUE
    AND SALES                             |            |           
|OEM systems revenue                                        | 2,107,618  | 3,726,433 
|Aftermarket revenue                                        | 2,614,939  | 2,373,308 
|                                                           | 4,722,557  | 6,099,741 
|                                                           |            |           
|CONTRACT COSTS AND
    COST OF SALES                       |            |           
|OEM systems contract
    costs and costs of sales          | 1,750,940  | 3,233,276 
|Aftermarket contract costs and cost of
    sales           | 1,523,210  | 1,325,652 
|                                                           | 3,274,150  | 4,558,928 
|Gross margin                                               | 1,448,407  | 1,540,813 
|                                                           |            |           
|EXPENSES                                                   |            |           
|Selling, general and
    administrative                    | 2,202,144  | 1,791,623 
|Research and
    development [note 15]                     | 64,803     | 20,089    
|Stock-based
    compensation expense [note 13]             | 6,619      | 7,758     
|Goodwill impairment loss [note 9]                          |           | 398,897   
|                                                           | 2,273,566  | 2,218,367 
|                                                           |            |           
|(Loss) from operations                                     | (825,159)  | (677,554) 
|Interest income                                            | 10,518     | 9,502     
|Interest (expense)                                         | (3,082)    | (15,030)  
|(Loss) before provision for (recovery
    of) income taxes | (817,723)  | (683,082) 
|Provision for (recovery of) income
    taxes [note 14]     | (36,116)   | 613       
|Net (loss)                                                 | (781,607)  | (683,695) 
|Other comprehensive
    income:                            |            |           
|Foreign currency
    translation adjustment                | 17,862     | 186,183   
|Comprehensive (loss)                                       | (763,745)  | (497,512) 
|                                                           |            |           
|Basic (loss) per share[note
    16]                        | ($0.07)    | ($0.07)   
|                                                           |            |           
|Diluted (loss) per share [note 16]                         | ($0.07)    | ($0.07)   
|                                                           |            |           
|Basic weighted average number of
    shares [note 16]      | 10,507,237 | 10,507,250
|Diluted weighted average number of
    shares [note 16]    | 10,507,237 | 10,507,250

See accompanying notes

F-4

---



TurboSonic Technologies Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
(see note 2 - Going Concern)

|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,
    2002                | 10,507,250       | 2,349,821  | 2,008,288   | (2,051,761)   | (77,529)      | 2,228,819
|Net (loss)                                 |                 |           |            | (683,695)     |              | (683,695)
|Stock-based
    compensation [note 13]     |                 |           | 7,758       |              |              | 7,758    
|Translation adjustment                     |                 |           |            |              | 186,183       | 186,183  
|Balance - June 30, 2003                    | 10,507,250       | 2,349,821  | 2,016,046   | (2,735,456)   | 108,654       | 1,739,065
|Net (loss)                                 |                 |           |            | (781,607)     |              | (781,607)
|Stock-based
    compensation [note 13]     |                 |           | 6,619       |              |              | 6,619    
|Translation adjustment                     |                 |           |            |              | 17,862        | 17,862   
|Purchase of small-lot shares [note
    13] | (26)             | (3)        | (10)        |              |              | (13)     
|Balance - June 30, 2004                    | 10,507,224       | 2,349,818  | 2,022,655   | (3,517,063)   | 126,516       | 981,926  
|                                           |                  |            |             |               |               |          
|See accompanying
    notes                 |                  |            |             |               |               |          

F-5

---



TurboSonic Technologies, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

|                                                            |           |          
|----------------------------------------------------------- | --------- | ---------
|                                                            | 2004      | 2003     
|                                                            | $         | $        
|                                                            |           |          
|OPERATING
    ACTIVITIES                                    |           |          
|Net (loss)                                                  | (781,607) | (683,695)
|Add charges to
    operations not requiring a               |           |          
|current
    cash payment:                                   |           |          
|Stock-based compensation expense [note 13]                  | 6,619     | 7,758    
|Depreciation and amortization [note 8]                      | 62,910    | 76,792   
|Goodwill
    impairment loss [note 9]                       |          | 398,897  
|                                                            | (712,078) | (200,248)
|Net change in non-cash
    working capital balances related |           |          
|to operations [note
    17]                                 | (190,040) | 444,298  
|Cash (applied to) provided by
    operating activities      | (902,118) | 244,050  
|                                                            |           |          
|INVESTING
    ACTIVITIES                                    |           |          
|Purchase of capital assets                                  | (64,295)  | (33,676) 
|Cash (applied to) investing
    activities                  | (64,295)  | (33,676) 
|                                                            |           |          
|FINANCING
    ACTIVITIES                                    |           |          
|(Repayment) of obligations under
    capital leases         | (12,392)  | (28,825) 
|Cash (applied to) financing
    activities                  | (12,392)  | (28,825) 
|Effect of exchange rate changes on
    cash                 | 14,658    | 161,671  
|                                                            |           |          
|Net cash (applied)
    provided during year                 | (964,147) | 343,220  
|Cash and cash equivalents, beginning
    of year            | 1,183,885 | 840,665  
|Cash and cash equivalents, end of
    year                  | 219,738   | 1,183,885
|                                                            |           |          
|Supplemental cash
    flow information:                     |           |          
|Interest                                                    | 3,082     | 15,073   
|Income taxes                                                | 3,150     | 613      
|                                                            |           |          
|See accompanying
    notes                                  |           |          

F-6

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

1. ORGANIZATION AND BUSINESS DESCRIPTION

TurboSonic Technologies, Inc. and its subsidiaries
[collectively the "Company"], designs and markets integrated pollution control
and industrial gas cooling/conditioning systems including liquid atomization
technology and dust suppression systems to ameliorate or abate industrial
environmental problems.

2. GOING CONCERN UNCERTAINTY

These consolidated financial statements have been prepared on
a going concern basis, which presumes that assets will be realized and
liabilities discharged in the normal course of business over the foreseeable
future. The Company

In order to reverse this trend, the Company has taken
initiatives to lower operating expenses and to generate new OEM system and
Aftermarket orders. Cost reduction initiatives include lowering the office staff
head count (completed), downsizing of the New Jersey office (completed),
consolidating all project management functions at head office (completed) and
implementing further cost and expenditure controls and monitoring (ongoing). As
the result of marketing and sales plans instituted in fiscal 2004, the Company
received new OEM systems orders valued in excess of $5 million in the second and
third quarters of calendar 2004, with positive revenue impact commencing late in
the fourth quarter of fiscal 2004 and expected to continue into fiscal 2005.
Additionally, the Company is also pursuing a line of credit on the basis of
current and future projects. TurboSonic currently has no outside debt. The
Company has not yet addressed the prospects of shareholder loans or equity
financing. Based upon the current cash position, confirmed orders for fiscal
2005 of $6.9 million, a steady stream of Aftermarket orders and depending upon
profitable execution of projects and successful management of costs, the Company
expects to have sufficient operating cash for fiscal 2005.

These consolidated financial statements do not include any of
the adjustments to the amounts or classification of assets and liabilities that
may be required should the Company be unable to continue its business in the
normal course of business.

3. 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 the Company and
its 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.

| | F-7
| | ---

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

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, the Company has completed the transitional
impairment test as at July 1, 2001 and annual impairment tests as at April 1,
2002, 2003 and 2004, to identify if there is any impairment to the goodwill
using a fair value methodology by reporting unit [note 9].

Capital assets

Capital assets and leasehold improvements 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

The Company derives revenue from long-term contracts which require
performance [i.e., design, construction and performance testing] over a time
span which may extend one or more accounting periods. For long-term contracts,
two methods of recognition are employed by the Company - 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.

| | F-8
| | ---

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

Cash and cash equivalents

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

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

The Company accounts for income taxes in accordance with the
provisions of SFAS No. 109,

Advertising costs

All costs associated with advertising and promoting products are expensed as
incurred. Advertising and promotion expense was $39,539 in 2004 [$36,383 in
2003].

Stock-based compensation

Financial Accounting Standards Board ["FASB"] SFAS No. 123,

| | F-9
| | ---

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

Pro forma information regarding net income and earnings per
share is required by SFAS No. 123 and has been determined as if the Company had
accounted for its 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 the Company's 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. The Company's pro forma
information is as follows:

|                                                       | 2004      | 2003     
|------------------------------------------------------ | --------- | ---------
|                                                       | $         | $        
|                                                       |           |          
|Net (loss)                                             | (781,607) | (683,695)
|Stock-based
    compensation expense under APB No.25   | 6,619     | 7,758    
|Stock-based compensation expense
    under SFAS No.123 | (48,000)  | (25,578) 
|Pro forma (loss)                                       | (822,988) | (701,515)
|                                                       |           |          
|Pro forma income
    per share:                        |           |          
|Basic                                                  | $(0.08)   | $(0.07)  
|Diluted                                                | $(0.08)   | $(0.07)  

Warranty

The Company carries 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.

Loss per share

Basic loss per share is computed by dividing net loss
available to common shareholders by the weighted average number of common shares
outstanding during the year. In computing the loss per share, the TurboSonic
Canada Inc. Class B exchangeable shares, disclosed in

Foreign currency translation

The Company maintains its 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,

| | F-10
| | ----

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

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

Accounting for Stock-Based Compensation - Transition and Disclosure

In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation Transition and Disclosure". SFAS 148 is effective for
2003, and increases the disclosure requirements for stock-based compensation
plans. The impact of implementation of SFAS 148 in 2003 was to increase the
Company's pro forma stock compensation disclosure.

Consolidation of Variable Interest Entities

In December 2003, the FASB amended interpretation No. 46
("FIN 46"),

4. FINANCIAL INSTRUMENTS

Fair value of financial instruments

The carrying amounts reported in the balance sheet for cash
and cash equivalents, accounts receivable, retentions receivable, income taxes
payable, 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 subject the Company to
credit risk. Sales are made to end users of all sizes located primarily in North
America. The Company provides an allowance for doubtful accounts equal to the
estimated losses expected to be incurred in the collection of accounts
receivable.

As at June 30, 2004, the Company had three customers that comprised 58% of
the total trade receivable balance and had three customers that comprised 35% of
the total trade receivable balance at June 30, 2003.

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

| | F-11
| | ----

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

5. ACCOUNTS RECEIVABLE

|                                                           | 2004      | 2003    
|---------------------------------------------------------- | --------- | --------
|                                                           | $         | $       
|                                                           |           |         
|Trade accounts
    receivable                              | 1,249,646 | 650,242 
|Other receivables                                          | 75        | 11,202  
|Allowance for doubtful accounts                            |          | (49,183)
|                                                           | 1,249,721 | 612,261 
|                                                           |           |         
|Bad
    debt recovery was $14,945 in 2004 and nil in 2003.

6. INVENTORIES

|                         | 2004     | 2003   
|------------------------ | -------- | -------
|                         | $        | $      
|                         |          |        
|Finished goods           | 64,370   | 66,021 
|Reserve for obsolescence | (11,856) | (8,823)
|                         | 52,514   | 57,198 

7. COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

|                                                                          | 2004        | 2003       
|------------------------------------------------------------------------- | ----------- | -----------
|                                                                          | $           | $          
|                                                                          |             |            
|Costs incurred on
    uncompleted contracts                               | 2,548,297   | 3,097,549  
|Estimated earnings                                                        | 359,735     | 746,105    
|                                                                          | 2,908,032   | 3,843,654  
|Less billings to date                                                     | (3,210,107) | (4,000,392)
|                                                                          | (302,075)   | (156,738)  
|                                                                          |             |            
|Included in the accompanying balance sheets under the following captions:
|                                                                          |             |            
|                                                                          | 2004        | 2003       
|                                                                          | $           | $          
|                                                                          |             |            
|Deferred contract
    costs and unbilled revenue                          | 38,233      | 64,524     
|Unearned revenue and contract
    advances                                | (340,308)   | (221,262)  
|                                                                          | (302,075)   | (156,738)  

As the result of the financial difficulties experienced by
one of the Company's subcontractors that became known subsequent to June 30,
2001, the estimated completion costs for a project were revised upward by
$177,000 in the fiscal 2001 consolidated financial statements. In the second
quarter of the year ended June 30, 2002, the estimated completion costs were
increased by a further $140,000 to a total of $317,000. Substantially all of the
estimated completion costs were incurred by June 30, 2002, and no further
increases were deemed necessary. Recovery, in whole or part, of these increased
costs may be possible through the liquidation of the assets of the
subcontractor, although, due to the uncertainty, no recovery has been recorded.
The liquidation process was not complete at June 30, 2004.

| | F-12
| | ----

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

8. CAPITAL ASSETS

|                           |           | Accumulated  | Net Book
|-------------------------- | --------- | ------------ | --------
|                           | Cost      | Depreciation | Value   
|2004                       | $         | $            | $       
|                           |           |              |         
|Office equipment           | 588,514   | 542,895      | 45,619  
|Other equipment            | 429,953   | 383,285      | 46,668  
|Leasehold
    improvements | 52,160    | 33,217       | 18,943  
|                           | 1,070,627 | 959,397      | 111,230 
|                           |           |              |         
|                           |           | Accumulated  | Net Book
|                           | Cost      | Depreciation | Value   
|2003                       | $         | $            | $       
|                           |           |              |         
|Office equipment           | 552,600   | 507,698      | 44,902  
|Other equipment            | 412,486   | 367,336      | 45,150  
|Leasehold
    improvements | 31,370    | 25,829       | 5,541   
|                           | 996,456   | 900,863      | 95,593  

Total depreciation and amortization incurred by the Company during fiscal
2004 was $62,910 [2003 - $76,792].

The total depreciation, included in the above amounts, for assets under
capital leases during fiscal 2004 was $6,504 [2003 - $28,885].

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

|     |         | Accumulated  | Net Book
|---- | ------- | ------------ | --------
|     | Cost    | Depreciation | Value   
|2004 | $       | $            | $       
|     |         |              |         
|     | 124,692 | 107,257      | 17,435  
|     |         |              |         
|     |         | Accumulated  | Net Book
|     | Cost    | Depreciation | Value   
|2003 | $       | $            | $       
|     |         |              |         
|     | 97,719  | 87,764       | 9,955   

| | F-13
| | ----

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

9. GOODWILL

The changes in the carrying amount of goodwill are as follows:

|                                            | OEM       |             |          
|------------------------------------------- | --------- | ----------- | ---------
|                                            | Systems   | Aftermarket | Total    
|                                            | $         | $           | $        
|                                            |           |             |          
|Balance as of
    June 30, 2002             | 398,897   | 398,897     | 797,794  
|Impairment loss
    recognized in operating |           |             |          
|income                                      | (398,897) |            | (398,897)
|Balance as of June 30, 2003                 |          | 398,897     | 398,897  
|Impairment loss
    recognized in operating |           |             |          
|income                                      |          |            |         
|Balance as of June 30, 2004                 |          | 398,897     | 398,897  

The Company completed its goodwill impairment testing as at
April 1, 2004, as required by SFAS No. 142. Prior to fiscal 2004, the Company had two reportable
business segments - nozzle systems and scrubber systems. During fiscal 2004, the
Company realigned its business activities and commenced reporting on two
business segments - OEM systems and Aftermarket. The previous scrubber systems
segment is closely aligned with the OEM systems segment and the previous nozzle
systems segment is closely aligned with the Aftermarket segment. Due to deferred
demand for the period ended June 30, 2003 in the capital good markets relative
to the status of environmental regulatory changes, the scrubber systems business
segment experienced depressed revenue levels and losses from operations. These
conditions created uncertainty regarding the forecasted future cash flows
required to support the goodwill associated with the scrubber business segment
under the rules of SFAS No. 142. Accordingly, the Company had concluded that the
$398,897 of goodwill associated with this business segment should be expensed in
the period ended June 30, 2003. The Company has concluded that there has not
been impairment associated with the Aftermarket segment to the period ended June
30, 2004.

10. WARRANTY

As part of the normal sale of scrubber and nozzle systems,
the Company has provided its 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:

|                               | 2004     | 2003    
|------------------------------ | -------- | --------
|                               | $        | $       
|                               |          |         
|Balance,
    beginning of year | 68,623   | 58,385  
|Payments made                  | (48,989) | (11,503)
|Provisions made                | 40,808   | 21,741  
|Balance, end of year           | 60,442   | 68,623  

| | F-14
| | ----

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

11. OBLIGATIONS UNDER CAPITAL LEASES

The Company has entered into certain capital leases for automobiles and
computer hardware and software, with interest rates ranging from 4.8% to 10%.

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

|                                  | $     
|--------------------------------- | ------
|                                  |       
|2005                              | 11,062
|2006                              | 7,148 
|2007                              | 3,574 
|Total minimum lease payments      | 21,784
|Less amount representing interest | 2,306 
|                                  | 19,478
|Less current portion              | 8,873 
|                                  | 10,605

12. COMMITMENTS AND CONTINGENCIES

[a]

> The Company has entered into operating leases, expiring through 2009, for
>   office equipment and premises. Total minimum annual payments under these
>   leases for the years after June 30, 2003 are as follows:

|     | $      
|---- | -------
|     |        
|2005 | 47,710 
|2006 | 41,898 
|2007 | 40,983 
|2008 | 40,983 
|2009 | 3,415  
|     | 174,989

> Rental expense for office equipment and premises was $116,231 in 2004
>   [$109,200 in 2003].

[b]     Contingencies

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

| | F-15
| | ----

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

13. SHAREHOLDERS' EQUITY

Common and Class B exchangeable shares

The Company has total authorized share capital of 30,000,000
shares. In connection with the consolidation of the Company 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 the 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 the Company. The Class B exchangeable shares have voting rights
through a trustee. During 2004, 330,000 Class B exchangeable shares were
exchanged for common shares of the Company, leaving 4,121,365 Class B
exchangeable shares outstanding as of June 30, 2004.

During fiscal 2002, the Company entered into an agreement to
form a strategic alliance with Hamon Research-Cottrell, Inc. ["Hamon"]. As part
of the agreement, Hamon acquired directly from the Company 500,000 shares of
TurboSonic common stock, representing an approximate 4.7% equity interest at
$1.00 U.S. per share. Certain of TurboSonic's shareholders, including officers
and directors, granted options to Hamon to acquire control of TurboSonic from
these shareholders at prices ranging from $1.80 to $2.50 per share. These
options were exercisable only in the event that Hamon initiates a tender offer
for TurboSonic's common stock, and expired August 31, 2003. The agreement also
provides for the joint marketing of certain products.

In fiscal 2004, the board of directors approved the re-purchase of small-lot
shares when the Company is approached by shareholders to purchase such shares. A
total of 26 shares were re-purchased at an average cost of $0.50 per share.

At the end of fiscal 2004, a total of 6,385,859 common shares and 4,121,365
Class B exchangeable shares were outstanding.

Stock-based compensation

The Company instituted the 2000 stock plan [the "2000 Plan"]
with the express purpose of encouraging key employees of the Company, as well as
other individuals who render services to the Company, by providing opportunities
to participate in the ownership of the Company. The Plan provides for the grant
of options, awards of capital stock in the Company and opportunities to make
direct purchases of capital stock in the Company. Collectively, these are
referred to as stock rights.

A stock plan [the "2003 Plan"] was approved at a shareholders vote at the
Company's 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 common stock of the Company or shares of common stock
reacquired by the Company in any manner. The aggregate number of shares that may
be issued, pursuant to the Plans, is 750,000 under the 2000 Plan and 500,000
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 2004, an expense of $6,619 [2003 - $7,758] was recorded in connection with
these options.

F-16

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

13. SHAREHOLDERS' EQUITY cont'd

Stock-based compensation cont'd

The Company accounts for all other option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issues to Employees.

In July and December 2001, eight Company directors and advisers were granted
options to purchase 10,000 common shares each at an exercise price of $0.80. The
options expire five years from the grant date, and vest on July 30, 2006.

In June 2002, eight Company directors and advisers were each granted options
to purchase 10,000 common shares each at an exercise price of $0.45. The options
expire five years from the grant date, and vest on June 30, 2005.

In December 2003, eight Company directors and advisers were
each granted options to purchase 10,000 common shares at an exercise price of
$0.35. These options vested immediately at grant, and expire in five years.
Further, each committee member will receive options for 5,000 shares and the
chairperson will receive options for an additional 5,000 shares as compensation
for the time devoted to the Company business.

A summary of the option activity since June 30, 2002 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,
    2002  | 742,250            | 0.4616   | 500                
|New options authorized      |                   |         | 500,000            
|Balance, June 30, 2003      | 742,250            | 0.4616   | 500,500            
|Granted
    during the year | 120,000            | 0.3500   | (120,000)          
|Forfeited during the year   | (80,000)           | 0.5203   | 80,000             
|Balance, June 30, 2004      | 782,250            | 0.4385   | 460,500            

F-17

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

13. SHAREHOLDERS' EQUITY cont'd

Stock-based compensation cont'd

The weighted average characteristics of options outstanding at June 30, 2004
are as follows:

|Options outstanding |          | Options
    exercisable
|------------------- | -------- | -----------------------
|                    |          | Weighted               
|                    | Weighted | average                
|                    | average  | remaining              
|Exercise            | exercise | contractual            
|price               | price    | life                   
|$                   | $        | [years]                
|                    |          |                        
|0.3500              | 0.3500   | 4.5                    
|0.4000              | 0.4000   | 2.2                    
|0.4500              | 0.4500   | 3.2                    
|0.5625              | 0.5625   | 2.3                    
|0.8000              | 0.8000   | 1.3                    
|                    | 0.4385   |                        

Warrants

The Company has in the past granted detachable warrants for
400,000 common shares to debt holders as an inducement to advance funds to the
Company. 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,
the Company 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 $0.50 per share, for a period of two years following the
initial three year period at a price of $0.75 per share, and for an additional
period of one year at a price of $1.00 per share. Additionally, warrants to
acquire another 400,000 common shares were granted in aggregate to the lenders,
at a price of $0.5625 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 the Company stock have closed at a trading price
above $1.50 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 will
expire during fiscal 2005.

F-18

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

14. INCOME TAXES

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

|                                |            | 2004     | 2003
|------------------------------- | ---------- | -------- | ----
|                                |            | $        | $   
|                                |            |          |     
|Current:                        | - U.S.     | 3,150    | 613 
|                                | - Canadian | (39,266) |    
|Total current taxes             | (36,116)   | 613     
|Deferred:                       | - U.S.     |         |    
|                                | - Canadian |         |    
|Total deferred taxes            |           |        
|Income tax provision (recovery) | (36,116)   | 613     

Components of the current tax provision are as follows:

|                                                  | 2004      | 2003
|------------------------------------------------- | --------- | ----
|                                                  | $         | %   
|                                                  |           |     
|(Recovery of) income
    tax based                |           |     
|on basic
    U.S. tax rates                       | (171,534) | (21)
|(Recovery of) income
    taxes based              |           |     
|on basic
    Canadian federal income tax rates    | (78,616)  | (10)
|(Recovery of) income
    taxes based on basic     |           |     
|Canadian provincial
    income tax rates          | (39,152)  | (5) 
|Non-deductible
    goodwill impairment loss       |          |    
|Benefit of deductible
    temporary differences   |           |     
|and tax
    losses not recognized during the year | 253,186   | 32  
|Other                                             |          |    
|                                                  | (36,116)  | (4) 

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

|                                              | 2004      | 2003     
|--------------------------------------------- | --------- | ---------
|                                              | %         | %        
|                                              |           |          
|U.S.                                          | 34.0      | 34.0     
|Canadian
    federal                          | 25.1      | 25.1     
|Canadian
    provincial                       | 12.5      | 12.5     
|                                              |           |          
|(Loss)
    before provision for income taxes: |           |          
|                                              | 2004      | 2003     
|                                              | $         | $        
|                                              |           |          
|U.S.                                          | (504,511) | (617,928)
|Canadian                                      | (313,212) | (65,154) 
|Income before provision for income
    taxes  | (817,723) | (683,082)

F-19

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

14. INCOME TAXES cont'd

Income taxes paid are as follows:

|                                                | 2004   | 2003  
|----------------------------------------------- | ------ | ------
|                                                | $      | $     
|                                                |        |       
|Canadian
    federal                            |       |      
|Canadian
    provincial                         |       |      
|U.S.
    federal                                |       |      
|U.S. state                                      | 3,150  | 613   
|                                                | 3,150  | 613   
|                                                |        |       
|Income tax
    refunds received are as follows: |        |       
|                                                | 2004   | 2003  
|                                                | $      | $     
|                                                |        |       
|Canadian
    federal                            | 6,426  | 20,526
|Canadian
    provincial                         | 13,655 | 6,703 
|U.S. federal                                    |       |      
|                                                | 20,081 | 27,229

The Company has unutilized operating losses in the United
States of approximately $2,265,000 available for carry forward to reduce income
taxes otherwise payable in future years. This amount includes purchased loss
carry forwards of approximately $1,000,000. Access to purchased unutilized
operating losses is restricted to $83,168 per year until 2012. If the amount is
not used during the year, it is available for utilization in future years. A
total of $323,723 relating to prior year purchased operating losses was
available to apply against current year income. Other unutilized operating
losses available for carry forward total approximately $1,275,000 and expire in
2012. During the current year, losses in the amount of $0 [$0 in 2003] were
utilized.

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

|                                                 | 2004      | 2003     
|------------------------------------------------ | --------- | ---------
|                                                 | $         | $        
|                                                 |           |          
|Book over
    (under) tax depreciation           | 10,796    | 9,076    
|Benefit of
    unrecorded investment tax credits |          |         
|Reserves
    not currently deductible            | 18,205    | 20,669   
|Net operating loss carryforward                  | 872,049   | 618,652  
|Total deferred tax assets                        | 901,050   | 648,397  
|Valuation allowance for deferred tax
    assets  | (901,050) | (648,397)
|Net deferred tax asset
    (liabilities)         |          |         
|                                                 |           |          
|15.
    RESEARCH AND DEVELOPMENT EXPENSES        |           |          
|                                                 |           |          
|                                                 | 2004      | 2003     
|                                                 | $         | $        
|                                                 |           |          
|Expenses
    incurred                            | 64,803    | 22,569   
|Customer payments                                | --        | (2,480)  
|                                                 | 64,803    | 20,089   

F-20

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

16. LOSS PER SHARE

The following table sets forth the computation of basic and diluted loss per
share. The effect of dilutive securities is included only when dilutive.

|                                                             | 2004       | 2003      
|------------------------------------------------------------ | ---------- | ----------
|                                                             | $          | $         
|                                                             |            |           
|Numerator                                                    |            |           
|Net (loss)                                                   | (781,607)  | (683,695) 
|                                                             |            |           
|Denominator                                                  |            |           
|Denominator for basic
    earnings per share -               |            |           
|weighted average shares
    outstanding                      | 10,507,237 | 10,507,250
|Denominator for diluted earnings per
    share -             |            |           
|adjusted weighted average
    shares and assumed conversions | 10,507,237 | 10,507,250
|Basic (loss) per share                                       | $(0.07)    | $(0.07)   
|Diluted (loss) per share                                     | $(0.07)    | $(0.07)   

For 2004 and 2003, all warrants and options were anti-dilutive and therefore
excluded from this calculation.

17. SUPPLEMENTARY INFORMATION ON CASH FLOWS

|                                                                        | 2004      | 2003     
|----------------------------------------------------------------------- | --------- | ---------
|                                                                        | $         | $        
|                                                                        |           |          
|Changes
    in non-cash working capital balances related to operations: |          
|(Increase) decrease in
    accounts receivable                          | (628,465) | 234,787  
|Decrease in retentions
    receivable                                   | 78,095    | 292,779  
|Decrease in income
    taxes receivable                                 | --        | 10,013   
|Decrease in
    inventories                                             | 4,932     | 24,410   
|Decrease in deferred
    contract costs and unbilled revenue            | 26,661    | 16,900   
|(Increase) in other
    current assets                                  | (19,096)  | (1,786)  
|Decrease in other
    assets                                            | 364       | 1,370    
|Increase in accounts
    payable                                        | 231,893   | 9,838    
|Increase in accrued
    charges                                         | 18,843    | 84,053   
|Increase (decrease) in
    unearned revenue and contract advances       | 116,188   | (250,051)
|(Decrease) increase in income taxes
    payable                         | (19,455)  | 21,985   
|                                                                        | (190,040) | 444,298  

18. SEGMENTED INFORMATION

The Company offers a range of products and systems,
incorporating diverse technologies, to address the industrial process, air
pollution control and other environmental management needs of its customers.
During fiscal 2004, the Company realigned its business activities on the basis
of long-term contracts and components/spare parts. Internal reporting to support
decision-making regarding the allocation of resources and evaluation of
activities was realigned to be consistent with the alignment of the business. As
such the Company has commenced reporting to shareholders on the two business
segments into which management now classifies the business - OEM systems and
Aftermarket. The comparative segment information has been reclassified to be
consistent with this presentation.

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

F-21

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

18. SEGMENTED INFORMATION cont'd

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:

|              | 2004      | 2003     
|------------- | --------- | ---------
|              | $         | $        
|              |           |          
|United States | 2,219,600 | 4,221,000
|Canada        | 1,138,100 | 1,147,000
|Asia          | 538,400   | 122,000  
|Europe        | 500,600   | 177,000  
|South America | 278,600   | 268,000  
|Other         | 47,257    | 164,741  
|              | 4,722,557 | 6,099,741

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, 2004, three customers
represented 23% of total revenues [in fiscal 2003, three customers represented
45% of total revenues].

Industry segments

|                                 | OEM         |             |          |          
|-------------------------------- | ----------- | ----------- | -------- | ---------
|                                 | Systems     | Aftermarket | Other    | Total    
|2004                             | $           | $           | $        | $        
|                                 |             |             |          |          
|Contract revenue and sales       |             |             |          |          
|OEM
    systems                  | 2,107,618   |            |         | 2,107,618
|Aftermarket                      |            | 2,614,939   |         | 2,614,939
|Total contract revenue and sales | 2,107,618   | 2,614,939   |         | 4,722,557
|(Loss) income from operations    | (1,040,149) | 214,990     |         | (825,159)
|Interest
    income              | 4,694       | 5,824       |         | 10,518   
|Interest expense                 | (1,375)     | (1,707)     |         | (3,082)  
|(Loss) income before provision   |             |             |          |          
|for income taxes                 | (1,036,830) | 219,107     |         | (817,723)
|(Recovery) of income taxes       | (16,118)    | (19,998)    |         | (36,116) 
|Net (loss) income                | (1,020,712) | 239,105     |         | (781,607)
|                                 |             |             |          |          
|Depreciation and amortization    | 31,455      | 31,455      |         | 62,910   
|Capital
    expenditures         | 32,148      | 32,147      |         | 64,295   
|Segment
    assets               | 1,041,765   | 968,812     | 219,7381 | 2,230,315
|Capital
    assets               | 55,615      | 55,615      |         | 111,230  
|Goodwill                         |            | 398,897     |         | 398,897  

1

F-22

---



|TurboSonic
    Technologies, Inc. and Subsidiaries |                                     
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS    
|                                                   |                                     
|June 30, 2004                                      | [expressed in United States dollars]

18. SEGMENTED INFORMATION cont'd

|                                  | OEM       |             |            |          
|--------------------------------- | --------- | ----------- | ---------- | ---------
|                                  | Systems   | Aftermarket | Other      | Total    
|2003                              | $         | $           | $          | $        
|                                  |           |             |            |          
|Contract revenue
    and sales    |           |             |            |          
|OEM systems                       | 3,726,433 |            |           | 3,726,433
|Aftermarket                       |          | 2,373,308   |           | 2,373,308
|Total contract revenue and sales  | 3,726,433 | 2,373,308   |           | 6,099,741
|(Loss) income from operations     | (792,353) | 114,799     |           | (677,554)
|Interest income                   | 5,805     | 3,697       |           | 9,502    
|Interest expense                  | (9,182)   | (5,848)     |           | (15,030) 
|(Loss) income before provision    |           |             |            |          
|for
    income taxes              | (795,730) | 112,648     |           | (683,082)
|Provision for income taxes        | 374       | 239         |           | 613      
|Net (loss) income                 | (796,104) | 112,409     |           | (683,695)
|                                  |           |             |            |          
|Depreciation and
    amortization | 38,396    | 38,396      |           | 76,792   
|Capital expenditures              | 16,838    | 16,838      |           | 33,676   
|Segment assets                    | 486,142   | 957,304     | 1,183,8851 | 2,627,331
|Capital assets                    | 47,797    | 47,796      |           | 95,593   
|Goodwill                          |          | 398,897     |           | 398,897  

1

19. COMPARATIVE FIGURES

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

F-23

---

TurboSonic
    Technologies, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL
    STATEMENTSJune 30, 2004
    [expressed in United States dollars]
SIGNATURES

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

By:
      /s/ Edward F. SpinkEdward F. SpinkChief Executive
      Officer


Date: September 28, 2004

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 28, 2004
|Edward F. Spink               | Chief Executive
    Officer                      |                   
|                              | (Principal Executive
    Officer)                |                   
|                              |                                                  |                   
|/s/ Patrick J. Forde          | President, Secretary,
    Treasurer and Director | September 28, 2004
|Patrick J. Forde              | (Principal Financial
    and Accounting Officer) |                   
|                              |                                                  |                   
|/s/ Richard H. Hurd           | Director                                         | September 28, 2004
|Richard H. Hurd               |                                                  |                   
|                              |                                                  |                   
|/s/ Donald R. Spink,
    Sr.  | Director                                         | September 28, 2004
|Dr. Donald R. Spink,
    Sr.  |                                                  |                   
|                              |                                                  |                   
|/s/ Jonathan R.
    Lagarenne | Director                                         | September 28, 2004
|Jonathan R. Lagarenne         |                                                  |                   
|                              |                                                  |                   
|/s/ Frederick R.
    Berlet   | Director                                         | September 28, 2004
|Frederick R. Berlet           |                                                  |                   
|                              |                                                  |                   
|/s/ Michael J. Widico         | Director                                         | September 28, 2004
|Michael J. Widico             |                                                  |                   

---