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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               -------------------

                                   FORM 10-KSB

(Mark One)
[X]  ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

                     For the fiscal year ended June 30, 2001


                         Commission file number 0-21832

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

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

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

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


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

                                  Common Stock
                                (Title of Class)

     Check whether the Issuer (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such  shorter  period  that the Issuer was  required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes [X] No [ ]

     Check if 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. [X]

     Issuer's revenues for its most recent fiscal year: $14,114,870

     Aggregate market value of the Issuer's common stock held by  non-affiliates
of the Issuer as of September 19, 2001: $4,155,837

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                         DURING THE PRECEDING FIVE YEARS

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

     The  number  of  shares  outstanding  of  the  Issuer's  common  stock  was
10,507,250 as of September 19, 2001.

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

                      DOCUMENTS INCORPORATED BY REFERENCE

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<PAGE>


Item 1. Description of Business

     (a) Business Development

     TurboSonic  Technologies,  Inc.,  formerly  known  as  Sonic  Environmental
Systems, Inc. (the "Company"),  directly and through  subsidiaries,  designs and
markets  integrated  pollution  control and industrial gas  cooling/conditioning
systems 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.

     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
products, mining, non-ferrous metallurgical,  iron and steel, chemical, food and
beverage,   waste   processing,   hazardous  and  municipal  solid  waste  (MSW)
incineration, power generation, automotive, and cement. 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,
                                                              ----------------
                                                              2001        2000
                                                              ----        ----
Hazardous waste incineration ..............................      6%         3%
Solid waste incineration ..................................      6%         5%
Chemical and mining processing ............................     10%        53%
Metallurgical processing ..................................      4%        13%
Dust suppression ..........................................     --          1%
Pulp and paper ............................................     49%        21%
Forest Products ...........................................     20%        --
Other .....................................................      5%         4%
                                                              ----       ----
                                                               100%       100%
                                                              ====       ====

                                       2

<PAGE>


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

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

Products and Systems

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

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

                                                                   Year Ended
                                                                    June 30,
                                                                  ------------
                                                                  2001    2000
                                                                  ----    ----
Evaporative gas cooling and conditioning systems ...............    14%     35%
Wet Electrostatic Precipitation Systems (WESP) .................    53%     25%
Wet scrubber systems  ..........................................    24%     22%
Dust control and suppression systems ...........................    --       1%
Other nozzle systems  ..........................................     9%     17%
                                                                  ----    ----
                                                                   100%    100%
                                                                  ====    ====

     TurboSonic's  products are operating in many industries  including pulp and
paper,  wood  products,  mining,  non-ferrous  metallurgical,  iron  and  steel,
chemical,  food and beverage,  waste  processing,  hazardous and municipal solid
waste (MSW) incineration, power generation, automotive, and cement.

                                       3

<PAGE>


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

     SoniCool(R) Evaporative Gas Cooling and Conditioning Systems

     Through the use of the Company's atomizing nozzles, SoniCool(R) Evaporative
Gas Cooling and Conditioning Systems accurately control temperature and humidity
of high-temperature  gas streams,  such as those emanating from cement kilns and
steel or non-ferrous 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(TM) Wet Electrostatic Precipitation Systems (WESP)

     The  SonicKleen(TM)  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(TM)  design is  recognized  as a proven  approach that meets and
exceeds  government  removal  targets while keeping costs and  maintenance  to a
minimum.

     Currently,  the U.S. EPA is tightening  emission  standards thereby forcing
industry  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  with much lower
operating costs.

     Ten SonicKleen(TM)  WESP systems have been sold for use in incinerators,  a
ceramic  refractory,  a hospital  medical waste  facility,  and a large pulp and
paper manufacturing  facility.  The Company's WESP technology can be used in the
forest  products,  waste  incineration,  metal and chemical  processing,  food &
beverage, 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 thereby
meeting 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, 2001.

                                       4

<PAGE>


     SonicBURN Waste Fuel Combustion

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

     Turbotak Wet 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
remove  more  contaminants  in a smaller  vessel,  resulting  in lower  capital,
maintenance and operating costs.

     The TurboSorb  Semi-Dry  Scrubber  treats  industrial  process gas streams,
removing  acid gases  such as SO2,  SO3,  HCI,  HF, and  ammonia  compounds.  By
spraying  alkalis  such as  calcium,  potassium  and  sodium-based  slurries  or
solutions,  the TurboSorb 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.

     SoniChem NCG Chemical Oxidizers

     The Company's  SoniChem  Chemical Oxidizer system for  Non-Condensable  Gas
(NCG) treatment  chemically  destroys odorous compounds  including  sulfides and
mercaptan  emissions from pulping  operations.  A new alternative to traditional
thermal oxidation,  SoniChem requires less than 50% of the capital and operating
costs of  thermal  oxidation,  requires  no fuel,  has no  internal  packing  to
maintain,  operates  only when  needed  and  requires  no  additional  treatment
equipment.

     The Company has supplied  equipment for NCG gas treatment  associated  with
the traditional method of thermal oxidation.  One of the SoniChem  installations
has been in operation for over one year at a pulp mill. The successful operating
data from this  installation will allow the Company to market this technology to
the pulp and paper industry.

     Dry Fog(R) Dust Control and Suppression Systems

     The  Company  is a  leader  in  dust  control  with  its  Dry  Fog(R)  dust
suppression  systems which control  virtually all types of respirable and larger
airborne  dust and mists.  Operating  costs for the Dry Fog(R) 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(R) system can be installed for as little
as 40% of the cost of a conventional bag filter type system.

                                       5

<PAGE>


     The Company is an  internationally  known  leader in dust control with over
400 systems throughout the world. Dry Fog(R) 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 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,  the distribution  pattern
and rugged  construction  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(R)
nozzle design has different  aspects to the droplet size, spray pattern and very
low flow rates that make it a good fit for applications such as dust suppression
and humidification.

     With over 1,500 nozzles sold, the patented  Turbotak  Atomizing nozzles are
at the heart of most of the  Company's  air  pollution  control  systems and are
recognized by industry as  excellently  designed.  The  SoniCore(R)  nozzles are
installed in hundreds of plants worldwide.

     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.

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

                                       6

<PAGE>


Company's  contractual  arrangements  with  its  14  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,  as disclosed in note 18 of the financial  statements,  the
Company entered into a strategic alliance with Hamon Research-Cottrell,  Inc., a
global leader in air pollution  control  technology.  A joint  management  team,
consisting of sales,  marketing and engineering personnel from each company, has
been formed to target sales opportunities for their combined technologies.

     This  strategic  alliance  enables  Hamon  Research-Cottrell  to market the
Company's products,  including the SonicKleen(TM) Wet Electrostatic Precipitator
(WESP) and the TurboSOx SO2 Recovery  system,  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  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 including
number of prospective  leads generated and sales closure rates,  and the breadth
of territorial coverage, among other criteria.

     Technical  inquiries received from potential  customers are referred to the
Company's  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.

     Two customers,  Emtrol LLC (for equipment ultimately sold to Eastman Kodak)
and Thermal Ceramics,  accounted for 11% and 15% respectively,  of the Company's
net revenues during the fiscal year ended June 30, 2000.  During the fiscal year
ended June 30,  2001,  two  customers,  Norske Skog Canada Ltd. and Homanit USA,
Inc., accounted for 47% and 20% respectively, of the Company's net revenues.

Backlog

     At June  30,  2001,  the  amount  of the  Company's  contract  backlog  was
approximately  $1,642,000,  contrasted  with $986,000 at June 30, 2000.  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, 2002.

                                       7

<PAGE>


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 aggregated $47,239
and $37,311 for the fiscal years ended June 30, 2001 and 2000, respectively.

Proprietary Protection

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

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

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

Suppliers and Subcontractors

     Like  other  companies  in  the  industrial  processing  and  environmental
management  control  industry,  the  Company  has  historically  relied on third
parties to  manufacture  and  fabricate  its  products  and to supply  parts and
components for its systems in accordance with the Company's  specifications.  In
those  instances in which the Company's  scope of work includes  installation of
equipment,  the Company selects and supervises  subcontractors for this work. To
date,  the  Company  has  not  experienced   difficulties  either  in  obtaining
fabricated  components and other materials and parts used in any of its products
and systems or in  obtaining  qualified  subcontractors.  The  Company's  vendor
sources  for  various  components,  materials  and  parts  used in its  systems,
including  its  atomizing  nozzle,  control  switches and  electrical  and other
components,  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.

                                       8

<PAGE>


Bonding and Insurance

     While  only  two of the  contracts  performed  by the  Company  to date has
required  it to  procure  bid  and  performance  bonds,  such  requirements  are
prevalent  for projects  partially  or fully  funded by federal,  state or local
governments.  A bid bond  guarantees that a bidder will execute a contract if it
is awarded the job and a performance bond guarantees completion of the contract.

     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.

Government Regulation

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

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

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

Competition

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

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

                                       9

<PAGE>


Employees

     As of June 30,  2001,  the  Company  employed  30 full time and 1 part time
persons, of whom 2 were executive officers, 9 were engineers, 4 were in sales, 1
in production,  10 in technical support and 5 in administrative support. None of
the Company's  employees are represented by a labor union.  The Company believes
that its relationship with its employees is satisfactory.

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

     U.S. and Canadian  customers  collectively  accounted for approximately 93%
and 96% of the  Company's  sales during the fiscal years ended June 30, 2001 and
2000,  respectively.  Revenue  derived from export sales is  transacted  in U.S.
dollars.

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

                                                                  Year Ended
                                                                   June 30,
                                                               2001        2000
                                                               ----        ----
United States  ............................................      40%         83%
Canada  ...................................................      53%         13%
South and Central America  ................................       5%          2%
Far East  .................................................       1%          1%
Other  ....................................................       1%          1%
                                                               ----        ----
                                                                100%        100%
                                                               ====        ====

Forward-Looking Statements

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

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

                                       10

<PAGE>

          o Revenue  Concentration.  Sales to two customers accounted for 67% of
     the  Company's  net  revenues in the fiscal year ended June 30,  2001.  Two
     different  customers accounted for 26% 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.

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

          o Export  Sales.  Approximately  7% and 4% of the  Company's  revenues
     during the fiscal  years ended June 30, 2001 and 2000,  respectively,  were
     derived  from sales made outside of the United  States and Canada.  Foreign
     sales are subject to certain inherent risks,  including  unexpected changes
     in  regulatory  and other  legal  requirements,  tariffs  and  other  trade
     barriers,  great  difficulty  in  collection  of  accounts  receivable  and
     potentially adverse tax consequences.  There can be no assurance that these
     factors will not have an adverse  impact on the  Company's  future  foreign
     sales and, consequently, on the Company's operating results.

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

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

          o Competition.  Most of the Company's  competitors are larger and have
     greater  financial and other  resources  than the Company.  The markets for
     environmental  control  products  and  systems  are both  characterized  by
     substantial  competition  based primarily on engineering and  technological
     expertise and quality of service.  Because  virtually all contracts for the
     Company's  products and systems are obtained through  competitive  bidding,
     price is also a competitive  factor and may be the most significant  factor
     in certain instances. Although the Company believes that it competes on the
     basis of its technical  expertise and

                                       11

<PAGE>


     reputation  for service,  there can be no  assurance  that the Company will
     maintain its competitive position in its principal markets.

          o 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 Property

     The  Company  leases  approximately  9,700  square  feet of  executive  and
administrative offices and shop space in Waterloo,  Ontario, Canada at an annual
rent of approximately $48,000. Insurance and utilities are paid separately. This
lease expires on June 30, 2003 and, at the Company's option,  may be renewed for
an additional two year term on substantially identical terms.

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

Item 3. Legal Proceedings

     None.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters  were  submitted  for a vote to  Registrant's  security  holders
during the fourth quarter of Registrant's fiscal year ended June 30, 2001.

                                       12

<PAGE>

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

     The  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       Low
                                                             ------    ------
Fiscal Year Ended June 30, 2001:
     First Quarter  -------------------------------------    $1.250    $0.562
     Second Quarter  ------------------------------------    $1.250    $0.437
     Third Quarter  -------------------------------------    $0.875    $0.437
     Fourth Quarter  ------------------------------------    $0.750    $0.437

Fiscal Year Ended June 30, 2000:
     First Quarter  -------------------------------------    $0.531    $0.312
     Second Quarter  ------------------------------------    $0.490    $0.250
     Third Quarter  -------------------------------------    $2.125    $0.260
     Fourth Quarter  ------------------------------------    $1.250    $0.531

---------
     (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,  2001,  there were 552  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.

                                       13

<PAGE>


Item 6. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

Results of Operations

     Twelve  Months Ended June 30, 2001  Compared  with Twelve Months Ended June
30, 2000

     Nozzle systems revenue in fiscal 2001 increased $216,932 (7%) to $3,480,445
from  $3,263,513  in fiscal  2000,  due to an  increased  volume of spare  parts
orders.

     Fiscal  2001  Scrubber  system  revenue  increased   $7,716,376  (264%)  to
$10,634,425  from $2,918,049 in fiscal 2000. As revenue levels for scrubbers and
upgrades were  substantially  similar in fiscal 2001 and fiscal 2000, the fiscal
2001 increase was primarily due to the sale of a WESP to Norske Skog Canada Ltd.
for $6.5 million.  The Company  anticipates  that sales of WESPs will contribute
significantly to future revenues.

     Costs for Nozzle system  equipment for the  twelve-month  period ended June
30, 2001  decreased by $260,925  (12%) to  $1,834,530  from  $2,095,455  for the
corresponding  2000 period.  This  decrease is primarily  the result of improved
margins on the large  systems sold in the year  combined with a higher volume of
spare parts orders.  Expressed as a percentage of Nozzle system revenue, cost of
Nozzle  equipment in the current fiscal year was 53% as contrasted  with 64% for
the same period in 2000.  This  decrease was due to a product mix shift with the
inclusion of a greater volume of spare parts orders and improved  margins on the
larger jobs in the current fiscal year.

     Fiscal  2001 costs for  Scrubber  systems  equipment  increased  $7,459,581
(325%)  to  $9,754,375  from  $2,294,794  in the same  period  in 2000.  This is
primarily the result of the WESP sale noted above, as well as an upward revision
of $177,000 in the  estimated  contract  completion  costs in 2001 on a scrubber
project  as the  result  of  financial  difficulties  experienced  by one of the
Company's  subcontractors  subsequent  to year-end.  As a percentage of Scrubber
system  revenue,  Scrubber  system  costs  rose to 92% from 79% in the  previous
fiscal year.  This  increase is primarily  due to two  contracts  that  included
significant  equipment and services purchased from other vendors that was billed
to the customers at a significantly  lower margin than normally  charged for our
own equipment.  Also impacting was the $177,000  upward  revision of costs noted
above that  affected  both the gross  margin on that  project and the  Company's
overall costs as a percentage of Scrubber revenue.

     Total selling,  general and administrative expenses increased by $37,523 to
$1,698,286 as contrasted  with $1,660,763 for the same period in 2000. A portion
of these incremental costs relates to increased marketing  activities in general
with specific  emphasis on the WESP product  line.  Expressed as a percentage of
total revenue,  selling,  general and  administrative  expenses were 12% for the
current twelve month period ended June 30, 2001 and 27% for the preceding twelve
month fiscal  period.  Also  included in fiscal 2001  expenses  are  stock-based
compensation  recovery ($17,715) [see note 12] relating to the 2000 Stock Option
Plan, as compared to the expense  incurred of $44,061 in the year ended June 30,
2000.  Additionally,  debt  modification  expense of $40,678 was recorded in the
year ended June 30, 2001 relative to loans from shareholders [see note 9].

     Net  Interest  expense  decreased  $26,683  (71%) to $10,788 for the twelve
months  ended June 30, 2001 as  compared  to $37,471 in the 2000 fiscal  period.
This  decrease  is the result of  interest  earned on cash  balances  offsetting
interest expense on shareholder loans.

                                       14

<PAGE>


Liquidity and Capital Resources

     The Company had positive cash flow from operating  activities of $1,397,934
for the twelve month period  ended June 30, 2001,  as compared to positive  cash
flow of $96,813 for the same period in fiscal 2000, an  improvement in cash flow
of $1,301,121.

     On an overall basis, the Company had a positive cash flow of $1,370,820 for
fiscal 2001 as compared to positive cash flow of $96,840  during the same period
in 2000.  This increase in overall cash flow is primarily  the result  increased
operating earnings in fiscal 2001.

     At June 30, 2001, the Company had positive working capital of $1,216,432 as
compared  to  positive  working  capital of  $631,559  as at June 30,  2000,  an
increase of $584,873.  The Company's  current ratio  (current  assets divided by
current  liabilities)  was 1.34 and  1.40 at June  30,  2001 and June 30,  2000,
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,  2001,  "Deferred  contract  costs  and  unbilled
revenue" exceeded  "Unearned  revenue and contract  advances" by $49,163 thereby
positively  affecting  working  capital.  At June 30, 2000,  working capital was
negatively affected by $150,335.

     As a consequence of a working capital  deficiency  incurred in fiscal 1998,
Donald R.  Spink,  Sr. and  Patrick J.  Forde,  directors  and  officers  of the
Company,  together with two  shareholders  of the Company,  lent an aggregate of
Canadian  $400,000  (representing  $261,510 at the exchange  rate at the date of
each loan) to the Company in fiscal  1999.  These loans were  extended in fiscal
2001 (see Note 9 to the Consolidated Financial Statements).

     The Company's backlog as at June 30, 2001 was approximately $1,642,000, all
of which  should be shipped  during the 2002 fiscal year.  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, 2002.

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 Statements

     Reference  is made to pages F-1 through  F-25  comprising a portion of this
Annual Report on Form 10-KSB.

                                       15

<PAGE>


Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

     None.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act

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

        Name                   Age         Positions and Offices
        ----                   ---         ----------------------

Dr. Donald R. Spink, Sr.       78          Director

Edward F. Spink                47          Chairman of the Board and CEO

Patrick J. Forde               68          President, Secretary/Treasurer
                                           and Director

Richard H. Hurd                64          Director

Jonathan Lagarenne             41          Director

     EDWARD  F.  SPINK  has  served  as  President  of  the  Company  since  the
Consolidation  Date (August 27, 1997) 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.

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

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

                                       16

<PAGE>


     JONATHAN  LAGARENNE  was elected to the Board of  Directors at the July 30,
2001 meeting.  He is presently Chief Executive  Officer of Hamon Corporation and
previously  held the  position of Chief  Operating  Officer and General  Counsel
there from July 1998 to May 2000.  He held the  position  of Vice  President  of
Research-Cottrell from 1995 to July 1998.

     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,  2001,  all  filing  requirements  applicable  to its  officers,
directors and greater than 10% beneficial owners were complied with.

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, 2001,  2000 and
1999 to its chief  executive  officer.  No other officer  received  compensation
exceeding  $100,000  during its fiscal  year  ended  June 30,  2001 (the  "Named
Officer"):

                                                             LONG TERM
                       ANNUAL COMPENSATION              COMPENSATION AWARDS
                       -------------------              -------------------
                                                                       SHARES
                                                                     UNDERLYING
NAME AND          YEAR                                                NUMBER OF
PRINCIPAL         ENDED                              OTHER ANNUAL    OPTIONS AND
POSITION         June 30,    SALARY      BONUS       COMPENSATION      WARRANTS
--------         -------     ------      -----       ------------      -------
Edward F. Spink   2001      $65,821         --        $36,509 (2)       10,000
 CEO              2000      $67,797         --        $11,156 (2)       50,000
                  1999      $66,243     $3,505 (1)         --               --

(1)  Commissions  represent a fixed  percentage of sales recorded in each fiscal
     year. Effective July 1, 1998, Edward F. Spink's compensation was revised to
     include a base  salary of  $100,000  Canadian  (US$68,000  at $1.47) plus a
     discretionary  bonus to be determined at the end of each fiscal year by the
     Board of Directors.

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

                                       17

<PAGE>


Option Grants in Fiscal 2001

                 Number of Shares    % of Total
                    Underlying     Options Granted   Exercise     Expiration
                  Options Granted   to Employees       Price         Date
                  ---------------   ------------       -----         ----

Edward F. Spink       10,000            100%           0.5625   October 15, 2006

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


<TABLE>
<CAPTION>
                                                     Number of Securities
                                                    Underlying Unexercised           Value of Unexercised
                Number of Shares        Value       Options or Warrants at           In-The-Money Options
              Acquired on Exercise    Received          Fiscal Year End               at Fiscal Year End
              --------------------    --------          ---------------               ------------------
                                                 Exercisable    Unexercisable    Exercisable    Unexercisable
                                                 -----------    -------------    -----------    -------------
<S>                    <C>              <C>         <C>            <C>              <C>            <C>
Edward F. Spink        0                $0.00       18,000         42,000           $4,320         $8,455
</TABLE>

Employment Agreements

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

Item 11. Security Ownership of Certain Beneficial Owners and Management

     The  following  table  sets  forth,  as of June 30,  2001 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  Officer  and by all of the
executive officers and directors of the Company as a group.

Name and Address of                Number of Shares             Approximate
Beneficial Owner or                Beneficially                 Percentage
Identity of Group                  Owned (1) (2)                 of Class
-----------------                  -------------                 --------

Dr. Donald R. Spink, Sr. *            3,300,432 (3)(6)(7)(8)       30.1%

Edward F. Spink *                       465,338 (8)(9)              4.2%

Patrick J. Forde  *                     879,158 (4)(6)(7)(8)        8.0%

Richard H. Hurd**                       123,938 (5)(8)              0.2%

Canadian Venture Founders             1,337,977                    12.2%
    293 Church Street
    Oakville, Ontario L6J 1N9
    Canada

All executive officers                4,669,366 (2)-(9)            42.5%
    and directors as a
    group (4 persons)

                                       18

<PAGE>

---------
*    c/o  TurboSonic  Technologies,   Inc.,  550  Parkside  Drive,  Suite  A-14,
     Waterloo, Ontario N2L 5V4, Canada.

**   c/o TurboSonic Technologies, Inc., 11 Melanie Lane, Unit 22A, East Hanover,
     NJ 07936

(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 for each of Dr.  Donald Spink and Mr.  Patrick  Forde to
     purchase  100,000  common  shares  at an  initial  exercise  price of $0.50
     through October 21, 2000, and January 1, 2002  respectively,  increasing to
     $0.75 thereafter through October 21, 2002 and January 1, 2003, and to $1.00
     thereafter  through October 21, 2003and January 1, 2004,  respectively (see
     Note 9 to the Consolidated Financial Statements).

(7)  Includes  warrants for each of Dr.  Donald Spink and Mr.  Patrick  Forde to
     purchase  100,000  common  shares at an exercise  price of $0.5625  through
     October 31, 2000,  increasing to $0.75 thereafter  through October 31, 2002
     and to $1.00 thereafter through October 31, 2003,  respectively (see Note 9
     to the Consolidated Financial Statements).

(8)  Includes  10,000 shares  issuable  upon  exercise of an option  expiring in
     October 15, 2005 at an exercise price of $0.40, which option was granted to
     directors pursuant to the 2000 Stock Option Plan.

(9)  Includes  8,000  shares  issuable  upon  exercise of an option  expiring in
     October 15, 2006 at an exercise price of $0.40, which option was granted to
     employees pursuant to the 2000 Stock Option Plan.

Item 12. Certain Relationships and Related Transactions

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

                                       19

<PAGE>


repayment  of the loans to three years from the date of the loans.  The warrants
originally  issued to them were amended by extending the various  exercise dates
by one year and the  "...10  consecutive  trading  days  ..." to 30 days.  As an
inducement to agree to such amendments,  the Company issued additional  warrants
to purchase an aggregate of 200,000  common shares of the Company at an exercise
price of $0.5625 per share,  being equal to [in excess of] the then market price
of the Company's Common Stock to Dr. Spink and Mr. Forde. These warrants,  which
have the same terms as the original  warrants,  are exercisable  between October
21, 2000 and October 20, 2003.

                                     PART IV

Item 13. Exhibits and Reports on Form 8-K

(a)  Exhibits:

     (i)  Exhibits

          21 - Subsidiaries

(b)  Reports on Form 8K: None.

                                       20

<PAGE>


                                   SIGNATURES

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

                                        TURBOSONIC TECHNOLOGIES, INC.


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

Date: October 5, 2001

     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    October 5, 2001
------------------------------   Directors (Principal
Edward F. Spink                  Executive Officer)

/s/ Patrick J. Forde             President, Secretary,       October 5, 2001
------------------------------   Treasurer and Director
Patrick J. Forde                 (Principal Financial and
                                 Accounting Officer)

/s/ Richard H. Hurd              Director                    October 5 2001
------------------------------
Richard H. Hurd

/s/ Donald R. Spink, Sr.         Director                    October 5, 2001
------------------------------
Dr. Donald R. Spink, Sr.

                                       21

<PAGE>


                                                                      EXHIBIT 21


                          TURBOSONIC TECHNOLOGIES, INC.

                                  SUBSIDIARIES


                                      State of
Name                                Incorporation            % Ownership
----                                -------------            -----------

Sonic Fabricating, Inc.               Delaware                   100%

Sonic Thermal Systems, Inc.           Delaware                    80%

Euthenergy International, Inc.        Delaware                    80%

TurboSonic Canada, Inc.               Canada (Ontario)           100%

Turbotak Technologies, Inc.           Canada (Ontario)           100%

TurboSonic, Inc.                      Canada (Ontario)           100%

Turbotak USA Inc.                     Michigan                   100%


                                       22

<PAGE>


                          INDEPENDENT AUDITORS' REPORT



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, 2001 and 2000 and the related
consolidated statements of income and comprehensive income, 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 United  States  generally  accepted
auditing  standards.  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,  2001  and  2000 and the
consolidated  results  of its  operations  and its cash flows for the years then
ended in conformity with United States generally accepted accounting principles.

                                                       /s/ Ernst & Young LLP

                                                       Ernst & Young LLP
Kitchener, Canada,
August 23, 2001.                                       Chartered Accountants


                                      F-1

<PAGE>


TurboSonic Technologies, Inc. and Subsidiaries
[Incorporated under the laws of Delaware, United States of America]

                           CONSOLIDATED BALANCE SHEETS


As at June 30                               [expressed in United States dollars]

                                                       2001               2000
                                                        $                  $
--------------------------------------------------------------------------------

ASSETS
Current
Cash and cash equivalents                            1,778,604           407,784
Accounts receivable [note 4]                         1,698,139           972,911
Income taxes receivable                                   --              25,239
Inventories [note 5]                                    78,790           105,729
Deferred contract costs and
  unbilled revenue [note 6]                          1,257,351           647,214
Other current assets                                    32,574            52,947
--------------------------------------------------------------------------------
Total current assets                                 4,845,458         2,211,824
--------------------------------------------------------------------------------
Capital assets [note 7]                                115,427           142,595
Goodwill, less accumulated
  amortization [note 8]                                797,794         1,024,577
Other assets                                            20,780            20,780
--------------------------------------------------------------------------------
                                                       984,001         1,187,952
--------------------------------------------------------------------------------
Total assets                                         5,779,459         3,399,776
================================================================================

See accompanying notes

                                      F-2

<PAGE>


<TABLE>
<CAPTION>
                                                                       2001               2000
                                                                         $                  $
-------------------------------------------------------------------------------------------------
<S>                                                                  <C>                  <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable                                                     1,800,348            507,290
Accrued charges                                                        292,325            253,648
Loans from shareholders [note 9]                                       230,100                 --
Obligations under capital leases, current portion [note 10]             21,297             21,778
Unearned revenue and contract advances [note 6]                      1,208,188            797,549
Income taxes payable                                                    76,768                 --
-------------------------------------------------------------------------------------------------
Total current liabilities                                            3,629,026          1,580,265
-------------------------------------------------------------------------------------------------
Accrued charges                                                         38,066             75,140
Loans from shareholders [note 9]                                            --            268,103
Obligations under capital leases, long-term portion [note 10]           33,902             60,332
-------------------------------------------------------------------------------------------------
                                                                     3,700,994          1,983,840
-------------------------------------------------------------------------------------------------
Commitments and contingencies [note 11]
Shareholders' equity [note 12]
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
     5,285,358  common shares [2000 - 3,767,436]
     4,714,642  Class B exchangeable shares [2000 - 6,232,564]       2,299,096          2,299,096
Additional paid-in capital                                           1,549,624          1,492,099
-------------------------------------------------------------------------------------------------
                                                                     3,848,720          3,791,195
Accumulated other comprehensive (loss)                                 (38,326)           (50,293)
(Deficit)                                                           (1,731,929)        (2,324,966)
-------------------------------------------------------------------------------------------------
Total shareholders' equity                                           2,078,465          1,415,936
-------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                           5,779,459          3,399,776
=================================================================================================
</TABLE>

                                      F-3

<PAGE>


TurboSonic Technologies, Inc. and Subsidiaries


           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Year ended June 30                          [expressed in United States dollars]


                                                           2001         2000
                                                            $            $
-------------------------------------------------------------------------------

CONTRACT REVENUE AND SALES                              14,114,870    6,181,562
Contract costs and cost of sales                        11,588,905    4,390,249
-------------------------------------------------------------------------------
Gross margin                                             2,525,965    1,791,313
-------------------------------------------------------------------------------

EXPENSES
Selling, general and administrative                      1,698,286    1,660,763
Research and development                                    47,239       37,311
Stock-based compensation (recovery) expense [note 12]      (17,715)      44,061
-------------------------------------------------------------------------------
                                                         1,727,810    1,742,135
-------------------------------------------------------------------------------
Income from operations                                     798,155       49,178
-------------------------------------------------------------------------------
Other income (expense)
Interest income                                             30,597        7,341
Interest expense                                           (41,385)     (44,812)
Debt modification expense [note 9]                         (40,678)          --
-------------------------------------------------------------------------------
                                                           (51,466)     (37,471)
-------------------------------------------------------------------------------
Income before provision for income taxes                   746,689       11,707
Provision for income taxes [note 13]                       153,652       24,828
-------------------------------------------------------------------------------
Net income (loss)                                          593,037      (13,121)
Other comprehensive income (loss):
   Foreign currency translation adjustment                  11,967      (29,357)
-------------------------------------------------------------------------------
Comprehensive income (loss)                                605,004      (42,478)
===============================================================================

Basic earnings per share [note 14]                           $0.06        $0.00
===============================================================================
Diluted earnings per share [note 14]                         $0.06        $0.00
===============================================================================
Basic weighted average shares [note 14]                 10,000,000   10,000,000
===============================================================================
Diluted weighted average shares [note 14]               10,160,436   10,059,214
===============================================================================

See accompanying notes

                                      F-4

<PAGE>


TurboSonic Technologies Inc. and Subsidiaries


                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


Year ended June 30                          [expressed in United States dollars]



<TABLE>
<CAPTION>
                                                                                      Accumulated
                                       Exchangeable &        Additional                   other         Total
                                        common stock          paid-in    Accumulated  comprehensive  shareholders'
                                     Shares       Amount      capital      deficit       income        equity
                                          #           $           $             $           $            $
-----------------------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>          <C>          <C>           <C>         <C>
Balance - June 30, 1999              10,000,000   2,299,096    1,448,038    (2,311,845)   (20,936)    1,414,353
Net (loss)                                   --          --           --       (13,121)        --       (13,121)
Stock-based compensation [note 12]           --          --       44,061            --         --        44,061
Translation adjustment                       --          --           --            --    (29,357)      (29,357)
-----------------------------------------------------------------------------------------------------------------
Balance - June 30, 2000              10,000,000   2,299,096    1,492,099    (2,324,966)   (50,293)    1,415,936
Net income                                   --          --           --       593,037         --       593,037
Stock-based compensation [note 12]           --          --      (17,715)           --         --       (17,715)
Debt modification                            --          --       75,240            --         --        75,240
Translation adjustment                       --          --           --            --     11,967        11,967
-----------------------------------------------------------------------------------------------------------------
Balance - June 30, 2001              10,000,000   2,299,096    1,549,624    (1,731,929)   (38,326)    2,078,465
=================================================================================================================
</TABLE>

See accompanying notes

                                      F-5

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended June 30                          [expressed in United States dollars]

<TABLE>
<CAPTION>
                                                                       2001        2000
                                                                        $           $
-----------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>
OPERATING ACTIVITIES
Net income (loss)                                                     593,037     (13,121)
Add (deduct) charges to operations not requiring a
   current cash payment:
    Stock-based compensation (recovery) expense                       (17,715)     44,061
    Debt modification expense                                          40,678          --
    Depreciation and amortization                                     193,170     195,616
    Benefit of tax loss carryforwards applied to reduce goodwill       75,000          --
-----------------------------------------------------------------------------------------
                                                                      884,170     226,556
Changes in non-cash working capital balances related
   to operations [note 15]                                            513,764    (129,743)
-----------------------------------------------------------------------------------------
Cash provided by operating activities                               1,397,934      96,813
-----------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of capital assets                                            (17,106)     (4,417)
-----------------------------------------------------------------------------------------
Cash (applied to) investing activities                                (17,106)     (4,417)
-----------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Repayment of capital leases                                           (25,027)    (12,996)
-----------------------------------------------------------------------------------------
Cash (applied to) financing activities                                (25,027)    (12,996)
-----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                                15,019      17,440
-----------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------
Net cash provided during year                                       1,370,820      96,840
Cash, beginning of year                                               407,784     310,944
-----------------------------------------------------------------------------------------
Cash, end of year                                                   1,778,604     407,784
=========================================================================================

Cash paid for:
Interest                                                               38,296      42,277
Income taxes                                                              837      41,261
=========================================================================================
</TABLE>

See accompanying notes

                                      F-6

<PAGE>


TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of consolidation

The consolidated  financial  statements  include the accounts of the Company and
its  majority-owned   subsidiaries.   All  material  intercompany  accounts  and
transactions have been eliminated in consolidation.

Inventories

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

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

Goodwill

Goodwill,  which arose on the reverse  acquisition  of TurboSonic  Technologies,
Inc. is being amortized to expense on a straight-line  basis over 10 years.  The
Company  assesses  the  recoverability  of goodwill by  determining  whether the
amortization  of  goodwill  over its  remaining  life can be  recovered  through
projected, undiscounted, future cash flows from the related operations. Goodwill
is written down to the extent that projected  undiscounted  future cash flows do
not allow for the recovery of goodwill over its remaining life.

Capital assets

Capital assets and leasehold improvements are recorded at cost.  Depreciation is
calculated on the  straight-line  method over the estimated  useful lives of the
assets as follows:

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

                                      F-7

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

Revenues and long-term contracts

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

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

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

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
statement of income as a reduction of these expenses. Grants received to finance
capital  expenditures  are  applied  to reduce the cost of the  related  capital
assets.

Investment tax credits

Investment  tax credits are accrued when  qualifying  expenditures  are made and
there is reasonable assurance that the credits will be realized.  Investment tax
credits earned with respect to current  expenditures for qualified  research and
development  activities  are  included  in  the  statement  of  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.

                                      F-8

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

Income taxes

The Company  accounts  for income taxes in  accordance  with the  provisions  of
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
["SFAS  109"].  SFAS  109  requires  recognition  of  deferred  tax  assets  and
liabilities  for the expected  future tax  consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and  liabilities are determined  based on the difference  between the
financial  statement and tax bases of assets and  liabilities  using enacted tax
rates in effect for the year in which the differences are expected to reverse. A
valuation  allowance against the deferred tax assets is provided when it is more
likely  than not that a  portion  or all of a  deferred  tax  asset  will not be
realized.

Advertising costs

All costs  associated with  advertising  and promoting  products are expensed as
incurred.  Advertising  and  promotion  expense was $28,304 in 2001  [$21,796 in
2000].

Stock-based compensation

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

Earnings per share

Basic earnings per share is computed by dividing net income  available to common
shareholders by the weighted average number of common shares  outstanding during
the period.  In computing  the earnings per share,  the  TurboSonic  Canada Inc.
Class B exchangeable  shares,  disclosed in note 12, are considered  outstanding
common  shares of  TurboSonic  Technologies,  Inc.  Diluted  earnings  per share
reflects  the per share  amount that would have  resulted if dilutive  potential
common stock had been converted to common stock, as prescribed by SFAS 128.

Foreign currency translation

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

                                      F-9

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

Use of estimates

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

Impact of recently issued accounting standards

In  June  2001,  the  Financial   Accounting  Standards  Board  ["FASB"]  issued
Statements of Accounting Standard ["SFAS"] No. 141, Business  Combinations,  and
SFAS No. 142, Goodwill and Other Intangible  Assets,  effective for fiscal years
beginning  after  December 15, 2001.  In accordance  with these  pronouncements,
goodwill [and intangible  assets deemed to have indefinite lives] will no longer
be amortized but will be subject to annual  impairment  tests.  Other intangible
assets will continue to be amortized over their useful lives.

The  Company  will  apply the new rules on  accounting  for  goodwill  and other
intangible  assets  beginning in the first quarter of 2002.  Application  of the
non-amortization  provisions  of the  statement  is  expected  to  result  in an
increase in net income of $150,000 [$0.02 per share] per year.  During 2002, the
Company will perform the first of the required  impairment tests of goodwill and
indefinite  lived  intangible  assets  as of  January  1,  2002  and has not yet
determined  what the effect of these tests will be on the earnings and financial
position of the Company.

3. FINANCIAL INSTRUMENTS

Fair value of financial instruments

The  carrying   amounts  reported  in  the  balance  sheet  for  cash  and  cash
equivalents,  accounts  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.

Financial  instruments  which are  denominated  in  currencies  other  than U.S.
dollars  are  subject to  exchange  rate risk.  At June 30, the  Company had the
following Canadian dollar denominated financial  instruments  [converted to U.S.
dollar equivalents].

                                                           2001            2000
                                                             $               $
--------------------------------------------------------------------------------

Cash and cash equivalents                                1,685,807       328,844
Accounts receivable                                        148,456       143,734
Accounts payable                                         1,630,427       442,530
Loans from shareholders                                    230,100       268,103
Accrued charges                                            176,394       143,867
Income taxes payable                                        81,405            --

The Company does not use financial  instruments to mitigate the foreign exchange
risk.

                                      F-10

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

3. FINANCIAL INSTRUMENTS cont'd

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, 2001,  the Company had two  customers  that  comprised 58% of the
total trade  receivable  balance and had two customers that comprised 42% of the
total trade receivable balance at June 30, 2000.

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.

4. ACCOUNTS RECEIVABLE

                                                        2001              2000
                                                          $                 $
--------------------------------------------------------------------------------

Trade accounts receivable                             1,699,356         981,799
Other receivables                                        50,498          53,016
Allowance for doubtful accounts                         (51,715)        (61,904)
-------------------------------------------------------------------------------
                                                      1,698,139         972,911
===============================================================================

Bad debt expense was $714 in 2001 and $4,818 in 2000.

5. INVENTORIES

                                                       2001               2000
                                                         $                  $
--------------------------------------------------------------------------------

Raw materials                                             970             5,657
Finished goods                                        178,924           314,971
Reserve for obsolescence                             (101,104)         (214,899)
-------------------------------------------------------------------------------
                                                       78,790           105,729
===============================================================================

                                      F-11

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

6. COST AND ESTIMATED EARNINGS ON UNCOMPLETED
    CONTRACTS

                                                       2001             2000
                                                         $               $
-------------------------------------------------------------------------------

Costs incurred on uncompleted contracts              11,394,645       3,087,601
Estimated earnings                                    1,489,467       1,070,693
-------------------------------------------------------------------------------
                                                     12,884,112       4,158,294
Less billings to date                               (12,834,949)     (4,308,629)
-------------------------------------------------------------------------------
                                                         49,163        (150,335)
===============================================================================

Included in the accompanying balance sheets under the following captions:

                                                             2001        2000
                                                              $            $
-------------------------------------------------------------------------------

Costs and estimated earnings in excess of billings on
   uncompleted contracts                                  1,257,351     647,214
Billings in excess of costs and estimated earnings on
   uncompleted contracts                                 (1,208,188)   (797,549)
-------------------------------------------------------------------------------
                                                             49,163    (150,335)
-------------------------------------------------------------------------------

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  have been  revised  upward by  $177,000  in the
accompanying  financial  statements.  Management  has  based  this  estimate  on
information available about the subcontractor's  status and an assessment of its
own  obligations  under the contract  with its  customer.  Due to  uncertainties
related to obligations of the  subcontractor  that the Company will assume,  the
estimate of  additional  costs that the  Company  could  ultimately  incur could
differ materially in the near term from the estimated costs.

7. CAPITAL ASSETS

                                                       Accumulated      Net Book
                                            Cost       Depreciation      Value
2001                                          $              $             $
-------------------------------------------------------------------------------

Office equipment                           475,272        404,785         70,487
Other equipment                            359,853        322,354         37,499
Leasehold improvements                      23,205         15,764          7,441
--------------------------------------------------------------------------------
                                           858,330        742,903        115,427
================================================================================

                                      F-12

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

7. CAPITAL ASSETS cont'd

                                                        Accumulated     Net Book
                                            Cost       Depreciation       Value
2000                                          $              $              $
--------------------------------------------------------------------------------

Office equipment                           455,573        379,713         75,860
Other equipment                            369,041        313,924         55,117
Leasehold improvements                      23,678         12,060         11,618
--------------------------------------------------------------------------------
                                           848,292        705,697        142,595
================================================================================

Total depreciation  incurred by the Company during fiscal 2001 was $41,358 [2000
- $45,952].

The total  depreciation  for assets under capital  leases during fiscal 2001 was
$30,150 [2000 - $8,140].

The  purchase  of certain  capital  assets was  accomplished  through the use of
capital leases. Capital assets under capital leases at June 30 are as follows:

                                                        Accumulated     Net Book
                                            Cost       Depreciation       Value
2001                                          $              $              $
--------------------------------------------------------------------------------
                                           102,308         38,442         63,686

                                                        Accumulated     Net Book
                                            Cost       Depreciation       Value
2000                                          $              $              $
--------------------------------------------------------------------------------
                                           103,246          8,140         95,106

8. GOODWILL

                                                        Accumulated     Net Book
                                            Cost       Depreciation       Value
2001                                          $              $              $
--------------------------------------------------------------------------------
                                         1,472,228        674,434        797,794

                                                        Accumulated     Net Book
                                            Cost       Depreciation       Value
2000                                          $              $              $
--------------------------------------------------------------------------------
                                         1,557,191        532,614      1,024,577

                                      F-13

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

8. GOODWILL cont'd

Amortization  charged to income in fiscal 2001 was $151,812  [$176,409 in 2000].
In  2001,  $75,000  in  tax  benefits  arising  from  the  recognition  of  loss
carryforwards  were  applied  to  reduce  the  carrying  amount of  goodwill  as
disclosed in note 13.

9. LOANS FROM SHAREHOLDERS

An officer and director of the Company, together with another shareholder of the
Company,  lent  an  aggregate  of Cdn  $200,000  [representing  $129,400  at the
exchange  rate of $0.647 at such  date] to the  Company  on  October  21,  1998.
Another  officer and  director  and another  shareholder  each lent Cdn $100,000
[representing  $65,490 and $66,620 at the exchange  rates of $0.6549 and $0.6662
at the date of their  respective  loans] to the  Company  on January 4, 1999 and
April 9, 1999,  respectively.  All of these loans were  initially  repayable two
years  from  the  date of the  loan,  bear  interest  at 10% per  annum  and are
collateralized  by a lien upon and security interest in substantially all of the
Company's  assets.  As an  inducement  to advance  these sums,  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.  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.

On July 10, 2000,  officers,  directors  and  shareholders  agreed to extend the
maturity dates of their respective loans by an additional year. Accordingly, the
due dates are  October  21,  2001,  January  4,  2002 and April 9,  2002.  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  terms and periods of the warrants  were  modified to state 90 days after
the Company has notified the warrant holders in writing,  that the shares in the
common  stock of the Company  have closed at a trading  price above $1.50 for 30
consecutive  trading  days on the NASDAQ  over-the-counter  Bulletin  Board.  In
accordance with EITF 96-19, the modification of the term of the shareholder loan
was not considered to result in a substantially  different debt instrument.  The
new warrants and the  modification  of existing  warrants  were recorded at fair
value as debt  modification  costs  [$75,240]  in  October  2000  and are  being
amortized using the interest method over the new term of the debt.

10. OBLIGATIONS UNDER CAPITAL LEASES

The Company has entered into certain  capital  leases for computer  hardware and
software.

                                      F-14

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

10. OBLIGATIONS UNDER CAPITAL LEASES cont'd

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

                                                                            $
--------------------------------------------------------------------------------

2002                                                                     31,815
2003                                                                     23,705
2004                                                                      3,747
2005                                                                      3,473
-------------------------------------------------------------------------------
Total minimum lease payments                                             62,568
Less amount representing interest                                        (7,369)
-------------------------------------------------------------------------------
                                                                         55,199
Less current portion                                                    (21,297)
-------------------------------------------------------------------------------
                                                                         33,902
===============================================================================

11. COMMITMENTS AND CONTINGENCIES

[a]  Operating leases

The Company has entered into operating leases for office equipment and premises.
Total minimum  annual  payments under these leases for years after June 30, 2001
are as follows:

                                                                             $
-------------------------------------------------------------------------------

2002                                                                     98,110
2003                                                                     43,226
2004                                                                      3,220
2005                                                                      3,220
2006                                                                      1,274
-------------------------------------------------------------------------------
                                                                        149,050
===============================================================================

Rental expense for office  equipment and premises was $118,678 in 2001 [$120,117
in 2000].

[b]  Contingent 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.

                                      F-15

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

12. 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  the  current  fiscal  year,   1,517,922  Class  B
exchangeable  shares were  exchanged for common  shares of the Company,  leaving
5,285,358 Common shares,  and 4,714,642 Class B exchangeable  shares outstanding
as of June 30, 2001.

Stock-based compensation

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

The Company has  instituted  the 2000 stock plan [the  "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 as qualified "incentive stock options" ["ISO's"] under section 522[b] of
the  Internal  Revenue Code of 1986,  as amended  [the "Code"] or  non-qualified
"incentive  stock  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  Plan  shall  be  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 ISO and each non-qualified stock option granted under the 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 Plan, is 750,000, subject to certain adjustments.

On February 9, 2000,  the Company  adopted the Plan and provided that 20% of the
total number of shares covered by an option granted to employees  under the Plan
would be  exercisable  each year on a cumulative  basis over a five year period,
provided that the Company's  annual business plan targets with regard to revenue
and net operating income were met for each preceding fiscal year.  However,  the
Board of Directors  retained the right at its sole  discretion to allow exercise
of all or a portion of the shares granted if the corporate targets were not met.
A total of 500,000 options were granted at that date to all full-time  employees
at an exercise  price of $0.40.  On February 9, 2000,  a total of seven  Company
directors  and advisers  were granted  options to purchase  10,000 common shares
each at an exercise price of $0.40.  These options were also tied to meeting the
Company's business plan targets.

In July 2000, the Board of Directors waived the business plan target requirement
relative to fiscal 2000 for the options so granted to the  employees,  directors
and advisers. These options became exercisable on October 15,

                                      F-16

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

12. SHAREHOLDERS' EQUITY cont'd

2000. The employee  options expire on October 15, 2006 and the  director/adviser
options expire on October 15, 2005.

On July 10, 2000, a total of seven  Company  directors and advisers were granted
options to purchase 10,000 common shares each at an exercise price of $0.5625.

At the grant dates,  the number of options  which would be received was unknown,
due to the requirement to meet the business plan targets. Therefore, the Company
accounted  for these  variable  stock  option plans in  accordance  with FIN 28,
Accounting  for Stock  Appreciation  Rights and Other  Variable  Stock Option or
Award Plans.  Stock-based  compensation  expense totaling $44,061 was recognized
during fiscal 2000 and a recovery of $17,715 has been  recognized  during fiscal
2001.

During the third quarter of fiscal 2001, the 2000 stock option plan was amended.
Amendment to the option plan  provided  that the  applicable  options for fiscal
years 2000 through 2004 shall be exercisable  commencing on October 15, 2004. If
the business  targets are met, the options are  exercisable at earlier  periods.
The  amendment to the plan has changed it to a  non-variable  plan by fixing the
number of options.

As a result of the amendment,  the plan is being accounted for as a non-variable
plan from the date of  amendment  in  accordance  with FIN 28.  The  stock-based
compensation  expense was fixed based on the market price of the Company's stock
on the date of  amendment,  and is being  amortized  over the  options'  vesting
period.

The Company  accounts for option grants  subsequent to the amendment of the plan
in accordance with APB Opinion No. 25, Accounting for Stock Issues to Employees.

Subsequent to June 30, 2001, the Board of Directors  confirmed that the business
plan  target  requirement  was met  relative  to fiscal  2001 for the options so
granted  to  the  employees,   directors  and  advisers.  These  options  became
exercisable immediately. The employee options expire on October 15, 2006 and the
director/adviser options expire on October 15, 2006.

                                      F-17

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

12. SHAREHOLDERS' EQUITY cont'd

A summary of the option activity since June 30, 1999 is shown below:

                                                        Options Outstanding
--------------------------------------------------------------------------------
                                                                       Weighted
                                                                        average
                                                                       exercise
                                                      Shares             price
                                                          #                  $
--------------------------------------------------------------------------------

Balance, June 30, 1999                                   --                  --
   Granted during year                              570,000               0.4000
   Exercised during the year                             --                  --
   Cancelled during the year                             --                  --
Balance, June 30, 2000
   Granted during the year                           70,000               0.5625
   Exercised during the year                             --                  --
   Cancelled during the year                             --                  --
--------------------------------------------------------------------------------
Balance, June 30, 2001                              640,000               0.4178
================================================================================

The weighted average characteristics of options outstanding at June 30, 2001 are
as follows:

<TABLE>
<CAPTION>
                   Options outstanding                                 Options exercisable
-------------------------------------------------------------       ------------------------
                                   Weighted
  Range           Weighted          average                                         Weighted
   of              average         remaining                                         average
exercise          exercise        contractual       Number            Number        exercise
  price             price            life         outstanding       exercisable      price
    $                 $             [years]            #                 #              $
--------------------------------------------------------------------------------------------
<S>                <C>                <C>          <C>                <C>              <C>
 0.4000            0.4000             5.17         570,000            170,000          0.40
 0.5625            0.5625             5.29          70,000                 --            --
-------------------------------------------------------------------------------------------
                   0.4178             5.18         640,000            170,000          0.40
===========================================================================================
</TABLE>

Proforma 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 these  options was  estimated at the date of grant
using a  Black-Scholes  option  pricing  model with the  following  assumptions;
risk-free  interest rate of 6.0% [6.0% - 2000],  dividend  yield of 0.0% [0.0% -
2000],  volatility  factor of the expected market price of the Company's  common
stock of 1.28 [1.31 - 2000] and a weighted-average  expected life of the options
of 5.26 [5.26 - 2000] years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options,  which have no vesting  restrictions and are fully
transferable.  In  addition,  option  value  models  require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the Company's employee,  director and adviser stock options have characteristics
significantly  different  from  those of traded  options  and

                                      F-18

<PAGE>


12. SHAREHOLDERS' EQUITY cont'd

because changes in the subjective  input  assumptions can materially  affect the
fair  value  estimate,  in  management's  opinion,  the  existing  models do not
necessarily provide a reliable single measure of the fair value of its employee,
director and adviser stock options.

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

                                                            2001         2000
                                                              $            $
--------------------------------------------------------------------------------

Pro forma income                                           564,004       11,893
Pro forma income per share:
   Basic                                                      0.06         0.00
   Diluted                                                    0.06         0.00

Warrants

The Company has in the past  granted  detachable  warrants for a fixed number of
common shares to debt holders and options for common shares to certain directors
[note 9].

13. INCOME TAXES

Details of the income tax provision are as follows:

                                                            2001          2000
                                                              $             $
--------------------------------------------------------------------------------

Current:   - U.S.                                           75,000        24,828
           - Canadian                                       78,652            --
--------------------------------------------------------------------------------
Total current taxes                                        153,652        24,828
--------------------------------------------------------------------------------
Deferred:  - U.S.                                               --            --
           - Canadian                                           --            --
--------------------------------------------------------------------------------
Total deferred taxes                                            --            --
--------------------------------------------------------------------------------
Income tax provision                                       153,652        24,828
================================================================================

                                      F-19

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

13. INCOME TAXES cont'd

Components of the current tax provision are as follows:

<TABLE>
<CAPTION>
                                                             2001                    2000
                                                         $           %          $            %
----------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>       <C>           <C>
Provision for income tax based on basic U.S.
   tax rates                                          16,692         2       (3,289)       (28)
Provision for income taxes based on basic
   Canadian federal income tax rates                 195,337        26        6,200         53
Provision for income taxes based on basic
   Canadian provincial income tax rates               99,413        13        3,421         29
Non-deductible goodwill amortization                  55,161         7        3,130         27
Non-deductible stock compensation expense             (6,023)        1       14,981        128
Non-deductible debt modification expense              13,831         2           --         --
Realization of loss carryforwards from prior years  (197,466)      (26)      (4,704)       (40)
Other                                                (23,293)       (4)       5,089         43
----------------------------------------------------------------------------------------------
                                                     153,652        21       24,828        212
==============================================================================================
</TABLE>


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

                                                           2001           2000
                                                             %              %
-------------------------------------------------------------------------------
U.S.                                                       34.0           34.0
Canadian federal                                           28.0           29.0
Canadian provincial                                        14.3           16.0

Income (loss) before provision for income taxes:

                                                           2001           2000
                                                             $              $
-------------------------------------------------------------------------------

U.S.                                                     49,093          (9,673)
Canadian                                                697,596          21,380
-------------------------------------------------------------------------------
Income before provision for income taxes                746,689          11,707
===============================================================================

Income taxes paid are as follows:

                                                           2001           2000
                                                             $              $
-------------------------------------------------------------------------------

Canadian provincial                                          --           2,633
U.S. federal                                                 --          27,668
U.S. state                                                  837          10,960
-------------------------------------------------------------------------------
                                                            837          41,261
===============================================================================

                                      F-20

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

13. INCOME TAXES cont'd

Income tax refunds received are as follows:

                                                           2001           2000
                                                             $              $
-------------------------------------------------------------------------------

Canadian federal                                             --          73,171
Canadian provincial                                          --          14,240
U.S. federal                                             22,779              --
-------------------------------------------------------------------------------
                                                         22,779          87,411
===============================================================================

The  Company  has  unutilized  operating  losses in the United  States  totaling
$1,291,786  available for carry forward to reduce income taxes otherwise payable
in future years. 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  carryforward  into future years. A total of $213,676  relating to
prior year  purchased  operating  losses was available to apply against  current
year income.  Other unutilized operating losses available for carryforward total
$376,938 and expire in 2012.  During the current  year,  losses in the amount of
$220,588 [nil in 2000] were utilized.

During the year, the Company utilized  operating loss carryforwards in Canada of
$435,529  federally  and $529,951  provincially.  No  unutilized  Canadian  loss
carryforwards remain at year-end.

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

                                                           2001            2000
                                                             $               $
-------------------------------------------------------------------------------

Book over tax depreciation                               (1,725)          1,893
Non-deductible reserves                                  24,498              --
Net operating loss carryforward                         383,698         667,879
-------------------------------------------------------------------------------
Total deferred tax assets                               406,471         669,772
Valuation allowance for deferred tax assets            (406,471)       (669,772)
-------------------------------------------------------------------------------
Net deferred tax asset (liabilities)                         --              --
===============================================================================

                                      F-21

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

14. EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                 2001          2000
                                                                   $            $
--------------------------------------------------------------------------------------
<S>                                                           <C>          <C>
Numerator
Net income (loss)                                                593,037       (13,121)
Denominator
Denominator for basic earnings per share -
   weighted average shares outstanding                        10,000,000    10,000,000
Effect of dilutive securities:
   Warrants                                                      113,781        59,214
   Options                                                        46,655            --
--------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
   adjusted weighted average shares and assumed conversions   10,160,436    10,059,214
======================================================================================

Basic earnings per share                                      $     0.06   $      0.00
======================================================================================
Diluted earnings per share                                    $     0.06   $      0.00
======================================================================================
</TABLE>

15. SUPPLEMENTARY INFORMATION ON CASH FLOWS

<TABLE>
<CAPTION>
                                                                          2001        2000
                                                                           $           $
--------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>
Changes in non-cash working capital balances related to operations:
(Increase) in accounts receivable                                       (742,375)   (504,588)
Decrease in investment tax credits receivable                                 --      57,165
Decrease (increase) in income taxes receivable                            24,705      (6,968)
Decrease in inventories                                                   26,340      20,561
(Increase) in deferred contract costs and unbilled revenue              (620,982)   (544,949)
Decrease in other current assets                                          19,430      20,983
(Increase) in other assets                                                    --        (364)
Increase in accounts payable                                           1,298,968     245,771
Increase (decrease) in accrued charges                                     5,425     (76,785)
Increase in unearned revenue and contract advances                       425,719     659,431
Increase in income taxes payable                                          76,534          --
--------------------------------------------------------------------------------------------
                                                                         513,764    (129,743)
============================================================================================
</TABLE>

During fiscal 2000,  the Company  acquired  capital  assets in addition to those
included in the statement of cash flows. The additional assets valued at $95,106
were financed  through the use of capital leases.  As the leases were capital in
nature,  the assets and related  liabilities were recorded on the balance sheet.
No capital assets were financed through capital leases in fiscal 2001.

                                      F-22

<PAGE>


TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

16. 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.  The business can generally be
broken into two segments;  scrubber and nozzle systems. Wet scrubber systems are
generally used to absorb gaseous  pollutants and particulate matter contained in
exhaust  gas  streams  such as  smoke  stacks,  and  incorporate  the use of the
Company's proprietary air-atomizing nozzle technology.  Nozzle systems typically
operate in conjunction with products and systems supplied by others. Examples of
nozzle systems supplied include  evaporative gas cooling and conditioning,  dust
suppression and combustion.

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

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

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

Contract revenue and sales of  approximately  $3,823,000 of the scrubber segment
[2000 - $2,421,000]  and  $1,780,000  of the nozzle  segment [2000 - $2,720,000]
were to  customers  in the United  States.  The  remainder  of the  consolidated
revenues were primarily from customers in Canada [$7,485,000] [2000 - $824,000],
with lesser amounts from Asia  [$168,000]  [2000 - $36,000],  Europe  [$111,000]
[2000 - $43,000] and South America [$603,000] [2000 - $122,000].  The long-lived
assets  of the  nozzle  segment  are  located  in the  United  States  while the
remainder of the Company's assets,  including those of the scrubber segment, are
located in Canada.  For the year ended June 30, 2001, two customers  represented
67% of total  revenues [in fiscal 2000, two customers  represented  25% of total
revenues].

                                      F-23

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

16. SEGMENTED INFORMATION cont'd

Industry segments

<TABLE>
<CAPTION>
                                      Scrubber       Nozzle
                                       Systems       Systems       Other        Total
2001                                      $             $            $            $
----------------------------------------------------------------------------------------
<S>                                   <C>           <C>          <C>           <C>
Contract revenue and sales
Evaporative gas cooling                      --     2,396,140           --     2,205,590
Dust suppression                             --        20,394           --        18,772
Spray dry systems                            --       648,658           --       597,074
Other nozzle systems                         --       415,253           --       382,231
Wet scrubber systems                  3,348,644            --           --     3,460,716
Wet electrostatic precipitation       7,285,781            --           --     7,450,487
----------------------------------------------------------------------------------------
Total contract revenue and sales     10,634,425     3,480,445           --    14,114,870
----------------------------------------------------------------------------------------
Income from operations                  112,353       645,124           --       757,477
Interest income                          25,090         5,507           --        30,597
Interest expense                        (24,934)      (16,451)          --       (41,385)
----------------------------------------------------------------------------------------
Income before provision for taxes       112,509       634,180           --       746,689
Provision for income taxes               14,790       138,862           --       153,652
----------------------------------------------------------------------------------------
Net income                               97,719       495,318           --       593,037
========================================================================================

Depreciation and amortization            93,510        99,660           --       193,170
Capital expenditures                     10,264         6,842           --        17,106
Segment assets                        2,600,662     1,400,193    1,778,604     5,779,459
Capital assets                           55,810        59,617           --       115,427
</TABLE>

                                      F-24

<PAGE>

TurboSonic Technologies, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001                               [expressed in United States Dollars]

16. SEGMENTED INFORMATION cont'd

<TABLE>
<CAPTION>
                                    Scrubber       Nozzle
                                     Systems       Systems      Other       Total
-----------------------------------------------------------------------------------
2000                                    $             $           $           $
-----------------------------------------------------------------------------------
<S>                                 <C>           <C>          <C>        <C>
Contract revenue and sales
Evaporative gas cooling                    --     2,175,458         --    2,175,458
Dust suppression                           --        30,351         --       30,351
Other nozzle systems                       --     1,057,704         --    1,057,704
Wet scrubber systems                1,349,922            --         --    1,349,922
Wet electrostatic precipitation     1,568,127            --         --    1,568,127
-----------------------------------------------------------------------------------
Total contract revenue and sales    2,918,049     3,263,513         --    6,181,562
-----------------------------------------------------------------------------------
(Loss) income from operations        (292,998)      342,176         --       49,178
Interest income                         4,111         3,230         --        7,341
Interest expense                      (18,348)      (26,464)        --      (44,812)
-----------------------------------------------------------------------------------
(Loss)  income before provision
   for taxes                         (307,235)      318,942         --       11,707
Provision for income taxes                 --        24,828         --       24,828
-----------------------------------------------------------------------------------
Net (loss) income                    (307,235)      294,114         --      (13,121)
===================================================================================

Depreciation and amortization          94,694       100,922         --      195,616
Capital expenditures                       --            --         --           --
Segment assets                      1,653,244     1,400,193    407,784    3,399,776
Capital assets                         68,946        73,649         --      142,595
</TABLE>

17. COMPARATIVE FIGURES

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

18. SUBSEQUENT EVENTS

On August 7, 2001,  the Company  announced that it had entered into an agreement
to form a strategic alliance with Hamon  Research-Cottrell,  Inc. As part of the
agreement,  Hamon  Research-Cottrell  acquired directly from the Company 500,000
shares of TurboSonic  common stock,  representing an  approximately  4.7% equity
interest  at  $1.00  U.S.  per  share.  Certain  of  TurboSonic's  shareholders,
including officers and directors,  granted options to Hamon Research-Cottrell to
acquire  control of TurboSonic  from these  shareholders  at prices ranging from
$1.80 to $2.50 per share.  These options are exercisable  only in the event that
Hamon Research-Cottrell  initiates a tender offer for TurboSonic's common stock.
The agreement also provides for the joint marketing of certain products.


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