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U

F

A

For the fiscal year ended June 30, 2005

Commission file number 0-21832

TURBOSONIC TECHNOLOGIES, INC.

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


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

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

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

None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock(Title of Class)

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

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.

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

Issuer's revenues for its most recent fiscal year: $11,095,577

Aggregate market value of the Issuer's common stock held by non-affiliates of
the Issuer as of September 9, 2005: $5,637,537

The number of shares outstanding of the
Issuer's common stock as of September 9, 2005: 13,208,996

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

- 1 -

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

|                                        | Year Ended
|--------------------------------------- | ----------
|                                        | June 30   
|                                        | 2005      
|Industrial/Medical Waste Incineration   | 6%        
|Solid Waste Incineration, including MSW | 7%        
|Chemical and Mineral Processing         | 6%        
|Metallurgical Processing                | 16%       
|Pulp and Paper                          | 3%        
|Wood Products                           | 55%       
|Biomass Dryers                          | -         
|Other                                   | 7%        
|                                        | 100%      

> The Company is contractually responsible to its customers for all phases of
>   the design, fabrication and, if included in the scope of the Company's
>   contract, field installation of its products and systems. The Company's
>   successful completion of its contractual obligation is generally determined by
>   a performance test that is conducted either by its customer or by a
>   customer-selected independent testing agency.
>   The Company performs all process engineering, including but not limited to,
>   the determination of the size, geometry and structural characteristics of the
>   particular system needed for gaseous, mist or particulate removal, and
>   performs the detailed design of, and develops specifications for, all
>   applicable structural, electrical, mechanical and chemical components of such
>   system. The Company, historically, has not manufactured or fabricated its own
>   products or systems. Rather, it purchases components consisting of both
>   off-the-shelf items and items, such as its atomizing nozzles, which are made
>   to its design and specifications by third party manufacturers and fabricators,
>   enters into subcontracts for field construction, which it supervises, and
>   manages all technical, physical and commercial aspects of the performance of
>   its contracts.

- 2 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
|----------- | ----------------------------------------------

> Products and Systems

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

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

|                                                 | Year Ended
|------------------------------------------------ | ----------
|                                                 | June 30   
|                                                 | 2005      
|Evaporative Gas Cooling and Conditioning Systems | 20%       
|Wet Electrostatic Precipitator Systems (WESPs)   | 43%       
|Wet Scrubber Systems                             | 20%       
|Semi-dry Scrubber Systems                        | 9%        
|Dust Suppression                                 | 2%        
|Other Nozzle Systems                             | 6%        
|                                                 | 100%      

> The Company's products are utilized in many industries
>   including pulp and paper, wood products, chemical and mineral processing
>   (including cement), metallurgical (non-ferrous and iron and steel), biomass
>   dryers, industrial and medical incineration, municipal solid waste (MSW)
>   incineration, and power generation. The principal products and systems offered
>   by the Company are described below:
>   SoniCool® Evaporative Gas Cooling and Conditioning Systems
>   
>   Through the use of the Company's atomizing nozzles, SoniCool® Evaporative Gas Cooling and Conditioning Systems accurately control
>   temperature and humidity of high-temperature gas streams, such as those
>   emanating from cement kilns, non-ferrous smelters and steel mill Electric Arc
>   Furnaces (EAF) or Basic Oxygen Furnaces (BOF). The result is gas temperatures
>   that do not damage equipment and ductwork, smaller gas volumes, and improved
>   efficiency of downstream air pollution control equipment.
>   The Company is an internationally known leader in gas
>   cooling and conditioning with over 450 installations throughout the world.
>   SonicKleen Wet Electrostatic Precipitation Systems (WESP)
>   
>   The SonicKleen WESP removes sub-micron particulate, heavy
>   metals, dioxins and furans, mists, and fumes from process gas streams. Removal
>   efficiencies can be achieved at much lower operating costs than with
>   scrubbers. While there are many variations of electrostatic precipitators on
>   the market, the SonicKleen design is recognized as a proven approach that
>   exceeds requirements for meeting government removal targets while keeping
>   operating and maintenance costs to a minimum.
>   Currently, the U.S. Environmental Protection Agency is
>   tightening certain emission standards, thereby forcing a number of industries
>   to adopt technologies, such as WESPs, in order to meet emissions targets that
>   more traditional technologies, such as scrubbers, will not be able to meet
>   effectively. The Company's WESP is capable of achieving these higher standards
>   and efficiently capturing sub-micron particulates.
>   SonicKleen WESP systems have been sold for use in waste
>   incinerators, a ceramic refractory, biomass dryers, OSB (oriented-strand
>   board) facilities and industrial power boilers. The Company's WESP technology
>   is used in industries such as wood products, waste incineration, metallurgical
>   and chemical processing, and power generation industries.

TurboSOx SO2Recovery Systems

Developed in conjunction with The Dow
  Chemical Company, the TurboSOx SO2 Recovery System is a process
  that recovers pure Sulfur Dioxide (SO2) (a major contributor to
  "acid rain") as a usable by-product, thereby providing a return on investment
  from its reuse or sale. The patented process uses the TurboSOx Amine, a
  proprietary solvent developed and exclusively supplied to the Company by The
  Dow Chemical Company. TurboSOx provides a 25% saving over the capital costs of
  traditional mineral-based Flue Gas Desulfurization (FGD) systems. SO2
  removal efficiencies of greater than 99% have been achieved in pilot tests at
  commercial plants of prospective customers, thereby demonstrating regulatory
  compliance capability.

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, 2005.

- 3 -

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|Form 10-KSB | TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
|----------- | ----------------------------------------------

> SonicBURN Waste Fuel Combustion

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

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

Turbotak Wet, TurboVenturi and TurboSorb Semi-Dry Scrubbers

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

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

The TurboSorb Semi-Dry Scrubber treats
  industrial process gas streams, removing acid gases such as SO2and HCI. By spraying alkalis such as calcium, potassium and sodium-based
  slurries or solutions, the TurboSorb system can achieve higher removal
  efficiencies ofSO2and HCI than traditional "dry" scrubbers. Unlike "wet" systems, with the
  TurboSorb semi-dry scrubber all water is evaporated so there is no liquid
  waste stream generated.

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

Dry Fog® Dust Control and Suppression Systems

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

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

Air Pollution Control System Upgrades

Using the Company's atomizing nozzles and venturi scrubber
  technologies and years of experience in the air pollution control industry,
  the Company is able to retrofit existing air pollution control equipment to
  consistently improve performance. An equipment upgrade is significantly less
  expensive than purchasing new equipment, with lower maintenance requirements.
  The Company has upgraded hundreds of air pollution control systems.

Atomizing Nozzles and Spare Parts

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

With thousands of nozzles sold, the SoniCore® nozzles and
  the patented Turbotak Atomizing nozzles are at the heart of the Company's air
  pollution control systems and are recognized by industry as superior.

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

Contractual Liabilities

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

-

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Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIESMarketing and Sales
  The Company's marketing efforts are technical in nature and
  currently involve its senior management and technical professionals, supported
  by independent sales representatives. The Company's contractual arrangements
  with its 15 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.
  The Company's sales representatives assist the Company in
  consummating sales of its products and services, serve an ongoing liaison
  function between the Company and its customers during the sales process and
  address customers' questions or concerns arising thereafter. The sales
  representatives are selected by the Company based upon industry reputation,
  prior sales performance and the breadth of territorial coverage, among other
  criteria.
  Technical inquiries received from potential customers are
  referred to the Company's sales and engineering personnel who jointly prepare
  either a budget for the customers' future planning or a final bid. The period
  between initial customer contact and issuance of an order varies widely, but
  is generally between 6 and 24 months.
  The Company seeks to obtain repeat business from its
  customers, although it does not depend upon any single customer to maintain
  its level of activity from year to year; however, one or more different
  customers may be expected to account for greater than 10% of the Company's net
  revenues in any consecutive twelve month period. Three customers accounted for
  37%, 7% and 6% respectively, of the Company's net revenues during the fiscal
  year ended June 30, 2005. During the fiscal year ended June 30, 2004, three
  customers accounted for 9%, 8% and 7% respectively, of the Company's net
  revenues.
  Backlog
  
  At June 30, 2005, the amount of the Company's contract
  backlog was approximately $10,200,000 compared to $5,325,000 at June 30, 2004.
  Backlog represents work for which the Company has entered into a signed
  agreement or has received an order to proceed. Completion of 80% of the
  Company's backlog is anticipated to occur prior to June 30, 2006.
  Product Development
  
  The Company has an ongoing program for the development and
  commercialization of new industrial processing and air pollution control
  products, systems and technologies, and the enhancement of existing products
  and systems. Expenditures for research and development activities, net of
  customer and government support, were $39,049 and $64,803 for the fiscal years
  ended June 30, 2005 and 2004, respectively.
  Proprietary Protection
  
  The Company relies on a combination of patents, trade and
  service marks, trade secrets and know-how to protect its proprietary
  technology and rights. The Company owns or has licensed rights to over 30
  international patents relating to a variety of air pollution control
  applications.
  The Company has registered servicemarks or trademarks in
  the United States and certain foreign countries for several identifying names
  which it uses with its products and systems including SoniCool®, SoniCore®,
  SonicKleen and Dry Fog®.
  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 air pollution control industry,
  the Company has historically relied on third parties to manufacture and
  fabricate its products and to supply parts and components for its systems in
  accordance with the Company's specifications. In those instances in which the
  Company's scope of work includes installation of equipment, the Company
  selects and supervises subcontractors for this work. To date, the Company has
  not experienced difficulties either in obtaining fabricated components and
  other materials and parts used in any of its products and systems or in
  obtaining qualified subcontractors. The Company's vendor sources for various
  components, materials and parts used in its systems, including its atomizing
  nozzle and other components, include more than 100 firms. The Company does not
  depend on any one of the vendors to a material extent, and in any event the
  Company believes that alternative vendors would be available if needed. With
  respect to fabricators, the Company has satisfactory relationships with more
  than ten fabricators. Similarly, with respect to subcontractors for
  installation work, the Company has satisfactory relations with more than three
  firms. On the basis of the number of vendors, fabricators and subcontractors
  which it utilizes and the availability of alternative sources, the Company
  does not believe that the loss of its relationship with any one firm would
  have a material adverse effect on its business.

- 5 -
Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIESBonding and InsuranceWhile the Company generally has not been required to
  procure bid and performance bonds, such requirements are prevalent for
  projects partially or fully funded by federal, state or local governments. A
  bid bond guarantees that a bidder will execute a contract if it is awarded the
  job and a performance bond guarantees completion of the contract. Past
  coverage for these requirements has been provided using cash reserves and
  guarantees from a Canadian crown corporation.
  The Company currently maintains different types of
  insurance, including directors and officers liability, 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 other nations in response to public concern about the
  environment. The Company believes that the need to comply with these laws
  creates demand for the Company's products. The Federal Clean Air Act, federal,
  state and local regulations which implement it and the enforcement of these
  laws and regulations largely determine the level of expenditures that
  customers will make to limit emissions from their facilities.
  The market for the Company's air pollution control products
  and systems is directly dependent upon the existence and enforcement of laws
  and regulations which limit the release of pollutants into the atmosphere and
  impose substantial penalties for non-compliance. The Government can change
  environmental regulations at any time, which could have positive or negative
  effects upon the Company's future revenues and prospects of profitability.
  Competition
  The Company faces substantial competition in each of its
  principal markets from numerous competitors. The Company competes primarily on
  the basis of price as well as its engineering and technological expertise, and
  quality of its products, systems and service. Additionally, the Company
  believes that the successful performance of its installed products and systems
  is a key factor in dealing with its customers, which typically prefer to make
  significant purchases from a company with a solid performance history.
  Virtually all contracts for the Company's products and
  systems are obtained through competitive bidding. Although price is an
  important factor and may in some cases be the governing factor, it is not
  always determinative, and contracts may be awarded on the basis of the
  efficiency or reliability of products and the engineering and technical
  expertise of the bidder.
  Employees
  As of June 30, 2005, the Company employed 33 full time
  persons, including 9 engineers, 9 salespersons, and 8 technical support
  persons. None of the Company's employees are represented by a labor union. The
  Company believes that its relationship with its employees is satisfactory.
  Financial Information about Foreign and Domestic Operations
  and Export Sales
  U.S. and Canadian customers collectively accounted for
  approximately 82% and 71% of the Company's sales during the fiscal years ended
  June 30, 2005 and 2004. Revenue derived from export sales is transacted in
  U.S. dollars and Euros.

- 6 -
Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIESThe 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 EndedJune 302005
    2004United States
    39%
    47%Canada
    43%
    24%South and Central America
    8%
    6%Europe
    3%
    11%Far East
    4%
    11%Other
    3%
    1%100%
    100%Risks and UncertaintiesForward-looking statements in this report, including
  without limitation, statements relating to the Company's plans, strategies,
  objectives, expectations, intentions and adequacy of resources, are made
  pursuant to the safe-harbor provisions of the Private Securities Litigation
  Reform Act of 1995. Readers are cautioned that such forward-looking statements
  involve risks and uncertainties that could cause actual results to differ
  materially from those expressed therein. Such risks and uncertainties include,
  among others, the following:Dependence on
    Environmental Regulation. The
    market for the Company's air pollution control products and systems is
    directly dependent upon the existence and enforcement of laws and
    regulations which limit the release of pollutants into the atmosphere and
    impose substantial penalties for non-compliance. Stringent enforcement of
    these laws and regulations may increase the attractiveness of, and demand
    for the Company's products and services, whereas lax enforcement and/or
    repeal in whole or in part may have the opposite effect.Revenue
    Concentration. Sales to three
    customers accounted for 50% of the Company's net revenues in the fiscal year
    ended June 30, 2005. Three different customers accounted for 24% 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.Limited
    Protection of Patents and Proprietary Rights.
    The Company relies on a combination of patents, trade and service marks,
    trade secrets and know-how to protect its proprietary technology and rights.
    There can be no assurance that the Company's patents will not be infringed
    upon, that the Company would have adequate remedies for any such
    infringement, or that its trade secrets will not otherwise become known to
    or independently developed by competitors. There can also be no assurance
    that any patents now or hereafter issued to, licensed by or applied for by
    the Company will be upheld, if challenged, or that the protections afforded
    thereby will not be circumvented by others. Litigation may be necessary to
    defend the Company's proprietary rights, which would result in significant
    cost to the Company and a diversion of effort of its personnel.Export Sales.
    Approximately 18% and 29%, respectively, of the Company's revenues during
    the fiscal years ended June 30, 2005 and 2004 were derived from sales made
    outside of the United States and Canada. Foreign sales are subject to
    certain inherent risks, including unexpected changes in regulatory and other
    legal requirements, tariffs and other trade barriers, greater difficulty in
    collection of accounts receivable and potentially adverse tax consequences.
    There can be no assurance that these factors will not have an adverse impact
    on the Company's future foreign sales and, consequently, on the Company's
    operating results.Permitting
    Delays. Some of the Company's
    projects require permits to be issued by one or more governmental agencies
    prior to the commencement of both construction and operation. Issuance of
    such permits could be delayed by political and other considerations.
    Permitting delays could cause extended delay or cancellation of one or more
    of the Company's large projects, which would adversely impact the Company's
    future revenues.Dependence on
    Manufacturers, Fabricators and Subcontractors.
    The Company does not manufacture or fabricate its own products or systems,
    relying instead upon the services of third party manufacturers and
    fabricators. The Company also does not engage in the field construction of
    its systems but relies on field construction subcontractors operating under
    the supervision of the Company's own employees. The unavailability of the
    services of, or a substantial increase in pricing by a significant number
    of, these manufacturers, fabricators or subcontractors could adversely
    affect the Company. Given the number of manufacturers, fabricators and
    subcontractors which it utilizes and the availability of alternative
    sources, the Company does not believe that the loss of its relationship with
    any one firm would have a material adverse effect on its business.Competition.
    The markets for environmental control products are characterized by
    substantial competition based primarily on engineering and technological
    expertise and quality of service. Because virtually all contracts for the
    Company's products and systems are obtained through competitive bidding,
    price is also a competitive factor and may be the most significant factor in
    certain instances. Although the Company believes that it competes on the
    basis of its technical expertise and reputation for service, there can be no
    assurance that the Company will maintain its competitive position in its
    principal markets.- 7 -

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Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIESFixed 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.

ITEM2:DESCRIPTION OFPROPERTY

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

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

ITEM3:LEGALPROCEEDINGS

Not applicable.

ITEM4:SUBMISSION OFMATTERS
TO AVOTE OFSECURITYHOLDERS

No matters were submitted for a vote to the Company's security holders during
the fourth quarter of the Company's fiscal year ended June 30, 2005.





-

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Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIESPART
II

ITEM5:MARKET FORCOMMONEQUITY,RELATEDSTOCKHOLDERMATTERS ANDSMALLBUSINESSISSUERPURCHASES OFEQUITYSECURITIES

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            
|Fiscal Year Ended June 30, 2005: |                 
|First Quarter                    | $0.352          
|Second Quarter                   | $0.392          
|Third Quarter                    | $0.600          
|Fourth Quarter                   | $0.656          
|Fiscal Year Ended June 30, 2004: |                 
|First Quarter                    | $0.408          
|Second Quarter                   | $0.456          
|Third Quarter                    | $0.440          
|Fourth Quarter                   | $0.320          

______

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

As of June 30, 2005, there were 441 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.

ITEM6:MANAGEMENT'SDISCUSSION ANDANALYSIS
OFFINANCIALCONDITION
ANDRESULTS OFOPERATION

General

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

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

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

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

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

-

---

Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIESPrior to fiscal 2004, the Company had two reportable business
segments - nozzle systems and scrubber systems. During fiscal 2004, the Company
realigned its business activities on the basis of long-term contracts and
components/replacement parts. Internal reporting to support decision-making
regarding the allocation of resources and evaluation of activities was realigned
to be consistent with the alignment of the business. As such the Company has
commenced reporting to shareholders on the two business segments into which
management now classifies the business - Original Equipment ("OEM") systems and
Aftermarket . The previous scrubber systems segment is closely aligned with the
OEM systems segment and the previous nozzle system segment is closely aligned
with the Aftermarket segment. The comparative segment information has been
reclassified to be consistent with this presentation.
Forward-looking statements in this report, including without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that such forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed therein. In evaluating these statements, you should specifically
consider the risks discussed in this Form 10-KSB for the year ended June 30,
2005 and other reports or documents that we have filed from time to time with
the SEC.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

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

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

Goodwill

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

The goodwill impairment test was completed at April 1, 2005
for the Aftermarket business segment, as required by SFAS No. 142. The
conclusion reached was that there has not been an impairment of goodwill
associated with the Aftermarket segment for the year ended June 30, 2005.

-

---

Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

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

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

Results of Operation

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

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

During fiscal 2005, the OEM systems business segment
experienced significant bookings, in particular in the wood products industry,
while the order levels for the Aftermarket business segment have continued
relatively constant. Although there can be no assurances that this trend of
increased OEM system orders will continue, these new OEM systems order
placements are expected to have a positive revenue impact in all quarters of
fiscal 2006.

Twelve Months Ended June 30, 2005 Compared with Twelve Months
Ended June 30, 2004

OEM systems revenue increased by $5,612,577 (266%) to
$7,720,195 for the twelve-month period ended June 30, 2005 from $2,107,618 for
the same period in fiscal 2004. The increase is primarily the result of a
increase in large system sales in the period for the reasons discussed above,
and in particular, those of Wet Electrostatic Precipitators ("WESP") and wet
scrubbers.

Aftermarket revenue increased by $760,443 (29%) to $3,375,382
for the twelve months ended June 30, 2005 from $2,614,939 for the same period
one year earlier. Increased revenue for evaporative cooling components in fiscal
2005, primarily by customers in the mineral processing industry, has primarily
resulted in this positive increment.

Cost of OEM systems increased by $5,186,677 (296%) to
$6,937,617 for the twelve-month period ended June 30, 2005 from $1,750,940 for
the same period in fiscal 2004. The higher costs are the result of the increased
volume of OEM systems work, as discussed above. As a percentage of OEM systems
revenue, the cost of OEM systems was 90% for the twelve-month period ended June
30, 2005 and 83% for the same period in fiscal 2004. The higher percentage to
revenue for the OEM systems is the result of higher than anticipated costs on
certain projects during the current year than in fiscal 2004.

Aftermarket costs increased by $661,553 (43%) to $2,184,763
for the twelve-month period ended June 30, 2005 from $1,523,210 for the same
period one year earlier. The increased costs are the result of the increased
sales volume discussed above. As a percentage of aftermarket revenue, the
aftermarket costs were 65% versus 58% for the same period in fiscal 2004. The
increased ratio of aftermarket costs to revenue was the result of increased
component revenue in fiscal 2005, which typically has a higher ratio than
replacement parts.

Selling, general and administrative expenses decreased
$17,551 (1%) to $2,186,593 for the twelve-month period ended June 30, 2005 from
$2,202,144 for the same period in fiscal 2004. Decreased selling, general and
administrative expenses resulted from reduced sales travel expense. As a
percentage of total revenue, selling, general and administrative expenses were
20% for the fiscal period ended June 30, 2005 and 47% for the same period a year
earlier. This decrease in percent to revenue is the direct result of the
increased volume of revenue for the current period. Also included in total
expenses in the current year were stock-based compensation expense ($2,268 vs.
$6,619 in fiscal 2004)[see note 13 to the Consolidated Financial Statements].

Loss before tax in fiscal 2005 decreased $571,825 to a loss
before taxes of $245,898, from a loss before taxes of $817,723 for the same
period in fiscal 2004. Income tax recovery for fiscal 2005 decreased $17,414, to
a recovery of $18,702 from a recovery in 2004 of $36,116. The tax recovery
relates to carry-back of the 2004 tax loss to 2001. The future benefit of US tax
losses has not been recorded in the financial statements, as discussed in note
14 to the Consolidated Financial Statements. An "other comprehensive income" of
$131,951 was recorded for the twelve-months ended June 30, 2005, as compared to
"other comprehensive income" of $17,862 for the same period in fiscal 2004. The
"other comprehensive income" in the current period was the result of the
increase in the value of the Canadian dollar compared to the US dollar from June
30, 2004 to June 30, 2005, and the resulting changes in our balance sheet
relative to Canadian dollar-denominated accounts.

-

---

Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

Liquidity and Capital Resources

On an overall basis, the Company had net cash provided of
$1,058,679 for fiscal 2005 as compared to net cash applied of $964,147 during
the same period in 2004. The fiscal 2005 net cash provided figure included cash
provided by operating activities of $992,470. This increase in overall cash flow
is the result of the reduced operating loss, the decrease in accounts
receivable, increases in accounts payable and unearned revenue and contract
advances, partially offset by increased deferred contract costs and unbilled
revenue.

At June 30, 2005, the Company had positive working capital of
$370,644 as compared to positive working capital of $460,577 at June 30, 2004, a
decrease of $89,933. The Company's current ratio (current assets divided by
current liabilities) was 1.13 and 1.37 at June 30, 2005 and June 30, 2004,
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, 2005 and June 30, 2004,
"Unearned revenue and contract advances" exceeded "Deferred contract costs and
unbilled revenue" with the result that cash flow was positively affected by
$673,138 and $302,075, respectively.

The Company's backlog as at June 30, 2005 was approximately $10,200,000, 80%
of which is expected to be shipped during the 2006 fiscal year, compared to the
June 30, 2004 backlog of $5,325,000.

At June 30, 2005, the cash balance was $1,278,417, which is a
decrease of $599,379 compared to March 31, 2005, and an increase of $1,058,679
compared to June 30, 2004. The Company has received new OEM systems orders
valued at over $11.8 million in fiscal 2005, with positive revenue impact
expected for fiscal 2006 of $7.5 million and $2.1 million for fiscal 2007.
TurboSonic has no outside debt. The Company has not addressed the prospects of
shareholder loans or equity financing. Based upon the current cash position,
initiatives to lower operating expenses, expected revenue for fiscal 2006 of at
least $8.2 million based upon orders in-house at June 30, 2005, anticipated new
OEM orders and a steady stream of Aftermarket orders, the Company believes that
projected cash generated from operations will be sufficient to meet its cash
needs through the end of the fiscal year ended June 30, 2006.

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.

ITEM7:FINANCIALSTATEMENTS

Reference is made to pages F-1 through F-20 comprising a portion of this
Annual Report on Form 10-KSB.

ITEM8:CHANGES IN ANDDISAGREEMENTS
WITHACCOUNTANTS ONACCOUNTING
ANDFINANCIALDISCLOSURE

None.

ITEM8A:CONTROLS ANDPROCEDURES

Management of the Company carried out an evaluation, with the
participation of its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures as of June 30,
2005. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
it in reports that the Company files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission.

There has not been any change in the Company's internal
control over financial reporting in connection with the evaluation required by
Rule 13a-15(d) under the Exchange Act that occurred during the quarter ended
June 30, 2005 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

ITEM8B:OTHER INFORMATION

On September 21, 2005, TurboSonic Technologies, Inc (the "Company") issued a
press release announcing its financial results for the year ended June 30, 2005.
A copy of the press release is being furnished as Exhibit 99.1 to this report
and incorporated herein by reference.

-

---

Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

P

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                                         
|------------------------ | --- | --------------------------------------------------------------
|                         |     |                                                               
|Edward F. Spink          | 51  | Chairman of the Board and CEO                                 
|Patrick J. Forde         | 72  | President, Secretary/Treasurer and Director                   
|Richard H. Hurd          | 68  | Director                                                      
|Dr. Donald R. Spink, Sr. | 82  | Director                                                      
|Jonathan R. Lagarenne    | 45  | Director                                                      
|Julien Hradecky          | 47  | Director                                                      
|Egbert Q. van Everdingen | 44  | Executive VP                                                  
|Robert A. Allan          | 63  | VP Engineering                                                
|Ronald A. Berube         | 58  | VP Marketing & Sales - Gas Conditioning and
    Nozzle Systems
|David J. Hobson          | 57  | VP Finance and Administration                                 

Edward F. Spink

Patrick J. Forde

Richard H. Hurd

Dr. Donald R. Spink, Sr.

Jonathan R. Lagarenne

Julien J. Hradecky

Egbert Q. van Everdingen

Robert A. Allan

Ronald A. Berube

David J. Hobson

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

-

---

Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIESAll 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, 2005, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with.
The Company's audit committee consists of two directors,
Richard H. Hurd and Jonathan R. Lagarenne. The Board of Directors has determined
that each member of the Audit Committee meets the Nasdaq Marketplace Rule
definition of "independent" for audit committee purposes. The Board of Directors
has also determined that Richard Hurd meets the SEC definition of an "audit
committee financial expert."
The Company's Audit Committee has adopted a Code of Ethics
applicable to all of the Company's employees, including its Principal Executive
Officer, Principal Financial Officer and Principal Accounting Officer, as well
as the members of the Company's board of directors. The Code of Ethics was filed
as Exhibit 14 to the Form 10-KSB for the year ended June 30, 2004.

I

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,
2005, 2004 and 2003 by its chief executive officer and by executive officers
receiving annual compensation exceeding $100,000 during its fiscal year ended
June 30, 2005 (collectively the "Named Officers").

|                          |            |              | Annual Compensation | Long-term Compensation Awards
|------------------------- | ---------- | ------------ | ------------------- | -----------------------------
|Name and                  | Year Ended | Salary       | Bonus               | Other Annual                 
|Principal
    Position    | June 30    |              |                     | Compensation                 
|                          |            |              |                     |                              
|Edward F. Spink, CEO      | 2005       | $139,994 (1) | -- (1)              | $
    -- (2)                 
|                          | 2004       | $130,275 (1) | -- (1)              | $375 (2)(3)                  
|                          | 2003       | $115,000 (1) | -- (1)              | $ 13,603 (2)(3)              
|                          |            |              |                     |                              
|Egbert Q. van Everdingen, |            |              |                     |                              
|Executive Vice President  | 2005       | $119,995 (4) | -- (4)              | $
    50 (5)                 
|                          | 2004       | $111,664 (4) | -- (4)              | $ 18,703 (5)                 
|                          | 2003       | $ 29,784     | --                  | $ 40,737 (5)                 
|                          |            |              |                     |                              
|Ronald A. Berube, VP -    |            |              |                     |                              
|Nozzles Sales & Marketing | 2005       | $ 35,999     | --                  | $ 82,103 (6)                 
|                          | 2004       | $ 33,499     | --                  | $ 66,693 (6)                 
|                          | 2003       | $ 29,784     | --                  | $ 57,055 (6)                 

_______

> (1) Effective July 1, 2002, Mr.
>   Spink's compensation was revised to CAD 175,000 (USD 139,994 in 2005, USD
>   130,275 in 2004, USD 115,000 in 2003) of salary, together with a $20,000 bonus
>   to be based upon meeting the earnings before tax target in the Company's
>   business plan. For the fiscal years ended June 30, 2003, 2004 and 2005, Mr. Spink was not entitled to any bonus payment due to the performance of the
>   Company over that period.
>   (2) Effective July 1, 1999, Mr.
>   Spink's compensation was revised to include a sales commission on Scrubber
>   System sales rather than the previous discretionary bonus.
>   (3) Represents commission on
>   orders received prior to fiscal 2003.
>   (4) Effective July 1, 2003, Mr.
>   Van Everdingen's compensation was revised to CAD 150,000 (USD 119,995 in 2005,
>   USD 111,664 in 2004) of salary, together with a $10,000 bonus to be based upon
>   meeting the earnings before tax target in the Company's business plan. For the
>   fiscal years ended June 30, 2004 and 2005, Mr. Van Everdingen was not entitled
>   to any bonus payment due to the performance of the Company over that period.
>   (5) Represents commission on
>   orders received prior to fiscal 2004.
>   (6) Represents commission on
>   orders received.

-

---

Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIESOption Grants in Fiscal 2005
Number of Shares
    %
    of TotalUnderlying
    Options Granted
    Exercise
    ExpirationOptions Granted
    to Employees
    Price
    DateEdward F. Spink
    --
    --
    --
    --Egbert Q. van Everdingen
    --
    --
    --
    --Ronald A. Berube
    --
    --
    --
    --

|                                                                                                
|------------------------------------------------------------------------------------------------
|Aggregate Option and Warrant Exercises in Last Fiscal Year and Fiscal Year
    End Option Values
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Edward F. Spink                                                                                 
|Egbert Q. van Everdingen                                                                        
|Ronald A. Berube                                                                                

____

> (1) The per share exercise price
>   of some of the unexercised options or warrants exceed $0.512, the fair market
>   value of the Company's common stock on June 30, 2005.
>   (2) The number of options and the
>   share prices reflect the July 2005 5-for-4 stock split.

Employment Agreements

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

Compensation of Directors

During the fiscal year ended June 30, 2005, the Company's
directors were each paid $500 for each board meeting attended. The Company's
directors are periodically granted stock options, typically on a yearly basis.
Non-employee directors receive reimbursement of out-of-pocket expenses incurred
for each board meeting or committee meeting attended. During the fiscal year
ended June 30, 2005, there was no grant of options.

ITEM11:SECURITYOWNERSHIP
OFCERTAINBENEFICIALOWNERS ANDMANAGEMENT
ANDRELATEDSTOCKHOLDERMATTERS

The following table sets forth, as of June 30, 2005 the
shares of the Company's Common Stock beneficially owned by each person who, to
the knowledge of the Company, is the holder of 5% or more of the Common Stock of
the Company, by each director of the Company, by the Named Officers and by all
of the executive officers and directors of the Company as a group. The number of
shares reflect the July 2005 5-for-4 stock split.

|Name and Address
    of Beneficial                                                                             | Number of Shares Beneficially Owned | Approximate Percentage of Class
|-------------------------------------------------------------------------------------------------------------- | ----------------------------------- | -------------------------------
|Owner or Identity or Group                                                                                     | (1)                                 |                                
|                                                                                                               |                                     |                                
|Dr. Donald R. Spink, Sr. *                                                                                     | 3,745,790                           | (2) (3) (6)                    
|Edward F. Spink *                                                                                              | 676,048                             | (2) (7)                        
|Patrick J. Forde *                                                                                             | 884,823                             | (2) (4) (6) (11)               
|Richard H. Hurd **                                                                                             | 208,673                             | (5) (6)                        
|Jonathan R. Lagarenne *                                                                                        | 18,750                              | (8)                            
|Julien J. Hradecky *                                                                                           | 184,423                             | (12)                           
|Egbert Q. van Everdingen *                                                                                     | 357,141                             | (2) (9) (13)                   
|Ronald A. Berube*                                                                                              | 188,081                             | (2) (9)                        
|Heartland Advisors, Inc.***                                                                                    | 1,262,500                           | (15)                           
|Bard Associates, Inc. ****                                                                                     | 1,345,750                           | (14)                           
|All Executive Officers and Directors                                                                           | 6,576,599                           | (2) - (13)                     
|as a group (10 persons)                                                                                        |                                     |                                
|                                                                                                               |                                     |                                
|                                                                                                               |                                     |                                
|*
    c/o TurboSonic Technologies, Inc. 550 Parkside Drive, Suite A-14, Waterloo,
    Ontario, N2L 5V4, Canada

-

---

Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES** c/o TurboSonic Technologies,
  Inc. 239 New Road, Building B, Suite 205, Parsippany, NJ 07054
  *** Heartland Advisors, Inc., 789
  North Water St., Milwaukee, WI 53202
  **** Bard Associates, Inc., 135
  South Lasalle St., Suite 2320, Chicago, IL 60603
  (1) Unless otherwise indicated,
  all persons named below have sole voting and investment power over listed
  shares.
  (2) Includes shares of TurboSonic
  Canada Inc., a wholly owned subsidiary of the Company, which by their terms
  are convertible at any time into a like number of shares of Common Stock of
  the Company ("TurboSonic Canada Shares").
  (3) Includes 3,260,234 TurboSonic
  Canada Shares owned by Canadian numbered corporation, over which shares Dr.
  Spink exercises voting control.
  (4) Includes 634,553 TurboSonic
  Canada Shares owned by the Patrick and Joan Forde Family Trust
  (5) Includes 1,494 shares owned by
  Mr. Hurd's spouse, as to which Mr. Hurd disclaims any beneficial ownership.
  (6) Includes 68,750 shares
  issuable upon exercise of vested options.
  (7) Includes 112,500 shares
  issuable upon exercise of vested options.
  (8) Includes 18,750 shares
  issuable upon exercise of vested options.
  (9) Includes 37,500 shares
  issuable upon exercise of vested options.
  (10) Includes 116,334 shares owned
  by an executive officer's spouse, as to which the executive officer disclaims
  any beneficial ownership.
  (11) Includes 15,000 shares owned
  by Mr. Forde's spouse, as to which Mr. Forde disclaims any beneficial
  ownership.
  (12) Includes 13,280 shares owned
  by Mr. Hradecky's spouse, as to which Mr. Hradecky disclaims any beneficial
  ownership
  (13) Includes 12,500 shares owned
  by Mr. van Everdingen's spouse, as to which Mr. van Everdingen disclaims any
  beneficial ownership.
  (14) As identified in a Schedule
  13-G filing made on February 8, 2005, which indicated that Bard Associates,
  Inc. had sole power to dispose or direct the disposition of 1,345,750 common
  shares, and the sole power to direct the vote of 126,250 common shares;
  (15) As identified in a Schedule
  13-G filing made on January 31, 2005, which indicated that Heartland Advisors,
  Inc. had shared power to dispose or direct the disposition of and to vote
  1,262,500, common shares;

|Securities Authorized for Issuance Under Equity Compensation Plans (3): |                                                                                     |                        
|----------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | -----------------------
|                                                                        |                                                                                     |                        
|                                                                        |                                                                                     | Number of Securities to
|                                                                        |                                                                                     | be Issued upon Exercise
|                                                                        |                                                                                     | of Outstanding Options,
|Plan Category                                                           | Warrants and Rights                                                                 | Warrants and Rights    
|                                                                        |                                                                                     |                        
|Equity compensation plans approved by security holders (1)              | 112,500                                                                             | $0.280                 
|Equity compensation plans not approved by security holders              |                                                                                     |                        
|-
    Options (2)                                                       | 746,563                                                                             | $0.361                 
|                                                                        | Total                                                                               | 859,063                
|(1)                                                                     | 2003 Stock Plan.                                                                    |                        
|(2)                                                                     | 2000 Stock Plan.                                                                    |                        
|(3)                                                                     | Number of shares and exercise prices reflect the July 2005 5-for-4 stock
    split. |                        

The Company instituted the 2000 Stock Plan [the "2000 Plan"]
with the express purpose of encouraging key employees of the Company, as well as
other individuals who render services to the Company, by providing opportunities
to participate in the ownership of the Company. The 2000 Plan provides for the
grant of options as non-qualified options, awards of capital stock in the
Company and opportunities to make direct purchases of capital stock in the
Company. Collectively, these are referred to as stock rights. The 2000 Plan,
adopted by the Company on February 9, 2000, is administered by the Board of
Directors, which determines to whom such stock rights may be granted, at which
times the stock rights shall be granted and the time or times when each option
shall become exercisable and the duration of the exercise period. The exercise
price per each non-qualified option granted under the 2000 Plan shall be not
less than the fair market value per share of common stock on the date of such
grant. The stock, subject to stock rights, shall be authorized but unissued
shares of common stock of the Company or shares of common stock reacquired by
the Company in any manner. The aggregate number of shares that may be issued,
pursuant to the 2000 Plan, is 937,500, of which 746,563 have been granted and
remain outstanding, and 11,750 have been granted and exercised.

-

---

Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM12:CERTAINRELATIONSHIPS
ANDRELATEDTRANSACTIONS

Not applicable.

P

ITEM13:EXHIBITS ANDREPORTS
ONFORM8-K

a) Exhibits

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

|Exhibit Number          | Exhibit Description
|----------------------- | -------------------
|                        |                    
|                        | 3.1                
|                        | 3.2                
|                        | 3.3                
|                        | 3.4                
|                        |                    
|                        |                    
|                        | 3.5                
|                        | 4.1                
|                        | 10.1 *             
|                        | 10.2 *             
|                        | 14                 
|                        | 21.1               
|                        | 23.1               
|                        | 23.2               
|                        | 31.1               
|                        | 32.1               
|                        | 99.1               
|                        |                    
|*
    Compensatory Plan

> (1) Filed on April 9, 1993, as an
>   exhibit to the Company's Registration Statement on Form S-1 (File Number
>   33-60856) and incorporated herein by reference.
>   (2) Filed on November 18, 1997 as
>   an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year
>   ended April 30, 1996 and incorporated herein by reference.
>   (3) Filed on September 30, 2002 as
>   an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year
>   ended June 30, 2002 and incorporated herein by reference.
>   (4) Filed on March 19, 2001 as an
>   exhibit to the Company's Registration Statement on Form S-8 (File Number
>   333-57248) and incorporated herein by reference.
>   (5) Filed on November 12, 2002 as
>   an exhibit to the Company's proxy statement for the 2002 annual meeting, and
>   incorporated herein by reference.
>   (6) Filed on September 28, 2004 as
>   an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year
>   ended June 30, 2004, and incorporated herein by reference.

b)

During the quarter ended June 30, 2005, the Company filed or
furnished no current reports on Form 8-K with the Securities and Exchange
Commission.

-

---

Form 10-KSB
    TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

|Fees billed by
    Ernst & Young LLP:    | 2005         | 2004        
|---------------------------------------- | ------------ | ------------
|Audit fees                               | $
    6,690  | $
    51,450
|Audit-related fees                       | $
    10,704 | $
    1,806 
|Tax fees                                 | --           | $
    13,706
|All other fees                           | --           | --          
|                                         | $17,394      | $ 63,035    
|                                         |              |             
|Fees billed by
    Mintz & Partners LLP: | 2005         | 2004        
|Audit fees                               | $46,398      | --          
|Audit-related fees                       | --           | --          
|Tax fees                                 | $5,200       | --          
|All other fees                           | --           | --          
|                                         | $51,598      | --          

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

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

-

---



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

REPORT OF INDEPENDENT REGISTERED PUBLIC 
ACCOUNTING FIRM

To the Directors and Shareholders of TurboSonic Technologies, Inc.

We have audited the accompanying consolidated balance sheet
of TurboSonic Technologies, Inc. and Subsidiaries as of June 30,
2005 and the related consolidated statements of loss and comprehensive loss,
shareholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of TurboSonic
Technologies, Inc. as of June 30, 2004 and for the year then ended, were audited
by other auditors whose report dated August 27, 2004, included an explanatory
paragraph that the financial statements were prepared assuming that TurboSonic
will continue as a going concern. This related to losses incurred by the Company
over the past three years, which had significantly reduced cash reserves and
depleted shareholders' equity, and was discussed in Note 2 to the consolidated financial
statements..

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the 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, 2005, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with United States generally accepted accounting
principles.

The accompanying financial statements have been prepared
assuming that TurboSonic Technologies, Inc. will continue as a going concern. As
more fully described in Note 2, the Company has incurred losses over the past
four years, which have significantly reduced cash reserves and depleted
shareholders' equity. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

|Toronto, Canada, | /s/ Mintz &
    Partners LLP
|---------------- | ----------------------------
|August 26, 2005. | Mintz & Partners
    LLP    
|                 | Chartered
    Accountants   

F-1

---



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

REPORT OF INDEPENDENT REGISTERED PUBLIC 
ACCOUNTING FIRM

To the Directors and Shareholders of TurboSonic Technologies, Inc.

We have audited the accompanying consolidated balance sheet
of TurboSonic Technologies, Inc. and Subsidiaries as of June 30,
2004 and the related consolidated statements of loss and comprehensive loss,
shareholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TurboSonic Technologies, Inc. and Subsidiaries as of June 30, 2004, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with United States generally accepted accounting
principles.

The accompanying financial statements have been prepared
assuming that TurboSonic Technologies, Inc. will continue as a going concern. As
more fully described in Note 2, the Company has incurred losses over the past
three years, which have significantly reduced cash reserves and depleted
shareholders' equity. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

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

F-2

---



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

CONSOLIDATED BALANCE SHEETS

|As at
    June 30                                                    | [expressed in United States dollars]            
|-------------------------------------------------------------------- | ------------------------------------------------
|                                                                     |                                                 
|                                                                     |                                                 
|                                                                     |                                                 
|                                                                     |                                                 
|                                                                     |                                                 
|ASSETS                                                               |                                                 
|Current                                                              |                                                 
|Cash
    and cash equivalents                                        | 1,278,417                                       
|Accounts receivable[note
    5]                                      | 1,142,953                                       
|Retentions receivable                                                | 134,565                                         
|Inventories[note 6]                                                  | 79,579                                          
|Deferred contract costs and unbilled revenue
    [note 7]            | 460,739                                         
|Other current assets                                                 | 69,860                                          
|Total current assets                                                 | 3,166,113                                       
|Property and equipment,less accumulated
    amortization[note 8]     | 101,703                                         
|Goodwill[note 9]                                                     | 398,897                                         
|Other
    assets                                                     | 22,041                                          
|                                                                     | 522,641                                         
|Total assets                                                         | 3,688,754                                       
|                                                                     |                                                 
|LIABILITIES AND SHAREHOLDERS' EQUITY                                 |                                                 
|Current                                                              |                                                 
|Accounts payable                                                     | 1,326,385                                       
|Accrued charges[note 10]                                             | 328,467                                         
|Obligations under capital leases, current portion
    [note 11]      | 6,740                                           
|Unearned revenue and contract advances
    [note 7]                  | 1,133,877                                       
|Total current liabilities                                            | 2,795,469                                       
|Obligations under capital leases,
    long-term portion[note
    11] | 4,350                                           
|                                                                     |                                                 
|Commitments and contingencies
    [note 12]                          |                                                 
|Shareholders' equity[note 13]                                        |                                                 
|Share
    capital                                                    |                                                 
|Authorized                                                           |                                                 
|30,000,000                                                           | common
    shares, par value $0.10 per share    
|1,500                                                                | preferred
    shares, no par value              
|Issued                                                               |                                                 
|7,982,290                                                            | common
    shares [2004 - 6,385,859]            
|5,151,706                                                            | common
    shares reserved for the conversion of
|                                                                     | the
    subsidiary's Class B exchangeable shares
|                                                                     | [2004 -
    4,121,365]                          
|Additional paid-in capital                                           | 2,024,909                                       
|                                                                     |                                                 
|Accumulated other comprehensive income                               | 258,467                                         
|Accumulated deficit                                                  | (3,744,259)                                     
|Total shareholders' equity                                           | 888,935                                         
|Total liabilities and
    shareholders' equity                       | 3,688,754                                       
|                                                                     |                                                 
|See
    accompanying notes                                           |                                                 

F-3

---



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

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

|Years ended June
    30                                    | [expressed in United States dollars]
|---------------------------------------------------------- | ------------------------------------
|                                                           |                                     
|                                                           |                                     
|                                                           | 2005                                
|                                                           | $                                   
|                                                           |                                     
|CONTRACT REVENUE
    AND SALES                             |                                     
|OEM systems
    revenue                                    | 7,720,195                           
|Aftermarket revenue                                        | 3,375,382                           
|                                                           | 11,095,577                          
|                                                           |                                     
|CONTRACT COSTS
    AND COST OF SALES                       |                                     
|OEM systems
    contract costs and costs of sales          | 6,937,617                           
|Aftermarket contract costs and
    cost of sales           | 2,184,763                           
|                                                           | 9,122,380                           
|Gross margin                                               | 1,973,197                           
|                                                           |                                     
|EXPENSES                                                   |                                     
|Selling, general
    and administrative                    | 2,186,593                           
|Research and
    development[note 15]                      | 39,049                              
|Stock-based
    compensation expense[note 13]              | 2,268                               
|                                                           | 2,227,910                           
|                                                           |                                     
|(Loss) from
    operations                                 | (254,713)                           
|Interest income                                            | 10,244                              
|Interest (expense)                                         | (1,429)                             
|(Loss) before provision for
    (recovery of) income taxes | (245,898)                           
|Provision for (recovery of)
    income taxes[note 14]      | (18,702)                            
|Net (loss)                                                 | (227,196)                           
|Other
    comprehensive income:                            |                                     
|Foreign currency
    translation adjustment                | 131,951                             
|Comprehensive (loss)                                       | (95,245)                            
|                                                           |                                     
|Basic (loss) per share[note 16]                            | ($0.02)                             
|                                                           |                                     
|Basic weighted average number of
    shares[note 16]       | 13,134,030                          
|                                                           |                                     
|See accompanying
    notes                                 |                                     

F-4

---



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

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|Years ended June
    30                    |                  |            |             |               | [expressed in United States dollars]
|------------------------------------------ | ---------------- | ---------- | ----------- | ------------- | ------------------------------------
|                                           |                  |            |             |               |                                     
|                                           |                  |            |             |               |                                     
|                                           |                  |            |             |               | Accumulated                         
|                                           | Exchangeable and | Additional |             | other         | Total                               
|                                           | common shares    | paid-in    | Accumulated | comprehensive | shareholders'                       
|                                           | Shares           | Amount     | capital     | deficit       | income (loss)                       
|                                           | #                | $          | $           | $             | $                                   
|                                           |                  |            |             |               |                                     
|Balance - June
    30, 2003                | 10,507,250       | 2,349,821  | 2,016,046   | (2,735,456)   | 108,654                             
|Net (loss)                                 |                 |           |            | (781,607)     |                                    
|Stock-based
    compensation [note 13]     |                 |           | 6,619       |              |                                    
|Translation
    adjustment                 |                 |           |            |              | 17,862                              
|Purchase of small-lot shares [note 13]     | (26)             | (3)        | (10)        |              |                                    
|Balance - June 30, 2004                    | 10,507,224       | 2,349,818  | 2,022,655   | (3,517,063)   | 126,516                             
|Net (loss)                                 |                 |           |            | (227,196)     |                                    
|Stock-based
    compensation [note 13]     |                 |           | 2,268       |              |                                    
|Translation
    adjustment                 |                 |           |            |              | 131,951                             
|Purchase of
    small-lot shares [note 13] | (27)             |           | (14)        |              |                                    
|Stock split [note 13]                      | 2,626,799        |           |            |              |                                    
|Balance - June 30, 2005                    | 13,133,996       | 2,349,818  | 2,024,909   | (3,744,259)   | 258,467                             
|See accompanying notes                    



F-5

---



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

CONSOLIDATED STATEMENTS OF CASH FLOWS

|Years ended June
    30                                   | [expressed in United States dollars]
|--------------------------------------------------------- | ------------------------------------
|                                                          |                                     
|                                                          |                                     
|                                                          | 2005                                
|                                                          | $                                   
|                                                          |                                     
|OPERATING
    ACTIVITIES                                  |                                     
|Net (loss)                                                | (227,196)                           
|Add charges to
    operations not requiring a             |                                     
|current cash payment:                                     |                                     
|Stock-based compensation expense [note 13]                | 2,268                               
|Depreciation and amortization [note 8]                    | 65,303                              
|                                                          | (159,625)                           
|Net change in
    non-cash assets and liabilities related |                                     
|to
    operations [note 17]                               | 1,152,095                           
|Cash (applied to) provided by
    operating activities    | 992,470                             
|                                                          |                                     
|INVESTING
    ACTIVITIES                                  |                                     
|Purchase of property and
    equipment                    | (47,305)                            
|Cash (applied to) investing
    activities                | (47,305)                            
|                                                          |                                     
|FINANCING
    ACTIVITIES                                  |                                     
|(Repayment) of obligations under
    capital leases       | (9,956)                             
|Cash (applied to) financing
    activities                | (9,956)                             
|Effect of exchange rate changes
    on cash               | 123,470                             
|                                                          |                                     
|Net cash
    provided (applied) during year               | 1,058,679                           
|Cash and cash equivalents,
    beginning of year          | 219,738                             
|Cash and cash equivalents, end
    of year                | 1,278,417                           
|                                                          |                                     
|Supplemental
    cash flow information:                   |                                     
|Interest paid                                             | 1,429                               
|Income taxes paid                                         | 947                                 
|                                                          |                                     
|See
    accompanying notes                                |                                     

F-6

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

1. ORGANIZATION AND BUSINESS DESCRIPTION

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

2. GOING CONCERN UNCERTAINTY

These consolidated financial statements have been prepared on
a going concern basis, which presumes that assets will be realized and
liabilities discharged in the normal course of business over the foreseeable
future. The Companyhas incurred significant losses during the current
fiscal year and the past three most recently completed fiscal years, which have
reduced the Company's cash reserves and reduced stockholders' equity. These
conditions raise substantial doubt about the Company's ability to continue in
the normal course of business as a going concern. The Company's ability to
continue in the normal course of business is dependent on achieving a profitable
level of operations and support from the Company's suppliers and shareholders.

In order to reverse this trend, the Company had taken
initiatives to lower operating expenses and to generate new OEM system and
Aftermarket orders. As the result of marketing and sales plans instituted in
fiscal 2004, the Company received new OEM systems orders valued in excess of
$11.8 million in fiscal 2005, resulting in OEM expected revenue for fiscal 2006
of $7.5 million and $2.1 million for fiscal 2007. Additionally, the Company is
also pursuing a line of credit on the basis of current and future projects.
TurboSonic currently has no outside debt. The Company has not yet addressed the
prospects of shareholder loans or equity financing. Based upon the current cash
position, expected revenue for fiscal 2006 of at least $8.2 million based upon
orders in-house at June 30, 2005, a steady stream of Aftermarket orders and
depending upon profitable execution of projects and successful management of
costs, the Company expects to have sufficient operating cash for fiscal 2006.

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of consolidation

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

Inventories

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

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

Goodwill

Under Statement of Financial Accounting Standard ["SFAS"]
No.142, goodwill is no longer amortized but is subject to an annual impairment
review [or more frequently if deemed appropriate]. Since the adoption of SFAS
No. 142 as at July 1, 2001, the Company has completed the transitional
impairment test as at July 1, 2001 and annual impairment tests as at April 1,
2002, 2003, 2004 and 2005, to identify if there is any impairment to the
goodwill using a fair value methodology by reporting unit [note 9].

F-7

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

Property and Equipment

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

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

Revenues and long-term contracts

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

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

When the current estimated costs to complete indicate a loss, such losses are
recognized immediately for accounting purposes.

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

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

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

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.

Allowance for doubtful accounts

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

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.

F-8

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

Grants received to finance specific expenses are included in the consolidated
statement of loss as a reduction of these expenses. Grants received to finance
capital expenditures are applied to reduce the cost of the related capital
assets.

Investment tax credits

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

Research and development expenditures

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

Income taxes

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

Advertising costs

All costs associated with advertising and promoting products are expensed as
incurred. Advertising and promotion expense was $48,933 in 2005 [$39,539 in
2004].

Stock-based compensation

Financial Accounting Standards Board ["FASB"] SFAS No. 123,
Accounting for Stock-Based Compensation, provides an alternative to APB
Opinion No. 25. The Company follows APB Opinion No. 25, Accounting for Stock
Issued to Employees, in accounting for stock-based compensation issued to
employees. For companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the
pro forma effect on net income and earnings per share of its fair value based
accounting for those arrangements.

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

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

|                                                     | 2005      | 2004     
|---------------------------------------------------- | --------- | ---------
|                                                     | $         | $        
|                                                     |           |          
|Net (loss)                                           | (227,196) | (781,607)
|Stock-based compensation expense under APB
    No.25 | 2,268     | 6,619    
|Stock-based compensation expense under SFAS No.123   | (4,250)   | (48,000) 
|Pro forma (loss)                                     | (229,178) | (822,988)

F-9

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

|Pro forma income per
    share: |         |        
|------------------------------- | ------- | -------
|Basic                           | $(0.02) | $(0.06)
|Diluted                         | $(0.02) | $(0.06)

Warranty

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

Loss per share

Basic loss per share is computed by dividing net loss
available to common shareholders by the weighted average number of common shares
outstanding during the year. In computing the loss per share, the TurboSonic
Canada Inc. Class B exchangeable shares, disclosed in note 13, are
considered outstanding common shares of TurboSonic Technologies, Inc. Diluted
loss per share reflects the per share amount under the treasury stock method
that would have resulted if dilutive potential common stock had been converted
to common stock, as prescribed by SFAS 128, Earnings Per Share.

Foreign currency translation

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

Use of estimates

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

Impact of recently issued accounting standards

Share Based Payments

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

F-10

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd

Inventory Pricing

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

Exchange of Nonmonetary Assets

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

4. FINANCIAL INSTRUMENTS

Fair value of financial instruments

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

Credit risk

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

As at June 30, 2005, the Company had three customers that comprised 50% of
the total trade receivable balance and had three customers that comprised 58% of
the total trade receivable balance at June 30, 2004.

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 three
Canadian chartered banks, which are AA rated financial institutions.

5. ACCOUNTS RECEIVABLE

|                                | 2005      | 2004     
|------------------------------- | --------- | ---------
|                                | $         | $        
|                                |           |          
|Trade accounts receivable       | 1,142,953 | 1,249,721
|Allowance for doubtful accounts |          |         
|                                | 1,142,953 | 1,249,721

Bad debt recovery was $14,945 in 2004 and nil in 2005.

F-11

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

6. INVENTORIES

|                         | 2005     | 2004    
|------------------------ | -------- | --------
|                         | $        | $       
|                         |          |         
|Finished goods           | 95,468   | 64,370  
|Reserve for obsolescence | (15,889) | (11,856)
|                         | 79,579   | 52,514  

7. COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

|                                            | 2005         | 2004       
|------------------------------------------- | ------------ | -----------
|                                            | $            | $          
|                                            |              |            
|Costs incurred on
    uncompleted contracts | 9,490,859    | 2,548,297  
|Estimated earnings                          | 1,067,972    | 359,735    
|                                            | 10,558,831   | 2,908,032  
|Less billings to date                       | (11,231,969) | (3,210,107)
|                                            | (673,138)    | (302,075)  

Included in the accompanying balance sheets under the following captions:

|                                                 | 2005        | 2004     
|------------------------------------------------ | ----------- | ---------
|                                                 | $           | $        
|                                                 |             |          
|Deferred contract
    costs and unbilled revenue | 460,739     | 38,233   
|Unearned revenue and contract advances           | (1,133,877) | (340,308)
|                                                 | (673,138)   | (302,075)

As the result of the financial difficulties experienced by
one of the Company's subcontractors that became known subsequent to June 30,
2001, the estimated completion costs for a project were revised upward by
$177,000 in the fiscal 2001 consolidated financial statements. In the second
quarter of the year ended June 30, 2002, the estimated completion costs were
increased by a further $140,000 to a total of $317,000. Substantially all of the
estimated completion costs were incurred by June 30, 2002, and no further
increases were deemed necessary. Recovery, in whole or part, of these increased
costs may be possible through the liquidation of the assets of the
subcontractor, although, due to the uncertainty, no recovery has been recorded.
The liquidation process was not complete at June 30, 2005.

8. PROPERTY AND EQUIPMENT

|                       |           | Accumulated  | Net
    Book
|---------------------- | --------- | ------------ | ------------
|                       | Cost      | Depreciation | Value       
|2005                   | $         | $            | $           
|                       |           |              |             
|Office equipment       | 660,455   | 606,532      | 53,923      
|Other equipment        | 446,041   | 414,253      | 31,788      
|Leasehold improvements | 57,561    | 41,569       | 15,992      
|                       | 1,164,057 | 1,062,354    | 101,703     
|                       |           |              |             
|                       |           | Accumulated  | Net
    Book
|                       | Cost      | Depreciation | Value       
|2004                   | $         | $            | $           
|                       |           |              |             
|Office equipment       | 588,514   | 542,895      | 45,619      
|Other equipment        | 429,953   | 383,285      | 46,668      
|Leasehold improvements | 52,160    | 33,217       | 18,943      
|                       | 1,070,627 | 959,397      | 111,230     

F-12

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

8. PROPERTY AND EQUIPMENT cont'd

Total depreciation and amortization incurred by the Company during fiscal
2005 was $65,303 [2004 - $62,910].

The total depreciation, included in the above amounts, for assets under
capital leases during fiscal 2005 was $10,515 [2004 - $6,504].

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

|     |         | Accumulated  | Net Book
|---- | ------- | ------------ | --------
|     | Cost    | Depreciation | Value   
|2005 | $       | $            | $       
|     |         |              |         
|     | 135,722 | 127,260      | 8,462   
|     |         |              |         
|     |         | Accumulated  | Net Book
|     | Cost    | Depreciation | Value   
|2004 | $       | $            | $       
|     |         |              |         
|     | 124,692 | 107,257      | 17,435  

9. GOODWILL

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

|                                        | OEM     |             |        
|--------------------------------------- | ------- | ----------- | -------
|                                        | Systems | Aftermarket | Total  
|                                        | $       | $           | $      
|                                        |         |             |        
|Balance as of June 30, 2003             |        | 398,897     | 398,897
|Impairment loss recognized in operating |         |             |        
|income                                  |        |            |       
|Balance as of June 30, 2004             |        | 398,897     | 398,897
|Impairment loss recognized in operating |         |             |        
|income                                  |        |            |       
|Balance as of June 30, 2005             |        | 398,897     | 398,897

The Company completed its goodwill impairment testing as at
April 1, 2005, as required by SFAS No. 142. Prior to fiscal 2004, the Company
had two reportable business segments - nozzle systems and scrubber systems.
During fiscal 2005, the Company realigned its business activities and commenced
reporting on two business segments - OEM systems and Aftermarket. The previous
scrubber systems segment is closely aligned with the OEM systems segment and the
previous nozzle systems segment is closely aligned with the Aftermarket segment.
Due to deferred demand for the period ended June 30, 2003 in the capital good
markets relative to the status of environmental regulatory changes, the scrubber
systems business segment experienced depressed revenue levels and losses from
operations. These conditions created uncertainty regarding the forecasted future
cash flows required to support the goodwill associated with the scrubber
business segment under the rules of SFAS No. 142. Accordingly, the Company had
concluded that the $398,897 of goodwill associated with this business segment
should be expensed in the period ended June 30, 2003. The Company has concluded
that there has not been impairment associated with the Aftermarket segment to
the period ended June 30, 2005.

10. WARRANTY

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

F-13

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

10. WARRANTY cont'd

|                               | 2005     | 2004    
|------------------------------ | -------- | --------
|                               | $        | $       
|                               |          |         
|Balance, beginning of
    year | 60,442   | 68,623  
|Payments made                  | (28,804) | (48,989)
|Provisions made                | 51,680   | 40,808  
|Balance, end of year           | 83,318   | 60,442  

11. OBLIGATIONS UNDER CAPITAL LEASES

The Company has entered into certain capital leases for computer hardware and
software, with interest rates at approximately 10%.

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

|                                  | $     
|--------------------------------- | ------
|                                  |       
|2006                              | 8,284 
|2007                              | 3,452 
|2008                              | --    
|Total minimum lease payments      | 11,736
|Less amount representing interest | 646   
|                                  | 11,090
|Less current portion              | 6,740 
|                                  | 4,350 

12. COMMITMENTS AND CONTINGENCIES

> [a]

The Company has entered into operating leases, expiring through 2009, for
  office equipment and premises. Total minimum annual payments under these
  leases for the years after June 30, 2005 are as follows:

|     | $      
|---- | -------
|     |        
|2006 | 54,943 
|2007 | 50,455 
|2008 | 49,264 
|2009 | 8,373  
|2010 | 388    
|     | 163,423

Rental expense for office equipment and premises was $100,716 in 2005
  [$116,231 in 2004].

[b] Contingencies

General

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-14

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

13. SHAREHOLDERS' EQUITY

Common shares

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

The Company has total authorized share capital of 30,000,000
shares. In connection with the consolidation of the Company with Turbotak
Technologies Inc., on August 27, 1997, the shareholders of Turbotak Technologies
Inc. exchanged their shares for the Class B exchangeable shares of a wholly
owned subsidiary of the Company. These shares are exchangeable, at any time, at
the election of the holders of such shares, into an equivalent number of common
shares of the Company. The Class B exchangeable shares have voting rights
through a trustee. During 2004, 412,500 Class B exchangeable shares were
exchanged for common shares of the Company, leaving 5,151,706 Class B
exchangeable shares outstanding as of June 30, 2005 [after the July 2005
5-for-4-split].

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

At the end of fiscal 2005, a total of 7,982,290 common shares of the Company
and 5,151,706 Class B exchangeable shares of the subsidiary were outstanding
[after the July 2005 5-for-4-split].

Stock-based compensation

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

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

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

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

As a result of Board actions and Plan amendments in the 2000
and 2001 fiscal years, certain options which were issued in the prior years are
accounted for as "variable plan options" in accordance with FIN 28, Accounting
for Stock Appreciation Rights, and other variable stock option or award plans.
In 2005, an expense of $2,268 [2004 - $6,619] was recorded in connection with
these options.

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

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

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

F-15

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

13. SHAREHOLDERS' EQUITY cont'd

Stock-based compensation cont'd

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

A summary of the option activity since June 30, 2003 is shown below:

|                              | Number of shares | Weighted | Number of shares   
|----------------------------- | ---------------- | -------- | -------------------
|                              | to be issued     | average  | available for      
|                              | upon exercise    | exercise | future issuance    
|                              | of outstanding   | price    | excluding options  
|                              | options          | $        | already outstanding
|Balance, June 30, 2003        | 927,813          | 0.3693   | 625,625            
|Granted during the year       | 150,000          | 0.2800   | (150,000)          
|Forfeited during
    the year | (100,000)        | 0.4162   | 100,000            
|Balance, June 30, 2004        | 977,813          | 0.3508   | 575,625            
|Forfeited during
    the year | (118,750)        | 0.3537   | 118,750            
|Balance, June 30, 2005        | 859,063          | 0.3504   | 694,375            

The weighted average characteristics of options outstanding at June 30, 2005
are as follows:

|         | Options outstanding |             | Options exercisable
|-------- | ------------------- | ----------- | -------------------
|         |                     | Weighted    |                    
|         | Weighted            | average     |                    
|         | average             | remaining   |                    
|Exercise | exercise            | contractual | Number             
|price    | price               | life        | outstanding        
|$        | $                   | [years]     | #                  
|0.2800   | 0.2800              | 3.5         | 112,500            
|0.3200   | 0.3200              | 1.2         | 559,063            
|0.3600   | 0.3600              | 2.0         | 62,500             
|0.4500   | 0.4500              | 1.3         | 62,500             
|0.6400   | 0.6400              | 1.3         | 62,500             
|         | 0.3504              |             | 859,063            

Warrants

The Company has in the past granted detachable warrants for
500,000 common shares to debt holders as an inducement to advance funds to the
Company. In accordance with APB 14, a portion of the proceeds of the debt
securities issued with detachable stock purchase warrants, which is allocated as
the fair-value of the warrants, has been accounted for as paid-in capital. The
related discount on the debt securities was amortized over the remaining period
to the original maturity dates.

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

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

F-16

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

14. INCOME TAXES

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

|                                |            | 2005     | 2004    
|------------------------------- | ---------- | -------- | --------
|                                |            | $        | $       
|                                |            |          |         
|Current:                        | - U.S.     | 406      | 3,150   
|                                | - Canadian | (19,108) | (39,266)
|Total current taxes             | (18,702)   | (36,116)
|Deferred:                       | - U.S.     |         |        
|                                | - Canadian |         |        
|Total deferred taxes            |           |        
|Income tax provision (recovery) | (18,702)   | (36,116)

Components of the current tax provision are as follows:

|                                                  | 2005     | 2004     
|------------------------------------------------- | -------- | ---------
|                                                  | $        | $        
|                                                  |          |          
|(Recovery of) income tax based                    |          |          
|on basic U.S. tax rates                           | (34,001) | (171,534)
|(Recovery of) income taxes based                  |          |          
|on basic Canadian federal income
    tax rates    | (37,193) | (78,616) 
|(Recovery of) income taxes based on basic         |          |          
|Canadian provincial income tax
    rates          | (16,287) | (39,152) 
|Non-deductible goodwill impairment loss           |         |         
|Benefit of deductible temporary differences       |          |          
|and tax losses not recognized
    during the year | 68,779   | 253,186  
|Other                                             |         |         
|                                                  | (18,702) | (36,116) 

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

|                                              | 2005      | 2004     
|--------------------------------------------- | --------- | ---------
|                                              | %         | %        
|                                              |           |          
|U.S.                                          | 34.0      | 34.0     
|Canadian federal                              | 25.1      | 25.1     
|Canadian provincial                           | 11.0      | 12.5     
|                                              |           |          
|(Loss) before
    provision for income taxes: |           |          
|                                              | 2005      | 2004     
|                                              | $         | $        
|                                              |           |          
|U.S.                                          | (100,004) | (504,511)
|Canadian                                      | (145,894) | (313,212)
|Income before provision for income
    taxes  | (245,898) | (817,723)
|                                              |           |          
|Income taxes paid are
    as follows:         |           |          
|                                              | 2005      | 2004     
|                                              | $         | $        
|                                              |           |          
|Canadian federal                              | 541       |         
|Canadian provincial                           |          |         
|U.S. federal                                  |          |         
|U.S. state                                    | 406       | 3,150    
|                                              | 947       | 3,150    

F-17

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|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

14. INCOME TAXES cont'd

Income tax refunds received are as follows:

|                    | 2005   | 2004  
|------------------- | ------ | ------
|                    | $      | $     
|                    |        |       
|Canadian federal    | 19,649 | 6,426 
|Canadian provincial |       | 13,655
|U.S. federal        |       |      
|                    | 19,649 | 20,081

The Company has unutilized operating losses in the United States of
approximately $2,525,000 available for carry forward to reduce income taxes
otherwise payable in future years. This amount includes purchased loss carry
forwards of approximately $1,000,000. Access to purchased unutilized operating
losses is restricted to $83,168 per year until 2012. If the amount is not used
during the year, it is available for utilization in future years. A total of
$406,891 relating to prior year purchased operating losses was available to
apply against current year income. Other unutilized operating losses available
for carry forward total approximately $1,535,000 and expire in 2012. During the
current year, losses in the amount of $0 [$0 in 2004] were utilized.

In Canada, the Company has unutilized operating losses of approximately
$324,000 federally and $321,000 in Ontario. During the year, losses in the
amount of $0 [$62,603 federal and $65,087 Ontario in 2004] were utilized.

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

|                                             | 2005        | 2004     
|-------------------------------------------- | ----------- | ---------
|                                             | $           | $        
|                                             |             |          
|Book over (under) tax depreciation           | 17,452      | 10,796   
|Benefit of unrecorded investment tax credits |            |         
|Reserves not currently deductible            | 30,095      | 18,205   
|Net operating loss carryforward              | 973,999     | 872,049  
|Total deferred tax assets                    | 1,021,546   | 901,050  
|Valuation allowance for deferred tax assets  | (1,021,546) | (901,050)
|Net deferred tax asset (liabilities)         |            |         

15. RESEARCH AND DEVELOPMENT EXPENSES

|                  | 2005     | 2004  
|----------------- | -------- | ------
|                  | $        | $     
|                  |          |       
|Expenses incurred | 56,583   | 64,803
|Tax recovery      | (17,534) |      
|                  | 39,049   | 64,803

16. LOSS PER SHARE

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

|                                                             | 2005       | 2004      
|------------------------------------------------------------ | ---------- | ----------
|                                                             | $          | $         
|Numerator                                                    |            |           
|Net (loss)                                                   | (227,196)  | (781,607) 
|Denominator                                                  |            |           
|Denominator for loss
    per share -                         |            |           
|weighted average shares
    outstanding                      | 13,134,030 | 13,134,046
|Denominator for diluted earnings per
    share -             |            |           
|adjusted weighted average
    shares and assumed conversions | 13,134,030 | 13,134,046
|(Loss) per share                                             | $(0.02)    | $(0.06)   

For 2005 and 2004, all warrants and options were anti-dilutive and therefore
excluded from this calculation.

F-18

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

17. SUPPLEMENTARY INFORMATION ON CASH FLOWS

|                                                                        |           |          
|----------------------------------------------------------------------- | --------- | ---------
|                                                                        | 2005      | 2004     
|                                                                        | $         | $        
|                                                                        |           |          
|Changes in non-cash
    working capital balances related to operations: |           |          
|Decrease (increase) in
    accounts receivable                          | 204,729   | (628,465)
|(Increase) decrease in
    retentions receivable                        | (56,036)  | 78,095   
|(Increase) decrease in
    inventories                                  | (23,899)  | 4,932    
|(Increase) decrease in
    deferred contract costs and unbilled revenue | (414,008) | 26,661   
|Decrease (increase) in
    other current assets                         | 2,032     | (19,096) 
|Decrease in other
    assets                                            | 32        | 364      
|Increase in accounts
    payable                                        | 742,589   | 231,893  
|(Decrease) increase in
    accrued charges                              | (55,996)  | 18,843   
|Increase in unearned
    revenue and contract advances                  | 752,652   | 116,188  
|(Decrease) in income taxes payable                                      | --        | (19,455) 
|                                                                        | 1,152,095 | (190,040)

18. SEGMENTED INFORMATION

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

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

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

Contract revenue and sales are broken down geographically as follows:

|              | 2005       | 2004     
|------------- | ---------- | ---------
|              | $          | $        
|              |            |          
|United States | 4,340,000  | 2,219,600
|Canada        | 4,785,100  | 1,138,100
|Asia          | 445,100    | 538,400  
|Europe        | 333,800    | 500,600  
|South America | 890,300    | 278,600  
|Other         | 301,277    | 47,257   
|              | 11,095,577 | 4,722,557

The long-lived assets of the two business segments are
primarily located in Canada, except for the wet electrostatic precipitator and
certain nozzle technologies. For the year ended June 30, 2005, three customers
represented 50% of total revenues [in fiscal 2004, three customers represented
24% of total revenues].

F-19

---



|TURBOSONIC
    TECHNOLOGIES, INC. AND SUBSIDIARIES | Notes to Consolidated Financial Statements
|-------------------------------------------------- | ------------------------------------------
|                                                   | Year ended June 30, 2005                  

18. SEGMENTED INFORMATION cont'd

Industry segments

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

1

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

1

19. COMPARATIVE FIGURES

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

F-20

---



SIGNATURES

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

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


Date: September 26, 2005

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

|                          |                                              |                   
|------------------------- | -------------------------------------------- | ------------------
|Signatures                | Capacity                                     | Date              
|                          |                                              |                   
|/s/ Edward F. Spink       | Chairman of the Board of Directors and       | September 26, 2005
|Edward F. Spink           | Chief Executive Officer                      |                   
|                          | (Principal Executive Officer)                |                   
|                          |                                              |                   
|/s/ Patrick J. Forde      | President, Secretary, Treasurer and Director | September 26, 2005
|Patrick J. Forde          | (Principal Financial and Accounting Officer) |                   
|                          |                                              |                   
|/s/ Richard H. Hurd       | Director                                     | September 26, 2005
|Richard H. Hurd           |                                              |                   
|                          |                                              |                   
|/s/ Donald R. Spink, Sr.  | Director                                     | September 26, 2005
|Dr. Donald R. Spink, Sr.  |                                              |                   
|                          |                                              |                   
|/s/ Jonathan R. Lagarenne | Director                                     | September 26, 2005
|Jonathan R. Lagarenne     |                                              |                   
|                          |                                              |                   
|/s/ Julien J. Hradecky    | Director                                     | September 26, 2005
|Julien J. Hradecky        |                                              |                   

---