UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended June 30, ~~2011~~2012

Commission file number 0-21832

TURBOSONIC TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware	13-1949528
(State of Incorporation)	(I.R.S. Employer Identification No.)

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

(519) 885-5513
(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Exchange Act:
None

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

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ ] No [ X ]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Exchange Act.

Yes [ ] No [ X ]

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.:

Large accelerated filer [ ]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company [ X ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [ X ]

Aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant as of December 3130, ~~2010~~2011: $34,~~802~~215,~~516~~267

The number of outstanding shares of the Registrant's common stock as of ~~September~~October 2112, ~~2011~~2012: 18,554,112

DOCUMENTS INCORPORATED BY REFERENCE ~~None~~

TURBOSONIC TECHNOLOGIES, INC.
2011 FORM 10-K
TABLE OF CONTENTS
		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	10
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
Item 4.	Reserved	10
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
Item 6.	Selected Financial Data	11
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 8.	Financial Statements and Supplementary Data	18
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	18
Item 9A.	Controls and Procedures	18
Item 9B.	Other Information	18
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	19
Item 11.	Executive Compensation	22
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
Item 13.	Certain Relationships and Related Transactions, and Director Independence	25
Item 14.	Principal Accounting Fees and Services	25
PART IV
Item 15.	Exhibits, Financial Statement Schedules	26

None

TURBOSONIC TECHNOLOGIES, INC.
2012 FORM 10-K
TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Mine Safety Disclosures	12

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	22
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22
Item 9A.	Controls and Procedures	22
Item 9B.	Other Information	22

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	24
Item 11.	Executive Compensation	27
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	29
Item 13.	Certain Relationships and Related Transactions, and Director Independence	30
Item 14.	Principal Accounting Fees and Services	30

PART IV
Item 15.	Exhibits, Financial Statement Schedules	31

All dollar amounts set forth in this report are in United States dollars except where otherwise indicated.

Forward-Looking Statements

Forward-looking statements in this report, including without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical results or those we anticipate. WeSee ~~refer to~~ “Item 1A: Risk Factors” as well as other factors discussed in this ~~annual~~ report for a discussion of those risks and uncertainties. Our statements are based upon information known to us as of the date of this ~~annual~~ report is filed with the SEC,, and we assume no obligation to update or alter our forward-looking statements within this ~~annual~~ report, whether as a result of new information, future events or otherwise, except when required by applicable federal securities laws.

– 2 –

PART I ~~ITEM~~ ~~1: BUSINESS~~

a)	Business Development
	TurboSonic Technologies, Inc. (OTCBB:TSTA) designs and supplies air pollution control technologies to industrial customers worldwide. In 1997, Sonic Environmental Systems, Inc., a US public company, consolidated with Turbotak Technologies, Inc, a privately-held Canadian company to form TurboSonic Technologies Inc. The founding companies were incorporated in the State of Delaware in April 1961 and in the Province of Ontario Canada in 1976.
	Our executive offices are located at 550 Parkside Drive, Suite A-14, Waterloo, Ontario, Canada N2L 5V4; our telephone number is (519) 885-5513. Our website is located at www.turbosonic.com. The information on our website is not part of this annual report.
b)	Our Business
	Introduction
	Our proprietary technology is designed to address a wide variety of air pollution control problems for industries including wood products, metallurgical (non-ferrous and iron and steel), cement and mineral processing, ethanol and biofuel production, industrial/medical and municipal solid waste (MSW) incineration, petrochemical, pulp and paper, glass and power generation. We are actively pursuing opportunities related to the production of alternative fuels as cellulosic ethanol, pelletizing, biodiesel and other biofuels processes are developed. We believe our products and systems, which are designed to meet the strictest emission regulations for gaseous and particulate emissions, afford economic and technical advantages over competitive air pollution equipment.
	The following table reflects the approximate percentages of our revenue derived from our principal customer categories during the fiscal years indicated:

ITEM 1: BUSINESS

	Year Ended June 30,
a)	Business Development
Customer Revenue by Industry	2011	2010
	TurboSonic Technologies, Inc. (OTCQB:TSTA), directly and through subsidiaries, designs and markets integrated air pollution control technologies to industrial customers worldwide. In 1997, Sonic Environmental Systems, Inc., a US public company, consolidated with Turbotak Technologies, Inc., a privately-held Canadian company to form TurboSonic Technologies, Inc. The founding companies were incorporated in the State of Delaware in April 1961 and in the Province of Ontario, Canada in 1976.
Cement and Mineral Processing	17%	24%
	Our executive offices are located at 550 Parkside Drive, Suite A-14, Waterloo, Ontario, Canada N2L 5V4; our telephone number is (519) 885-5513. Our website is located at www.turbosonic.com. The information on our website is not part of this annual report.
Ethanol and Biofuel Production	4%	3%
	Recent Developments
Glass	2%	--%
	On October 10, 2012, we entered into an Agreement and Plan of Merger (which we refer to as the “merger agreement”) with MEGTEC Systems, Inc. and MTS WSP, Inc. (which we refer to as “Merger Sub”), an entity wholly-owned by MEGTEC. Pursuant to the merger agreement, Merger Sub would be merged with and into TurboSonic and we would continue as the surviving corporation. If the merger agreement is adopted by our stockholders and the merger is consummated, all of our outstanding shares of common stock (other than shares owned by stockholders perfecting dissenters’ rights under Delaware law) will be cancelled and converted automatically into the right to receive a cash payment equal to $0.21 per share.
Metallurgical Processing	16%	7%
	Consummation of the merger is subject to certain conditions, including, among others, approval of the merger agreement by the holders of a majority of the outstanding shares of our common stock and the total number of dissenting shares shall not exceed 10% of the outstanding shares of our common stock. Our founder, executive officers and directors, who collectively own of record shares of common stock representing approximately 20.6% of the aggregate voting power entitled to vote on the merger agreement, have agreed with MEGTEC to vote their respective shares in favor of the adoption of the merger agreement.
Petrochemical	19%	16%
	Subject to the terms of the merger agreement, under certain circumstances, a break-up fee of $200,000 may be payable to MEGTEC in connection with the termination of the merger agreement. In addition, we have agreed to reimburse MEGTEC and Merger Sub for their expenses (but not in excess of $400,000) if the merger agreement is terminated by us because we pursue an alternative acquisition and under certain other circumstances.
Power Generation	10%	8%
	In connection with the merger agreement, we also entered into a secured promissory note and related security agreements with MEGTEC. Under the terms of the secured promissory note, MEGTEC agreed to make available to us a credit facility of $1,000,000, which we may draw down in whole, but not in part, at any time prior to the maturity date of the note and which we may use for working capital or general corporate purposes. The note bears interest at 10% per annum commencing on the date of the drawdown and matures on the first anniversary of the drawdown. Under certain circumstances, the maturity date of the note may be accelerated. In that event, the outstanding principal amount of the note and accrued and unpaid interest would be applied, under certain circumstances, to payment of the initial license fee under an intellectual property license agreement entered into with MEGTEC at the same time as the secured promissory note.
Pulp and Paper	1%	2%
	Reference is made to “Other Information” in Item 9B of this report for further information regarding the merger agreement and the related documents.
Waste Incineration, including MSW	4%	4%
b)	Our Business
Wood Products	21%	31%
	Introduction
Other	6%	5%
	Our proprietary technology is designed to address a wide variety of air pollution control problems for industries including wood products, metallurgical (non-ferrous and iron and steel), cement and mineral processing, ethanol and biofuel production, industrial/medical and municipal solid waste (MSW) incineration, petrochemical, pulp and paper, glass and power generation. We are actively pursuing opportunities related to the production of alternative fuels as cellulosic ethanol, pelletizing, biodiesel and other biofuels processes are developed. We believe our products and systems, which are designed to meet the strictest emission regulations for gaseous and particulate emissions, afford economic and technical advantages over competitive air pollution equipment.
	100%	100%
	The following table reflects the approximate percentages of our revenue derived from our principal customer categories during the fiscal years indicated:

U.S. and Canadian customers collectively accounted for approximately 49% and 70% of our sales during the fiscal years ended June 30, 2011 and 2010, respectively, with the complete distribution of revenue by geographic area shown below. Revenue derived from export sales is transacted in U.S. Dollars and Euro.

	Year Ended June 30,
Customer Revenue by Geographic Area	2011	2010
United States	47%	66%
Canada	2%	4%
Brazil	19%	--%
Other South and Central America	4%	7%
Greece	11%	9%
Italy	11%	6%
Other Europe	5%	5%
Asia	--%	2%
Other	1%	1%
	100%	100%

– 3 –

	Year Ended June 30,
*Customer Revenue by Industry*	2012	2011
Cement and Mineral Processing	15%	17%
Ethanol and Biofuel Production	4%	4%
Glass	--%	2%
Metallurgical Processing	15%	16%
Petrochemical	13%	19%
Power Generation	6%	10%
Pulp and Paper	2%	1%
Waste Incineration, including MSW	5%	4%
Wood Products	38%	21%
Other	2%	6%
	100%	100%

U.S. and Canadian customers collectively accounted for approximately 85% and 49% of our sales during the fiscal years ended June 30, 2012 and 2011, respectively, with the complete distribution of revenue by geographic area shown below. Revenue derived from export sales is transacted in U.S. Dollars and Euro.

	Year Ended June 30,
*Customer Revenue by Geographic Area*	2012	2011
United States	81%	47%
Canada	4%	2%
Brazil	2%	19%
Other South and Central America	1%	4%
Greece	1%	11%
Italy	5%	11%
Other Europe	5%	5%
Asia	1%	--%
Other	--%	1%
	100%	100%

Scope of Contracts

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

We perform all process engineering, including but not limited to, the determination of the size, geometry and structural characteristics of the particular system needed for gaseous, mist or particulate removal, and perform the detailed design of, and develop specifications for, all applicable structural, electrical, mechanical and chemical components of such system. We have sales, project management and field service personnel in remote offices to support local markets. We, historically, have not manufactured or fabricated our own products or systems. Rather, we subcontract the manufacturing of our components and use third party fabricators to complete our custom designed systems, which are then installed in the field by local contractors. Our project managers and quality assurance personnel supervise, and manage all technical, physical and commercial aspects of our contracts to ensure we meet our contractual obligations and customers’ performance criteria.

Products and Systems

We offer a range of products and systems, incorporating diverse technologies, to address the industrial processing, air pollution control and other environmental management needs of our customers. Besides the design and supply of stand-alone systems, we often integrate our products and systems into equipment provided by others. These alliances facilitate our ability to provide custom-engineered solutions to meet or exceed environmental standards.

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

	Year Ended June 30,
Customer Revenue by Primary Products and Systems	2011	2010
Catalytic Gas Treatment Systems	6%	27%
SoniCool™ Evaporative Gas Cooling and Conditioning Systems*	14%	12%
SonicKleen™ Wet Electrostatic Precipitation Systems (WESP)*	16%	18%
TurboNox Systems*	16%	--%
TurboSorb Semi-dry Scrubber Systems*	12%	22%
Wet Scrubbers and Gas Absorbers*	31%	15%
Atomizing Nozzles, Service and Spare Parts	5%	6%
	100%	100%

– 4 –

	Year Ended June 30,
*Customer Revenue by Primary Products and Systems*	2012	2011
Catalytic Gas Treatment Systems	21%	6%
SoniCool™ Evaporative Gas Cooling and Conditioning Systems*	14%	14%
SonicKleen™ Wet Electrostatic Precipitation Systems (WESP)*	33%	16%
TurboNO_xSystems*	2%	16%
TurboSorb Semi-dry Scrubber Systems*	17%	12%
Wet Scrubbers and Gas Absorbers*	8%	31%
Atomizing Nozzles, Service and Spare Parts	5%	5%
	100%	100%

(*) Includes Air Pollution Control system upgrades and spare parts.

Our principal products and systems are described below:

Catalytic Gas Treatment (CGT)™ Systems

Catalytic Gas Treatment (CGT)™ technology controls emissions of regulated Volatile Organic Compounds (VOCs) such as formaldehyde and methanol from process gas streams. CGT™ has been demonstrated to reduce regulated emissions of aldehydes and alcohols by over 95%. Treating a wide range of alcohols and aldehydes, CGT™ utilizes an environmentally friendly catalytic process to destroy VOCs without the production of harmful, combustion-related ~~green~~greenhouse ~~house~~ gases and nitrogen oxides (NOx). Traditional thermal ~~destruction~~ destruction technologies for VOC control consume expensive natural gas and generate CO2. CGT™ technology avoids CO2 creation, which is a much more desirable, cost-effective solution than thermal oxidation and avoids the need for carbon capture and sequestration. TurboSonic holds ~~the~~ exclusive worldwide marketing rights for the patented CGT™ technology. This agreement expires in 2016, but automatically continues provided that we meet certain criteria, as provided for in the agreement. On a case-by-case basis, TurboSonic’s proprietary clean air technology ~~will~~may be integrated with the CGT™ technology for use by building products and other industries requiring VOC control.

SoniCool™ Evaporative Gas Cooling and Conditioning Systems

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), resulting in gas temperatures that do not damage equipment and ductwork; smaller gas volumes; and improved efficiency of downstream air pollution control equipment. We are an internationally known leader in gas cooling and conditioning with hundreds of installations throughout the world.

– 4 –

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. More efficient than scrubbers, this system is often specified for power boilers, waste incineration, acid plant gas treatment, biofuel production, power generation, thermal oxidizer pre-cleaning, and other industrial process gas streams. It has proven to be reliable and has exceeded regulatory targets for performance while retaining operating and maintenance costs to a minimum.

~~TurboNox~~TurboNOx Systems

TurboSonic NO_xcontrol systems feature proprietary Turbotak air-atomized nozzle technology for controlled drop size andspray coverage, which provides superior performance in reaction and removal efficiencies. We offer a complete mechanical equipment scope of supply for Selective Non-catalytic Reduction (SNCR) as well as ammonia feed and injection equipment for Selective Catalytic Reduction (SCR) Systems.

TurboSorb Semi-Dry Scrubber

The TurboSorb Semi-Dry Scrubber treats industrial process gas streams, removing acid gases such as SO₂(sulfur dioxide) and HCI (hydrochloric acid). By spraying an alkali reagent, the TurboSorb system can achieve higher removal efficiencies of SO₂and HCl than traditional “dry” scrubbers. Unlike “wet” systems, all water is evaporated resulting in no liquid waste stream being generated.

– 5 –

We have a substantial installed base of hundreds of scrubbers and gas absorbers worldwide. Using patented processes and components we can meet the most rigorous current regulations for limiting gaseous and particulate emissions.

Wet Scrubbers and Gas Absorbers

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

The TurboVenturi Scrubber treats industrial process exhaust gas streams primarily for removal of particulate. The system operates by forcing the gas stream across a pressure drop in order to generate a fine stream of liquid droplets for very high efficiency particulate removal. This single purpose design is a low capital cost solution for specific applications.

Gas absorbers treat industrial process gas streams primarily for removal of contaminant gases, including acid gases (SO₂, HCl, etc.), where high removal efficiencies are required. Designs include packed-, spray- and tray-type towers and are selected based upon application-specific conditions.

SonicCharge™ CCM

We have developed a new carbon composite material, SonicCharge™ CCM, which has superior corrosion-resistance, has proven to be resistant to arc and spark erosion, and can withstand flue gas operating temperatures in the order of 350ºF on a sustained basis. TurboSonic has patents pending relating to this new material.

A tube bundle manufactured of SonicCharge™ CCM was installed in our WESP pilot unit, which has been operated on location at one of our industrial clients. Subsequent to this pilot testing an order was received for a full-scale WESP incorporating a tube bundle fabricated in SonicCharge™ CCM. This full-scale WESP has been in operation since the summer 2012.

Air Pollution Control System Upgrades

We are able to retrofit existing air pollution control equipment, using our atomizing nozzles, venturi scrubber and wet electrostatic precipitator technologies and years of experience in the air pollution control industry, to consistently improve performance. An equipment upgrade is significantly less expensive than purchasing new equipment. Our engineers will assess an existing system and propose an upgrade solution where practical.

Atomizing Nozzles and Spare Parts

Our Turbotak atomizing nozzles, which are used in a wide variety of industrial applications, atomize liquids to extremely small droplets. The nozzles feature a two-phase design for superior control over droplet size and distribution pattern. The nozzles range from single-orifice to multi-orifice designs which 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. Other nozzle designs we offer generate very low flow rates that make them ideal for applications such as dust suppression and humidification.

Our nozzles are sold as parts to other suppliers in the industry. We incorporate these nozzles into our air pollution control systems to meet superior performance criteria.

Given the extreme conditions under which industrial process and air pollution control systems operate, there is an ongoing requirement for maintenance and replacement parts. We offer specialized field service, replacement parts and retrofit components.

– 5 –

Contractual Liabilities

Our standard contractual terms with respect to the sale of our products and systems disclaim any liability for consequential or indirect losses or damages stemming from any failure of our products or systems or any of their components. We customarily seek contractual indemnification from our subcontractors for any loss, damage or claim arising from the subcontractor’s failure of performance, negligence or malfeasance. It is possible, however, that a customer’s inability to comply with applicable pollution control laws or regulations stemming from the failure or non-performance of our products or systems may result in an attempt to subject us to liability for any fines imposed upon such customer by governmental regulatory authorities or for damages asserted to have been incurred by any third party adversely affected ~~thereby~~by such failure or non-performance.

– 6 –

Marketing and Sales

Our marketing efforts are technical in nature and currently involve our senior management and technical professionals, who may be supported by independent sales representatives. A significant portion of our sales are made through the recommendation of engineering firms who are often engaged in complete plant installations or upgrades. Our independent sales representatives assist us in identifying opportunities and serve as liaison between us and our customers during the sales process. We select sales representatives based upon industry reputation, prior sales performance, product knowledge and territorial coverage, among other criteria. Our contractual arrangements with 1716 current independent sales representatives are territory and product specific, and the continuity of such arrangements is subject to performance criteria. None of these representatives ~~have~~has authority to execute contracts on our behalf.

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

We seek to obtain repeat business from our customers, although we do not depend upon any single customer to maintain our level of activity from year to year; however, one or more different customers may be expected to account for greater than 10% of our ~~net~~revenue ~~revenues~~ in any consecutive twelve month period.

	~~Year Ended June 30,~~	Year Ended June 30,
Significant Customer Revenue	~~2011~~	~~2010~~2012	2011
Top 3 customers for the year	~~30%~~	5344%	30%

Backlog

Backlog represents unfilled customer orders for our products and services. Additions to backlog are recorded with a signed sales contract. As work proceeds on the contract, the applicable percentage of completion is converted from backlog to revenue recognition. The backlog balance represents committed work yet to be completed.

Our business is driven by environmental regulations, operational improvements, product life cycles, new plant developments, competitive pressures, and other economic and non-regulatory factors affecting our capital goods markets. Our backlog and revenues can fluctuate significantly in response to these factors.

	~~Year Ended June 30,~~	Year Ended June 30,
Backlog	~~2011~~	~~2010~~2012		2011
Backlog, balance at	$~~12,000,000~~	$37,000,~~000~~0001	$	8,300,0001
1 adjusted backlog after taking into account a $3.7 million order cancellation in late fiscal 2012.

Product Research & Development

We have an ongoing program for the research, development and commercialization, as well as licensing of new industrial processing and air pollution control products, systems and technologies, and the enhancement of existing products and systems. We believe that these investments will contribute significantly to our future growth.

	~~Year Ended June 30,~~	Year Ended June 30,
Product Research & Development	~~2011~~	~~2010~~2012		2010
Expenditures for research and development	$~~182,007~~	~~$332~~63,~~193~~970	$	182,007

– 6 –

Proprietary Protection

We rely on a combination of patents, trade- and service- marks, trade secrets and know-how to protect our proprietary technology and rights. We own 2116 unique patents and patents pending in domestic and multiple international jurisdictions relating to a variety of air pollution control applications. ~~Five~~One ofpatent ~~these patents~~ will expire in fiscal ~~2012~~2013; however, we do not expect that ~~their~~ ~~expiration~~its expiration will have a negative impact on our future revenue. One patent each is scheduled to expire in fiscal ~~2013,~~ 2017 and 2018.

We have registered trademarks in the United States and certain foreign countries for identifying names (renewal dates shown in brackets) that we use with our products and systems including SoniCore® (2013) and TurboSOx® (2015).

– 7 –

Suppliers and Subcontractors

We have historically relied on third parties to manufacture and fabricate our products and to supply parts and components for our systems in accordance with our specifications and we supervise subcontractors for equipment installation when included in our scope of work. Throughout our markets, we have many vendors from which to choose, both pre-qualified or those with whom we have direct experience. Given the number of manufacturers, fabricators and subcontractors which we utilize and the availability of alternative sources, we do not believe that the loss of our relationship with any one firm would have a material adverse effect on our business.

Government Regulation

Stringent environmental laws and regulations have been enacted or ~~and~~ are pending in the United States and other nations in response to public concern about the environment. The need to comply with these laws creates demand for our products. In the United States, ~~the Clean Air Act,~~ federal, state and local regulations, which implement itthe Clean Air Act and related state laws, and the level of enforcement of these laws and regulations largely determine the level of expenditures that customers will make to limit emissions from their facilities to ~~regulated~~comply bywith these rules.

The market for our air pollution control products and systems is directly dependent upon the existence and effective enforcement of laws and ~~regulations~~ regulations that limit the release of pollutants into the atmosphere and impose ~~substantial~~ substantial penalties for non-compliance. Governments can change, modify or ~~amend~~ amend environmental regulations at any time, through an administrative process, which could have positive or negative effects upon our future revenues and prospects of profitability depending on the nature of the regulatory action. ~~The U.S. Environmental Protection Agency~~ (“EPA”) is currently seeking to tighten certain emission standards, thereby forcing a number of industries to adopt technologies, such as WESPs, in order to comply with those standards. These technologies may be more effective in meeting the new standards than more traditional technologies, such as scrubbers. Court challenges and EPA’s own delays to the implementation of certain of the National Emission Standards for Hazardous Air Pollutants (“NESHAP”) in the U.S. market have delayed order placement by companies intending to be compliant. The standards set by the EPA under NESHAP for particular source categories (such as (i) plywood and composite wood and (ii) boilers and process heaters) are known as Maximum Achievable Control Technology (“MACT”) standards. New SO2 emission rules went into effect on August 23, 2010. Proposed NESHAP emission rules for cement production facilities went into effect on November 8, 2010. New MACT rules for industrial boilers (Industrial Boiler MACT) and for electrical generating units (Utility MACT) in the US will be issued in the near future.

OnThe ~~August~~U.S. 8,Environmental ~~2011,~~Protection Agency (“EPA”) ~~issued~~is ~~its final Cross-State Air~~currently ~~Pollution~~seeking ~~Rule~~to ~~(“CSAPR”)~~tighten ~~which~~certain ~~will~~emission ~~impose~~standards, ~~further~~thereby ~~limits~~forcing ona ~~NOx~~number ~~and~~of ~~SO2~~industries ~~from~~to ~~fossil-fuel~~adopt ~~fired~~technologies, ~~utilities~~such inas 27WESPs, ~~specified~~in ~~eastern, mid-western~~order ~~and~~to ~~southern~~comply ~~states~~with those standards. These ~~standards,~~technologies ~~which~~may ~~are~~be tomore goeffective ~~into~~in meeting the new standards ~~effect~~than inmore ~~two~~traditional ~~phases~~technologies, insuch ~~2012~~as scrubbers. Court challenges and EPA’s ~~2014,~~own ~~replace~~delays in the ~~current~~implementation ~~Clean~~of ~~Air~~certain ~~Interstate~~of the National Emission ~~Rule~~Standards for Hazardous Air Pollutants (“~~CAIR~~NESHAP”) ~~and~~in ~~will~~the ~~tighten~~U.S. ~~those~~market have delayed order placement by companies intending to be compliant. The standards set ~~and~~by ~~impose~~the ~~shorter~~EPA ~~timelines~~under NESHAP for particular source categories (such as (i) ~~compliance,~~plywood ~~requiring~~and ~~plants~~composite inwood ~~affected~~and ~~states~~(ii) toboilers ~~install~~and orprocess ~~upgrade~~heaters) ~~their~~are known as ~~pollution~~Maximum ~~control~~Achievable ~~equipment~~Control Technology (“MACT”) standards. OnNew ~~September~~national standards 2,for ~~2011~~SO2 emission went into effect on August 23, 2010 but the ~~White~~EPA ~~House~~extended ~~ordered~~the ~~EPA~~date for designations of nonattainment until June 2013. NESHAP emission torules ~~withdraw~~for ~~its~~Portland ~~proposed~~cement ~~tightening~~production offacilities ~~National~~originally ~~Ambient~~went ~~Air~~into ~~Quality~~effect ~~Standards~~on November 8, 2010 though portions were reconsidered and re-proposed in July 2012. Revised MACT rules for industrial boilers (~~“NAAQS”~~Industrial Boiler MACT), originally issued Spring 2011, were withdrawn for ~~ground~~reconsideration and re-~~level~~proposed ~~ozone~~in December 2011. ~~The~~They ~~new~~are ~~standards~~expected ~~EPA~~in ~~planned~~final toform ~~propose~~by ~~would~~early 2013. MACT for ~~have~~electrical ~~significantly~~generating ~~impacted~~units ~~many~~(Mercury ~~regions~~and ofAir ~~the~~Toxic ~~country,~~Standards ~~requiring~~or ~~additional~~"MATS") went ~~controls~~into oneffect ~~emissions~~in ~~zone~~April ~~precursor~~2012, ~~VOCs~~although ~~and~~the ~~NOx.~~ EPA ~~will continue~~withdrew ~~its~~for ~~statutory-mandated~~reconsideration ~~review~~a portion of ~~its~~the ~~existing~~rule ~~ozone~~for ~~standard~~new units, ~~which~~with isa ~~still~~final ~~subject~~rule toexpected ~~ongoing~~in ~~litigation,~~Spring 2013. MATS requires compliance by ~~2013~~2015, though the rule allows for some extensions. The EPA also ~~continues~~proposed tightening national emissions standards for fine toparticulates ~~work~~in onmid-2012 ~~further~~and ~~strengthening~~stated ~~NAAQS~~it ~~for~~would ~~particulate~~finalize ~~matter~~a rule before the end of 2012. The EPA's Cross-State Air Pollution Rule, which ~~the~~addressed ~~agency~~fine particulate ~~had~~matter ~~previously~~and ~~said~~ozone, ~~would~~has bebeen ~~proposed~~vacated inby ~~mid-2011~~court order.

Many of the standards discussed above, ~~are~~most notably MATS, are subject to ongoing litigation and congressional scrutiny, and bills are being considered to delay implementation of certain of the standards. Therefore, the timing of issuance and implementation of final rules in these areas is somewhat uncertain.

~~EPA~~The ~~announced~~European onUnion ~~September 15, 2011 that it would further delay the release of proposed new source performance standards~~ (“~~NSPS~~EU”) ~~for~~is ~~greenhouse gas~~enforcing ~~(“GHG”)~~emission ~~emissions~~regulations based ~~from~~on the ~~electricity~~latest ~~generation~~standards ~~sector~~developed ~~beyond~~according ~~the September~~to 30individual ~~deadline it had previously announced. EPA had agreed in a~~industries, ~~settlement~~requiring ~~with~~industrial ~~environmental~~emitters ~~groups~~ to ~~propose~~operate ~~these~~according ~~regulations originally in July and~~ to ~~issue~~best ~~final~~known ~~regulations by May 26~~practices, ~~2012. EPA has stated it will keep~~ towhich ~~the~~may ~~final~~include ~~rule~~installing ~~deadline,~~ and isoperating ~~also~~emission ~~obligated~~control ~~to issue NSPS rules for GHG~~equipment. ~~emissions~~Similarly, ~~from~~other ~~the~~countries ~~refinery~~are ~~sector~~implementing, bytightening ~~November~~and ~~2012.~~enforcing Itindustrial emission isregulations ~~unclear~~requiring ~~what~~industrial ~~kinds~~entities ofto ~~controls~~install ~~these~~and ~~standards might require or~~operate ~~whether~~emission ~~EPA~~control ~~will further postpone GHG rulemaking~~equipment. ~~Any~~However, ~~standards~~the ~~are~~current ~~likely~~economic toconditions ~~be challenged~~ in ~~court and in~~ the ~~legislative arena. EPA already imposed GHG~~EU ~~controls on construction~~ and ~~modification~~other ofcountries ~~large~~has ~~GHG-emitting~~had ~~sources~~the ~~(“major sources”)~~effect ~~under~~of ~~its~~delayed ~~New~~implementation ~~Source~~of ~~Review~~many ~~program~~of ~~in January and July 2011, with a~~such ~~focus on more efficient combustion and lower carbon fuels~~regulations.

– 7 –

The European Union (“EU”) is enforcing emission regulations based on the latest standards developed according to individual industries, requiring industrial emitters to operate according to best known practices, which may include installing and operating emission control equipment. Similarly, other countries are implementing, tightening and enforcing industrial emission regulations requiring industrial entities to install and operate emission control equipment.

Competition

We face substantial competition in each of our principal markets and throughout our product line from numerous competitors. Price is the predominant competitive factor but we promote our engineering and technological expertise, quality of our products, systems and service, our reputation for performance, and our ability to negotiate responsible contracts. We believe customers award us contracts on varying combinations of these factors.

– 8 –

Employees

Our employees are generally long serving, technically qualified and performance driven. As of June 30, ~~2011~~2012, we employed 4746 full time persons , including 1514 engineers, 1413 salespersons, and 1713 technical support persons. None were employed part-time. None of our employees are represented by a labor union. We believe that our relationship with our employees is satisfactory. Subsequent to June 30, 2012, our employee headcount has decreased by three sales persons and two technical support persons.

Financial Information about Foreign and Domestic Operations and Export Sales

A table of Customer Revenues by Geographic Area is set forth above under “Our Business – Introduction”.

We have a sales and project management office in Milan, Italy to manage our business in Europe and other international locations.

Foreign transactions are conducted in Canadian dollars, USU.S. dollars or Euro to accommodate customers and all reporting is prepared in US dollars. As a result, fluctuations in currency exchange rates may affect operating results. To mitigate currency exposure we attempt to contract outsourcing, where practical, in the same currency as the sales contract. There were no outstanding foreign exchange forward contract commitments at June 30, ~~2011~~2012.

ITEM 1A: RISK FACTORS

Our operating results for fiscal ~~2011~~2012 were significantly ~~and~~ and negatively impacted by ~~the economic downturn Our operating revenues were approximately $13,739,000 for the fiscal year ended June 30, 2011, representing a decrease of 1.1% when compared to~~ our operating revenues of approximately $13,886,000 for the comparable twelve month period of the prior fiscal year (and a decrease of 45.9% when compared to our operating revenues of approximately $25,405,000 for our 2009 fiscal year). These reductions in operating revenues reflect our clients’ curtailment in capital expenditures and ~~deferral in order~~ placements as they sought to cope with the effects of the economic downturn upon their businesses. In fiscal 2011, we incurred a loss from operations of approximately $1,645,000 and a net loss of approximately $1,594,000, as contrasted with a loss from operations of approximately $1,884,000 and a net loss of approximately $975,000 in fiscal 2010 and income from operations of $2,165,000 and net income of approximately $1,556,000 in fiscal 2009. Our net loss for the 2011 fiscal year reflects the effect of a non-cash accounting adjustment of $722,824 which is attributable to a reduction in the valuation of our deferred tax assets due to our incurrence of two consecutive years of loss. This adjustment, by means of the establishment of a reserve, does not reduce the total deferred tax assets available to offset future taxes. Our backlog at June 30, 2011 was a record high of approximately $12,000,000 as compared to a backlog of approximately $3,000,000 and $10,200,000 at June 30, 2010 and 2009, respectively. Exacerbating our fiscal 2011 and 2010 operating results were U.S. legislative delays in the enactment of new environmental standards for emissions of hazardous pollutants~~, which caused many of our historical and prospective clients across market sectors to delay their plans for orders in anticipation of extended mandatory compliance dates~~. ~~We are unable to give you any assurance as to the timing, strength and duration of any economic recovery nor can we give you any assurance as to when we may return to continued profitability.~~

–For 8the –fiscal year ended June 30, 2012, our revenues were approximately $16,290,000, our loss before tax was approximately $1,741,000 and our net loss was approximately $2,762,000. Our net loss for fiscal 2012 reflects the effect of a non-cash accounting adjustment of $1,051,000, which is attributable to a reduction in the valuation of our deferred tax assets due to the fact that it is no longer more likely than not that the deferred income tax assets will be realized. Also reflected in our net loss for fiscal 2012 is a valuation allowance for value-added taxes receivable ($178,000) and the write-down of goodwill ($399,000).

WeThe ~~are~~following ~~dependent~~tables oncompare ~~environmental~~these ~~regulation~~amounts towith ~~drive~~ our ~~orders The market for our air pollution control products and systems is directly dependent upon the existence and enforcement of laws and regulations which limit the release of~~revenues, ~~pollutants~~loss ~~into~~from ~~the~~operations ~~atmosphere~~ and ~~impose~~our ~~substantial~~net ~~penalties~~loss for ~~non-compliance.~~fiscal ~~Stringent enforcement of these laws and regulations may increase the attractiveness of~~2011, ~~and~~fiscal ~~demand~~2010 ~~for our products~~ and ~~services, whereas lax enforcement and/or less~~fiscal ~~strict~~2009. ~~regulation~~All ornumbers ~~repeal~~are inapproximate ~~whole~~and orrounded into ~~part may have~~ the ~~opposite~~nearest ~~effect~~thousand. ~~Recent regulations include:~~

Industrial Boiler MACT regulations for industrial boiler emissions control that had been scheduled to become effective on May 20, 2011, but were delayed until the earlier of the settlement of court challenges or the completion of EPA’s reconsideration of the standards; EPA has recently stated it will complete reconsideration by October 2011 and issue final standards by April 2012.;

					Fiscal 2012 Compared to Fiscal 2011
		Fiscal 2012			Fiscal 2011			$ Change		% Change
Revenue	$	16,290,000		$	13,739,000		$	2,551,000		18.6%
(Loss) before taxes	$	(1,741,000	)	$	(1,647,000	)	$	(94,000	)	(5.6%	)
Net (loss)	$	(2,762,000	)	$	(1,594,000	)	$	(1,168,000	)	(73.3%	)

					Fiscal 2012 Compared to Fiscal 2010
		Fiscal 2012			Fiscal 2010			$ Change		% Change
Revenue	$	16,290,000		$	13,886,000		$	2,404,000		17.3%
(Loss) before taxes	$	(1,741,000	)	$	(1,886,000	)	$	145,000		7.7%
Net (loss)	$	(2,762,000	)	$	(975,000	)	$	(1,787,000	)	(183.3%	)

					Fiscal 2012 Compared to Fiscal 2009
		Fiscal 2012			Fiscal 2009			$ Change		% Change
Revenue	$	16,290,000		$	25,405,000		$	(9,115,000	)	(35.9%	)
(Loss) income before taxes	$	(1,741,000	)	$	2,185,000		$	(3,926,000	)	(179.7%	)
Net (loss) income	$	(2,762,000	)	$	1,556,000		$	(4,318,000	)	(277.5%	)

~~Utility~~Our ~~Boiler~~backlog ~~MACT~~at ~~regulations~~June ~~for~~30, ~~electric~~2012 ~~generating~~was ~~units~~approximately $7,000,000 ~~which~~as compared ~~EPA~~to ~~states~~a ~~will~~backlog beof ~~issued~~approximately ~~November~~$8,300,000 16at June 30, 2011; (adjusted backlog after taking into account a $3.7 million order cancellation in late fiscal 2012).

SO2 emission reduction regulations, which went into effect on August 23, 2010, for coal-fired power plants, pulp and paper mills, metallurgical smelters and cement kilns;

Portland cement NESHAP standards for the reduction of hazardous air pollutants from the Portland cement manufacturing industry which went into effect on November 8, 2010; and

Downwind emissions of NOx and SO2 from fossil-fired utilities in 27 states will be subject to stricter controls pursuant to the CSAPR, beginning in 2012 and in a second phase in 2014. The new rule replaces the existing CAIR program and strengthens existing standards, requiring compliance over a more immediate timeframe.

All these rules have been challenged in court. With regards to the Portland cement regulations, the reviewing court recently refused to stay these regulations pending judicial review. On May 17, 2011, the EPA agreed to reconsider certain requirements of the rules, but refused to reconsider other issues. On May 18, 2011, the EPA stated it would agree to reconsider certain aspects of the Industrial Boiler MACT regulations and has effectively stayed them but has now proposed a new timeline discussed above. That schedule, too, has been challenged in court. It is possible that further actions by the EPA, legal challenges or legislative developments could further delay or modify any of these or other regulations.

Our revenue is concentrated among a few customers who vary from year to year. Sales to our top three customers accounted for 30% (11%, 11%, 8%) of our net revenues in the fiscal year ended June 30, 2011 and 53% (29%, 15%, 9%) in the fiscal year ended June 30, 2010. One was a repeat customer accounting for 11% in fiscal 2011 (9% in fiscal 2010). The bulk of our revenue is large dollar capital contracts over multiple months where the customer base may change widely on a year-to-year basis. Our inability to replace these customers on an annual basis could materially and adversely affect future revenue and profitability.

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

Our foreign sales are subject to certain inherent risks. Approximately 51% and 30%, respectively, of our revenues during our fiscal years ended June 30, 2011 and 2010 were derived from sales made outside of North America. Foreign sales are subject to certain inherent risks, including unexpected changes in political, regulatory and other legal requirements, tariffs and other trade barriers, regional economic conditions and business practices, greater difficulty in collection of accounts receivable, foreign exchange fluctuations and potentially adverse tax consequences. There can be no assurance that these factors will not have an adverse impact on our future foreign sales and, consequently, on our operating results.

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

Since we do not manufacture or fabricate our own products or systems, we are dependent on the services of third party manufacturers and fabricators. We do not manufacture or fabricate our own products or systems, relying instead upon the services of third party manufacturers and fabricators. We also do not engage in the field construction of our systems but rely on field construction subcontractors operating under the supervision of our own employees. The unavailability of the services of, or a substantial increase in pricing by a significant number of, these manufacturers, fabricators or subcontractors could adversely affect us.

– 9 –

The ~~markets~~reduction ~~for~~in ~~environmental~~revenues ~~control~~from ~~products~~fiscal ~~are~~2009 ~~very competitive.~~reflects ~~The~~our ~~markets~~clients’ ~~for~~curtailment ~~environmental~~of ~~control~~capital ~~products~~expenditures ~~are characterized~~and bydeferral ~~substantial~~in ~~competition~~order ~~based~~placements ~~primarily~~as onthey ~~engineering~~sought ~~and technological~~to ~~expertise~~cope ~~and~~with ~~quality~~the effects of ~~service.~~the ~~Because~~economic ~~virtually~~downturn ~~all~~upon ~~contracts for~~their businesses. Exacerbating our fiscal ~~products~~2012 and ~~systems~~fiscal ~~are~~2011 ~~obtained~~operating ~~through~~results ~~competitive~~were ~~bidding,~~U.S. ~~price~~legislative ~~is also~~delays ain ~~competitive factor and may be~~ the ~~most~~enactment ~~significant~~of ~~factor~~new inenvironmental ~~certain instances.~~standards ~~Although~~for weemissions ~~believe~~of ~~that~~hazardous wepollutants, ~~compete~~which oncaused ~~the~~many ~~basis~~ of our ~~technical expertise~~historical and ~~reputation~~prospective ~~for~~clients ~~service,~~across ~~there~~market ~~can~~sectors beto delay notheir ~~assurance~~plans ~~that~~for weorders ~~will maintain~~in ~~our~~anticipation ~~competitive~~of ~~position~~extended inmandatory ~~our~~compliance ~~principal markets~~dates.

~~Our~~ We ~~fixed~~are ~~price~~unable ~~contracts~~to ~~expose~~give usany toassurance ~~losses~~as into the ~~event of~~timing, ~~cost~~strength ~~overruns.~~and ~~Our~~duration ~~receipt~~ of aany ~~fixed~~sustained ~~price~~economic ~~contract~~recovery, as ato ~~consequence~~whether ~~of being~~ the ~~lowest~~U.S. ~~competitive~~legislative ~~bidder~~delays ~~carries~~in the ~~inherent~~enactment ~~risk~~of ~~that~~new ~~our~~environmental ~~actual performance~~standards ~~costs~~will ~~may exceed the estimates upon which our bid for such contract was based. To the extent that contract performance costs exceed projected costs, our profitability could~~ be ~~materially~~favorably ~~adversely affected. Escalation clauses regarding labor or material changes~~reconciled, ~~including~~nor ~~commodity~~as ~~price~~to ~~changes,~~when ~~are not normally accepted by our clients. Rather~~ we may ~~elect~~return to ~~place orders as soon after receipt of a firm customer order as possible to manage our labor/material price escalation exposure~~profitability.

~~Adverse economic conditions may cause customers to delay or~~ ~~terminate~~Our ~~our~~financial ~~fixed~~statements ~~price~~contain ~~contracts. Due to~~ a ~~number~~going ofconcern ~~factors including adverse market conditions, fixed price contracts may be delayed or terminated by customers~~qualification. Although we are typically protected by contractual terms that will address the cost implications of these events, any such delays may have a material impact on our contract revenue and therefore our profitability in a given fiscal period.

~~The~~ Our ~~market~~audited ~~price~~consolidated offinancial ~~our~~statements ~~common~~have ~~stock~~been ~~could~~prepared beon ~~subject~~a ~~to wide~~going ~~fluctuations~~concern ~~in response to numerous factors~~basis, ~~some of~~ which ~~are~~presumes ~~beyond~~that our ~~control.~~ ~~These~~assets ~~factors~~will ~~include,~~be ~~among~~realized ~~other~~and ~~things,~~our ~~actual~~liabilities orwill ~~anticipated variations~~be discharged in ~~our~~the ~~costs~~normal course of ~~doing~~ business, ~~operating~~over ~~results~~the ~~and~~foreseeable ~~cash~~future. ~~flow,~~We have ~~backlog,~~incurred significant losses during the ~~nature~~three ~~and~~fiscal ~~content~~years ofended ~~our~~June ~~earnings~~30, ~~releases~~2012, ~~and~~which ~~our~~losses ~~competitors’ earnings~~have ~~releases,~~reduced ~~customers,~~our ~~competitors~~cash orand ~~markets,~~stockholders' ~~changes~~equity. inThese ~~business~~ conditions inraise substantial doubt about our ~~markets~~ability ~~and~~to ~~the~~continue ~~general~~as ~~state~~a ofgoing ~~the~~concern. ~~securities~~Our ~~markets~~ability ~~and~~to ~~the~~continue ~~market~~as ~~for~~a ~~similar~~going ~~stocks,~~concern ~~changes~~is independent ~~capital~~on ~~markets~~achieving ~~that~~a ~~affect~~profitable ~~the perceived~~level ~~availability~~ of ~~capital~~operations, and our ability to ~~companies~~either insuccessfully ~~our~~complete ~~industries,~~the ~~governmental legislation~~merger discussed elsewhere in this report or ~~regulation~~secure ~~the~~other ~~environment,~~sources asof ~~well~~financing. asThere ~~general~~can ~~economic~~be ~~and~~no assurance ~~market~~that ~~conditions,~~we ~~such~~will asbe ~~continued~~able ~~downturns~~to incomplete ~~our~~the ~~economy~~merger ~~and~~or ~~recessions~~raise sufficient additional capital to continue our operations.

If the merger agreement is terminated or is not approved at the special meeting of stockholders or if we are unable to find any other source of financing, we would only have sufficient capital resources to support our operations for a short period of time.

As of June 30, 2012, we had cash and cash equivalents of approximately $1.1 million and working capital of approximately $1.9 million. In connection with the merger agreement executed on October 10, 2012, MEGTEC has made available to us a $1.0 million credit facility, which, if drawn down by us, will bear interest at 10% per annum and be due and payable on the first anniversary of the drawdown, subject to acceleration under certain circumstances described in the note. If the note is not paid, the entire outstanding principal balance and accrued and unpaid interest, under certain circumstances, will be applied to the payment of a license fee under an intellectual property license agreement entered into by MEGTEC and us at the same time as the merger agreement.

Based on a current usage rate of approximately $550,000 per month, our current cash position and working capital, our credit agreements with HSBC Bank Canada and Export Development Canada, our anticipated revenue from operations and the availability of the MEGTEC credit facility, we believe that:

we will have sufficient capital resources to support our operations through the consummation of the merger (expected to close late in the fourth quarter of calendar 2012 or early in the first quarter of calendar 2013); or
if the merger is terminated or not approved at the special meeting of stockholders, we will have sufficient capital resources, after payment of expenses related to the merger, to support our operations for approximately six months following such termination or non-approval.

As indicated above, if the merger is not consummated, we will not have sufficient capital resources to support our operations for the next twelve months. Unless we are able to find another source of financing to support our operations, it is possible that we would be required to cease operations, in which event investors could lose all of their investment in our company.

Our merger with MEGTEC is subject to certain conditions to closing that could result in the merger not being completed or being delayed, either of which could negatively impact our stock price and future business and results of operations.

Consummation of the merger is subject to certain conditions, including, among others, approval of the merger agreement by the holders of a majority of the outstanding shares of our common stock, the absence of a material adverse effect (as defined in the merger agreement) on our company between the date of the merger agreement and the date of closing, and the total number of dissenting shares shall not exceed 10% of the outstanding shares of our common stock. In addition, if there is any pending or threatened legal action against us that seeks to challenge the merger or that may prevent, delay, make illegal or otherwise interfere with the merger in a manner likely to have a material adverse effect on us or on MEGTEC’s rights or interests under the merger agreement, MEGTEC may elect not to consummate the merger. There is no assurance that we will satisfy the conditions necessary for completion of the merger. If any of the conditions to the merger are not satisfied or, where waiver is permissible, not waived, the merger will not be consummated.

– 10 –

Failure to complete the merger would prevent our company from realizing the anticipated benefits of the merger. We have already incurred and expect to continue to incur significant costs associated with transaction fees, professional services and other costs related to the merger.

In the event that the merger is not completed, we will remain liable for these costs and expenses. Furthermore, if the merger is not consummated, under some circumstances, we may be required to promptly pay a $200,000 break-up fee to MEGTEC and reimburse MEGTEC for its transaction expenses up to $400,000, which would impact our liquidity and results of operations.

In addition, the current market price of our common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a negative perception by the market of us generally and a resulting decline in the market price of our common stock. Any delay in the consummation of the merger or any uncertainty about the consummation of the merger could also negatively impact our future business and results of operations by intensifying competition as our competitors may seek opportunities related to our pending merger and by affecting our relationships with our customers, subcontractors, suppliers and employees.

We are dependent on environmental regulation to drive our orders.

The market for our air pollution control products and systems is directly dependent upon the existence and effective 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 our products and services, whereas lax enforcement and/or less strict regulation or repeal in whole or in part may have the opposite effect. Recent enacted regulations include:

New SO₂national emission standards, which would address emissions from, among other sources, coal-fired power plants, pulp and paper mills, metallurgical smelters and cement kilns, went into effect on August 23, 2010, but the EPA extended the date for designations of nonattainment until June 2013;
Portland cement NESHAP standards for the reduction of hazardous air pollutants from the Portland cement manufacturing industry which initially went into effect on November 8, 2010 but certain provisions were reconsidered and re-proposed in July 2012; and
MACT standards for electric generating units under the MATS rule, which is to go into effect for new and existing units in 2015 (though the EPA is reconsidering new unit regulations and allowing some flexibility in initial compliance).

All these rules have been challenged in court. With regards to the Portland cement regulations, the reviewing court remanded certain emission standards in the NESHAP to the EPA in December 2011, and the EPA's recent proposal responds, among other things, to that remand. Industrial Boiler MACT regulations for industrial boiler emissions control are expected to be implemented after January 1, 2013. It is possible that further actions by the EPA, legal challenges or legislative developments could further delay or modify any of these or other regulations.

Our revenue is concentrated among a few customers who vary from year to year.

Sales to our top three customers accounted for 44% (20%, 14%, 10%) of our revenue in the fiscal year ended June 30, 2012 and 30% (11%, 11%, 8%) in the fiscal year ended June 30, 2011. The bulk of our revenue is large dollar capital contracts over multiple months where the customer base may change widely on a year-to-year basis. Our inability to replace these customers on an annual basis could materially and adversely affect future revenue and profitability.

Our proprietary technology and rights have limited protection.

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

Our foreign sales are subject to certain inherent risks.

Approximately 15% and 51%, respectively, of our revenues during our fiscal years ended June 30, 2012 and 2011 were derived from sales made outside of North America. Foreign sales are subject to certain inherent risks, including unexpected changes in political, regulatory and other legal requirements, tariffs and other trade barriers, regional economic conditions and business practices, greater difficulty in collection of accounts receivable, foreign exchange fluctuations and potentially adverse tax consequences. There can be no assurance that these factors will not have an adverse impact on our future foreign sales and, consequently, on our operating results.

– 11 –

Permitting delays may cause extended delay or cancellation of one or more of our large projects.

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

Since we do not manufacture or fabricate our own products or systems, we are dependent on the services of third party manufacturers and fabricators.

We do not manufacture or fabricate our own products or systems, relying instead upon the services of third party manufacturers and fabricators. We also do not engage in the field construction of our systems but rely on field construction subcontractors operating under the supervision of our own employees. The unavailability of the services of, or a substantial increase in pricing by a significant number of, these manufacturers, fabricators or subcontractors could adversely affect us.

The markets for environmental control products are very competitive.

The markets for environmental control products are characterized by substantial competition based primarily on engineering and technological expertise and quality of service. Because virtually all contracts for our products and systems are obtained through competitive bidding, price is also a competitive factor and may be the most significant factor in certain instances. Although we believe that we compete on the basis of our technical expertise and reputation for service, there can be no assurance that we will maintain our competitive position in our principal markets.

Our fixed price contracts expose us to losses in the event of cost overruns.

Our receipt of a fixed price contract as a consequence of being the lowest competitive bidder carries the inherent risk that our actual performance costs may exceed the estimates upon which our bid for such contract was based. To the extent that contract performance costs exceed projected costs, our profitability could be materially adversely affected. Escalation clauses regarding labor or material changes, including commodity price changes, are not normally accepted by our clients. Rather we may elect to place orders as soon after receipt of a firm customer order as possible to manage our labor/material price escalation exposure.

Adverse economic conditions may cause customers to delay or terminate our fixed price contracts.

Due to a number of factors including adverse market conditions, fixed price contracts may be delayed or terminated by customers. Although we are typically protected by contractual terms that will address the cost implications of these events, any such delays may have a material impact on our contract revenue and therefore our profitability in a given fiscal period.

The market price of our common stock could be subject to wide fluctuations in response to numerous factors, some of which are beyond our control.

These factors include, among other things, actual or anticipated variations in our costs of doing business, operating results and cash flow, backlog, the nature and content of our earnings releases and our competitors’ earnings releases, customers, competitors or markets, changes in business conditions in our markets and the general state of the securities markets and the market for similar stocks, changes in capital markets that affect the perceived availability of capital to companies in our industries, governmental legislation or regulation of the environment, as well as general economic and market conditions, such as downturns in our economy and recessions.

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

ITEM 2: PROPERTIES

As of September 21, ~~2011~~2012, TurboSonic occupied the following facilities:

Location

Use

~~Use~~Sq. Ft.

Annual Rent

Lease Expires

~~Sq. Ft.~~

~~Annual Rent~~

~~Lease Expires~~

Waterloo, Ontario, Canada

Executive, administration, sales,

~~Executive~~12, ~~administration, sales, engineering, project management~~400

$114,100

July 2013

~~12,400~~

~~118,250~~

~~July 2013~~

Raleigh, North Carolina, USA

Project management

1,000

11,400

November 2013

engineering, project management

Milan, Italy

Sales & project management

975

14,800

July 2016

Raleigh, North Carolina, USA

Project management

1,000

$11,500

November 2013

Milan, Italy

Sales & project management

975

$18,773

July 2016

ITEM 3: LEGAL PROCEEDINGS

On October 6, 2005 a statement of claim was filed against our company in the Ontario Superior Court of Justice (Canada) by Abuma Manufacturing Limited (“Abuma”), one of our vendors, in which it claimed additional charges for work performed and refuted our claim for back charges on a specific project. Its claims are for CAD $95,647 in respect of unpaid accounts, CAD $50,000 for aggravated, punitive and/or exemplary damages, interest on the past due accounts and costs of the action. It is our position that the claims are without merit and we have filed a statement of defense and counter-claim. Each company has filed an affidavit of documents and discovery of both has been conducted. Legal counsel for Abuma has filed its Trial Record (February 2011) indicating its readiness to proceed to trial and a pre-trial conference is set for late October 2011 and a trial date has been established for mid-April 2012. It is still our contention that the claims are without merit. As such, there is no accrual for an adverse outcome.

On November 10, 2009 a statement of claim was served against our company and one of our customers in the United States District Court, Western District of Pennsylvania by a competitor, in which it was claimed that a contract awarded to our company in June 2009 had infringed on one of their patents. This patent infringement case, related to our TurboSorb Spray-Dry Absorption (SDA) technology, was settled in fiscal 2011 at no material cost to us. As a result of this settlement, our competitor granted TurboSonic a patent license to pursue SDA opportunities in the US and Canada. We continue to freely pursue opportunities in other markets on a world-wide basis.

In the normal course of operations, we are party to a number of lawsuits, claims and contingencies. Accruals are made in instances where it is probable that liabilities have been incurred and where such liabilities can be reasonably estimated. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, we do not believe that the ultimate outcome of these matters will have a material impact on our consolidated financial position.

ITEM 4: MINE SAFETY DISCLOSURES ~~RESERVED~~

– Not ~~10 –~~applicable.

– 12 –

PART II

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

Our Common Stock is quoted on the OTC ~~Bulletin~~Quote Board ~~under~~(OTCQB) ~~the~~under the symbol “TSTA”.

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

	~~Common Stock (1)~~	Common Stock (1)
	~~High~~	~~Low~~High		Low
Fiscal Year Ended June 30, 2011
Fiscal Year Ended June 30, 2012
First Quarter	$~~0.440~~	$0.~~280~~42	$	0.25
Second Quarter	$~~0.440~~	$0.~~230~~45	$	0.20
Third Quarter	$~~0.520~~	$0.~~300~~34	$	0.23
Fourth Quarter	$~~0.480~~	$0.~~340~~29	$	0.18
Fiscal Year Ended June 30, 2010
Fiscal Year Ended June 30, 2011
First Quarter	$~~1.370~~	$10.1144	$	0.28
Second Quarter	$~~1.300~~	$0.~~600~~44	$	0.23
Third Quarter	$~~0.850~~	$0.~~440~~52	$	0.30
Fourth Quarter	$~~0.600~~	$0.~~310~~48	$	0.34

⁽¹⁾	The above quotations represent prices between dealers and do not include retail mark up, markdown or commissions. They do not necessarily represent actual transactions.

As of June 30, ~~2011~~2012, there were ~~293~~292 holders of record and approximately 1,~~375~~225 beneficial holders of the Common Stock. This number of beneficial holders represents the number of actual holders of our Common Stock, including an estimate of the beneficial owners of shares held in “nominee” or “street” name.

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

ITEM 6: SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data for fiscal years ended June 30, ~~2007~~2008 through ~~2011~~2012 and balance sheet data as of June 30, ~~2007~~2008 through ~~2011~~2012. This selected financial data ~~(except for working capital, percentages and ratios)~~ is derived from our audited Consolidated Financial Statements, for the years ~~2007~~2008 to ~~2011~~2012. All of the selected data is in dollars except for the number of shares, percentages and ratios.

Selected Financial Data	Fiscal ~~2011~~2012		Fiscal ~~2010~~2011		Fiscal ~~2009~~2010		Fiscal ~~2008~~2009		Fiscal ~~2007~~2008
	$		$		$		$		$
Revenue	1316,~~739~~289,~~297~~795		13,~~886~~739,~~053~~297		2513,~~405~~886,~~475~~053		1425,~~268~~405,~~284~~475		2214,~~893~~268,~~353~~284
Net (Loss) Income	(1,594,144	)	(975,153	)	1,555,905		(662,994	)	1,281,462
Net (Loss) Income Before Taxes	(1,740,932	)	(1,647,484	)	(1,885,635	)	2,185,143		(977,968	)
% Return on sales	(11.6%	)	(7.0%	)	6.1%		(4.6%	)	5.6%
Net (Loss) Income	(2,762,330	)	(1,594,144	)	(975,153	)	1,555,905		(662,994	)
Total assets	7,982,899		7,436,267		13,480,335		8,597,847		7,092,800
% Return on sales	(17.0%	)	(11.6%	)	(7.0%	)	6.1%		(4.6%	)
Long-term debt	--		143,519		212,254		20,908		29,786
Total assets	6,662,562		7,982,899		7,436,267		13,480,335		8,597,847
Working capital	3,174,400		3,646,322		4,922,251		2,861,501		3,455,180
Long-term debt	--		--		143,519		212,254		20,908
Current Ratio	1.99:1		2.72:1		1.66:1		1.72:1		2.51:1
Working capital	1,888,187		3,174,400		3,646,322		4,922,251		2,861,501
Stockholders’ Equity	4,781,066		5,245,396		5,860,806		4,350,080		4,788,778
Current Ratio	1.40:1		1.99:1		2.72:1		1.66:1		1.72:1
% Return on stockholders’ equity	(33.3%	)	(18.6%	)	26.5%		(15.2%	)	26.8%
Stockholders’ Equity	1,949,397		4,781,066		5,245,396		5,860,806		4,350,080
Basic weighted average number of shares	17,037,418		15,137,528		15,130,054		15,130,054		14,933,087
% Return on stockholders’ equity	(141.7%	)	(33.3%	)	(18.6%	)	26.5%		(15.2%	)
Diluted weighted average number of shares	17,037,418		15,137,528		15,168,536		15,130,054		15,055,748
Basic weighted average number of shares	18,554,112		17,037,418		15,137,528		15,130,054		15,130,054
Diluted earnings (loss) per share	(0.09	)	(0.06	)	0.10		(0.04	)	0.09
Basic (loss) earnings per share	(0.15	)	(0.09	)	(0.06	)	0.10		(0.04	)
Diluted weighted average number of shares	18,554,112		17,037,418		15,137,528		15,168,536		15,130,054
Diluted (loss) earnings per share	(0.15	)	(0.09	)	(0.06	)	0.10		(0.04	)

– 1113 –

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our audited Consolidated Financial Statements and related notes., ~~The~~as ~~purpose~~ of, and for the ~~discussion~~years ended June 30, 2012 and ~~analysis~~2011. Reference is made to ~~enhance~~“Risk ~~the~~Factors” ~~understanding~~in ~~and~~Item ~~evaluation~~1A of this ~~our~~report ~~results~~for a discussion of ~~operations, financial~~important ~~position,~~factors ~~liquidity~~that ~~and~~could ~~capital~~cause ~~resources,~~actual results to differ from expectations and ~~other~~any ~~key~~of ~~financial~~our ~~information~~forward-looking statements contained herein.

Overview

~~TurboSonic~~We ~~Technologies,~~design ~~Inc. designs~~ and ~~supplies~~market integrated air pollution control technologies to industrial customers worldwide. We believe our products and systems, which are designed to meet the strictest emission regulations for gaseous and particulate emissions, afford economic and technical advantages over competitive air pollution equipment. We currently have two reportable business segments – OEM systems and Aftermarket.

Sales are frequently attained through the recommendation of engineering firms who are often engaged in complete plant installations or upgrades. Other sales opportunities are sourced directly with the end user by our independent sales representatives or by our internal sales team. We have sales, project management and field service personnel in remote offices to support local markets.

Our leading edge technology and strong project management performance contribute significantly to our strategy of building long-term loyalty and growth through customer satisfaction. This allows us to serve the demanding requirements of multinational firms that we believe can provide a series of opportunities over many years.

We perform all process engineering and provide the detailed design and specifications for all applicable structural, electrical, mechanical and chemical components of ~~such~~our ~~system~~systems. We subcontract ~~all~~the ~~fabrication~~manufacturing of equipment and when customer contracts include installation, ofwe ~~systems~~subcontract ~~when~~the ~~contracted~~service. Our project managers and quality assurance personnel supervise and manage all aspects of our contracts toin ~~ensure~~order wefor us to meet the performance criteria, as agreed with our customers.

We conduct business in Canadian dollars, USU.S. dollars and ~~European~~Euro ~~currency~~ to accommodate customers and mitigate our exchange risk through matching the sales currency with the supplier currency where practical. We participated in foreign exchange spot trading activities only during the fiscal ~~year~~years ended June 30, 2012 and 2011.

Environmental awareness, government regulations and our sales efforts drive the demand for our technologies. Geographic diversification and industry diversification contribute to market scope and strategies for growth. We are committed to developing innovative product offerings and forming technology partnerships, in response to new and existing regulations to better address demands for a greener industry and a reduction in consumption of non-renewable resources.

Our mission is two-fold: to increase shareholder value and to achieve customer satisfaction through delivery of high quality clean-air solutions to our customers. We believe that the trend toward a cleaner environment will continue through a confluence of government regulations and public pressure, driving the demand for our products and enabling growth. See Environmental Regulation below for a discussion of delays in the implementation of several of these regulations.

We believe that economic recovery will increase demand for our products in our established markets. A significant part of our business has relied historically on environmental regulation to drive demand for our products and systems. To complement this, and to potentially reduce our exposure to cyclical changes in regulatory enactments and enforcement, we have focused on several new developments that offer our customers pollution control products with an economic payback and a competitive advantage to traditional equipment solutions. Our new carbon composite material, SonicCharge™ CCM, and the Catalytic Gas Treatment (CGT) ™ technology is expected to contribute to revenue growth in fiscal 2013 and the foreseeable future.

Recent Developments

On October 10, 2012, we entered into an Agreement and Plan of Merger (which we refer to as the “merger agreement”) with MEGTEC Systems, Inc. and MTS WSP, Inc. (which we refer to as “Merger Sub”), an entity wholly-owned by MEGTEC. Pursuant to the merger agreement, Merger Sub would be merged with and into TurboSonic and we would continue as the surviving corporation. If the merger agreement is adopted by our stockholders and the merger is consummated, all of our outstanding shares of common stock (other than shares owned by stockholders perfecting dissenters’ rights under Delaware law) will be cancelled and converted automatically into the right to receive a cash payment equal to $0.21 per share.

Consummation of the merger is subject to certain conditions, including, among others, approval of the merger agreement by the holders of a majority of the outstanding shares of our common stock and the total number of dissenting shares shall not exceed 10% of the outstanding shares of our common stock. Our founder, executive officers and directors, who collectively own of record approximately 20.6% of the aggregate voting power entitled to vote on the merger agreement, have agreed with MEGTEC to vote their respective shares in favor of the adoption of the merger agreement.

– 14 –

Subject to the terms of the merger agreement, under certain circumstances, a break-up fee of $200,000 may be payable to MEGTEC in connection with the termination of the merger agreement. In addition, we have agreed to reimburse MEGTEC and Merger Sub for their expenses (but not in excess of $400,000) if the merger agreement is terminated by us because we pursue an alternative acquisition and under certain other circumstances.

In connection with the merger agreement, we also entered into a secured promissory note and related security agreements with MEGTEC. Under the terms of the secured promissory note, MEGTEC agreed to make available to us a credit facility of $1,000,000, which we may draw down in whole, but not in part, at any time prior to the maturity date of the note and which we may use for working capital or general corporate purposes. The note bears interest at 10% per annum commencing on the date of the drawdown and matures on the first anniversary of the drawdown. . Under certain circumstances described in the secured promissory note, including if we undergo an alternative transaction with another party, the maturity date of the note may be accelerated. In that event, the outstanding principal amount of the note and accrued and unpaid interest would be applied, under certain circumstances, to payment of the initial license fee under an intellectual property license agreement entered into with MEGTEC at the same time as the secured promissory note. The credit facility is collateralized by a second lien security agreement covering substantially all of our assets in the United States, separate United States trademark and patent security agreements and a general security agreement covering substantially all of our assets in Canada. The liens created by these security agreements are subordinate to the liens against our assets in favor of HSBC Bank Canada, our existing lender.

Reference is made to “Other Information” in Item 9B of this report for further information regarding the merger agreement and the related documents.

Critical Accounting Policies

Discussion of our financial condition and results of operations is an analysis of our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). 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. Estimates have been employed in the areas of revenue recognition, allowance for doubtful accounts, deferred taxes, investment tax credits, uncertain tax positions, stock-based compensation expense, contingencies, goodwill impairment testing, inventory obsolescence, warranty provision and long-lived assets and liabilities. We base our estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

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

Revenue Recognition

We derive revenue from long-term contracts which require performance [i.e., design, fabricate, install, commission and test] over a time span which may extend beyond one or more accounting periods. For long-term contracts, we employ the percentage of completion method for all of such projects being undertaken except in instances of significant uncertainty, such as in the use of new technology, in which we employ the completed contract method. Aftermarket revenue recorded is based on persuasive evidence of an existing arrangement, price is fixed and determinable, products are shipped, services are performed or billings are rendered, which approximates actual performance, and collection is reasonably assured.

The percentage-of-completion is determined by best available engineering estimates by our project managers. Engineering progress is measured in time relative to the overall project design time, valued at standard rates. Fabrication progress is determined by the degree of completeness in value relative to the project plan. When included in the scope of the work, installation progress is based upon work completed relative to the installation scope. Monthly revenue recognition reflects the summary degree of completeness based upon review of the above elements and further validated by review and consensus 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.

–At 12June –30, 2012, the net position of contracts in process is an advance payment of $1,263,901 compared to June 30, 2011 with an investment of $339,878. These amounts include gross costs and accrued income, which is netted against billings and progress payments. 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. For example, a one percent variance in our estimate of costs as of June 30, 2012 on all open fixed-price contracts would impact our pre-tax income from product sales and services by $70,000.

At June 30, 2011, the net position of contracts in process is an investment of $339,878 compared to June 30, 2010 with an investment of $133,885. These amounts include gross costs and accrued income, which is netted against billings and progress payments. 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. For example, a one percent variance in our estimate of costs as of June 30, 2011 on all open fixed-price contracts would impact our pre-tax income from product sales and services by $230,000.

Goodwill

Goodwill, ~~which~~is ~~resides~~tested ~~entirely~~annually for impairment during the fourth quarter or more frequently if it is warranted by changes in ~~our~~events ~~Aftermarket~~and circumstances that indicate goodwill is more likely than not impaired. These events and circumstances may include a significant change in legal factors or in the business ~~segment~~climate, ~~represents~~a ~~the~~significant ~~excess~~decline ofin ~~purchase~~our share price, ~~over~~an ~~fair~~adverse ~~value~~action ator ~~the~~assessment ~~time~~by ofa ~~the~~regulator, ~~combination~~unanticipated ofcompetition, ~~Turbotak~~a ~~Technologies~~loss ~~Inc.~~of ~~and~~key ~~Sonic~~personnel, ~~Environmental~~significant ~~Systems,~~disposal ~~Inc.~~activity ~~into~~and ~~TurboSonic~~the ~~Technologies,~~testing ~~Inc.~~of inrecoverability ~~1997~~for a significant asset group.

We– ~~assess~~15 the impairment of goodwill annually or whenever business circumstances indicate that the carrying value of the goodwill asset on our balance sheet may not be recoverable, in whole or part. Our impairment review considers, among other– ~~things:~~

Goodwill, which resides entirely in our Aftermarket business segment, represents the excess of purchase price over fair value at the time of the combination of Turbotak Technologies Inc. and Sonic Environmental Systems, Inc. into TurboSonic Technologies, Inc. in 1997. Goodwill is tested for impairment using a two-step process. The first step involves comparing the segment’s estimated fair value to its carrying amount, including goodwill. If the estimated fair value of the segment exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and the second step of the goodwill impairment test is performed to measure the impairment amount. The second step involves determining an implied fair value of goodwill for the segment, which is calculated by measuring the excess of the estimated fair value of our company over the aggregated estimated fair values of identifiable assets and liabilities. The second step involves significant ~~underperformance~~judgment ~~relative~~on the selection of assumptions necessary to ~~expected~~arrive ~~historical~~at oran ~~projected~~implied ~~future~~fair ~~operating~~value ~~results;~~of goodwill. These assumptions include, but are not limited to, development of multi-year business cash flow forecasts, the selection of discount rates and the identification and valuation of unrecorded assets. If, after conducting the second step of the test, the carrying amount of goodwill exceeds its implied fair value, a non-cash impairment loss is recognized in an amount equal to that excess.

At April 1, 2012, we performed the first step of the annual impairment test and determined that an impairment charge to goodwill was not warranted. Primarily as the result of a significant ~~changes~~drop in our share price at June 30, 2012, combined with the ~~manner~~additional factors discussed below, we once again performed the first step of ~~our~~the ~~use~~annual impairment test as at June 30, 2012 and determined that an impairment charge to goodwill was warranted. The estimated fair value of the ~~acquired~~segment ~~assets~~was ordetermined utilizing a discounted cash flow approach. We believe that the ~~strategy~~main ~~for~~factors leading to the impairment was a decline in our ~~overall~~share ~~business;~~price below book value and significant doubt over our ability to continue as a going concern. Other factors considered in this analysis included delays in regulations, slower than expected bookings and continued losses in operations. The result of this analysis was that the carrying value of the segment exceeded its estimated fair value as at the balance sheet date, and as such, the second step of the goodwill impairment test was performed.

~~significant~~ In ~~negative~~the ~~industry~~second orstep ~~economic~~of ~~trends;~~the impairment test, the impairment loss was measured by estimating the implied fair value of the segment’s goodwill and comparing it with its carrying value. Using the segment’s fair value determined in the first step as the acquisition price in a hypothetical acquisition of the segment, the implied fair value of goodwill was calculated as the residual amount of the acquisition price after allocations made to the fair value of net assets, including working capital, plant and equipment and both recognized and unrecognized intangible assets. Based on the results of the second step of the goodwill impairment test, it was concluded that the carrying value of goodwill was impaired. Consequently, we recorded a goodwill impairment charge of $398,897 and reported this amount as a separate line item in the Consolidated Statements of (Loss) and Comprehensive (Loss).

significant decline in our stock price for a sustained period, and our market capitalization relative to net book value.

An annual test was completed at April 1, 2011 for the Aftermarket reporting unit. This test and an additional test at June 30, 2011 were based on a five-year discounted (12%) Cash Flow calculated using the pre-tax net income projection from our 2012 business plan. With the fair value exceeding book value by $401,713 in the June 2011 test, the conclusion reached was that there was no impairment of goodwill value for the year ended June 30, 2011.

Income Taxes and Tax Valuation Allowances

We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in our Consolidated Balance Sheet, as well as operating loss and tax credit carryforwards. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. After ~~two~~three consecutive years of of substantial losses and continuing uncertainty surrounding the U.S. and global economics, the guidance under ASC Topic 740, “income taxes” (“ASC Topic 740”), considers this to be objective verifiable evidence that the deferred tax assets may not be recoverable through the criteria of a “more likely than not” (“MLTN”) occurrence. We reassessed the valuation of deferred tax assets during the second quarter of fiscal 2012 and recorded an additional valuation reserve totaling $750,000, thereby reducing the U.S. federal tax asset to nil at the time. In total, a U.S. valuation reserve of $1,292,516 was established for fiscal 2012, bringing the total U.S. reserve to $2,015,350. Furthermore, we re-assessed the valuation of Canadian deferred tax assets during the fourth quarter of fiscal ~~2011~~2012 and recorded a valuation reserve totaling $~~722~~257,~~834~~606, thereby reducing the Canadian tax asset to nil.

The total valuation reserve of $1,550,122 recorded during fiscal 2012 considered the jurisdictions where we are subject to income tax: US U.S. federal, State of North Carolina (“NC”), Canadian federal and provincial and Italian federal and regional. We considered our average tax ~~positioned~~position over the preceding five years in each jurisdiction, and combined this with our future projections of taxable income in the respective jurisdictions ~~and~~with ~~computed~~respect ~~a balance that we expect~~ to ~~realize in the five year period following fiscal 2011~~GAAP. That analysis determined that: the US federal deferred tax asset to be realized should be ~~capped~~reduced atto a deferred tax amount of ~~$750,000,~~ nil; the NC loss carryforward would expire in ~~2012~~2013 under the likelihood that no income is attributable in the state, and the Canadian and Italian deferred tax amounts ~~are~~should ~~MLTN~~be ~~recoverable~~reduced to a deferred tax amount of nil. In summary, a ~~valuation~~deferred ~~reserve~~tax inasset ~~fiscal~~of ~~2011~~$nil ~~was~~ is recorded together with a net provision for UStax ~~federal~~of $1,021,398 in fiscal 2012 (net recovery of tax of $~~615~~53,~~834~~340 in fiscal 2011) after giving effect to total U.S. and ~~for~~Canadian NCvaluation ~~tax~~reserves at June 30, 2012 of $~~107~~2,~~000~~272,956 ($722,834 in fiscal 2011).

Our Consolidated Balance Sheet as of June 30, 2011 includes a non-current deferred tax asset of $1,070,592, after recording the valuation reserve of $722,834. This compares with a non-current deferred tax asset of $1,021,343 as of June 30, 2010. For all other jurisdictions for which we have net deferred tax assets, we expect that our future levels of pre-tax income are sufficient to generate the amount of future taxable income needed to realize these tax assets. Although we make every reasonable effort to ensure the accuracy of our deferred tax assets, if we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, or if the potential impact of tax planning strategies changes, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results. As we realize future taxable income, we will record the applicable tax first against the valuation reserve before drawing on the gross ~~deferred~~balance of tax ~~asset~~loss ~~balance~~carry-forward.

– 1316 –

Results of Operations

~~Since~~ We ~~completing~~continue ato ~~record~~face ~~year~~market inuncertainties ~~fiscal~~due ~~2009,~~to wea ~~have~~slow ~~been experiencing~~economic ~~the~~recovery ~~effects~~and ofdelays in the ~~economic~~passage ~~downturn~~and inimplementation ~~fiscal~~of ~~2011~~regulations ~~and~~in ~~2010~~the United States. ~~This downturn~~As ina ~~our~~result ~~performance~~of ~~was~~these ~~attributable~~uncertainties, inwe ~~substantial~~have ~~part~~incurred tosignificant ~~capital~~losses during the three ~~expenditure~~fiscal ~~deferrals~~years byended ~~customers~~June ~~throughout~~30, 2012, which losses have reduced our ~~primary~~cash ~~business~~and ~~sectors~~stockholders' equity. ~~While~~ weThese ~~continue~~conditions toraise ~~face~~substantial ~~market~~doubt ~~uncertainties~~about ~~due~~our ability to continue as a ~~slow~~going ~~economic~~concern. ~~recovery, we~~Our ~~are~~ability ~~encouraged~~to bycontinue ~~$22.7~~as ~~million~~a ingoing ~~new~~concern ~~orders~~is ~~received~~dependent inon achieving ~~fiscal~~a ~~2011~~profitable ~~($6.7 million~~level inof ~~fiscal~~operations, ~~2010)~~and ~~from~~our ~~key~~ability ~~industries~~to aseither ~~represented~~successfully incomplete ~~our~~the ~~growth~~merger discussed elsewhere in ~~backlog~~ ~~orders~~this ~~from~~report $3or ~~million~~secure asother sources of ~~June~~financing. ~~30,~~There ~~2010~~can tobe ano ~~record~~assurance ~~high~~that ofwe ~~$12~~will be able to complete the merger or ~~million~~raise assufficient ofadditional ~~June~~capital ~~30,~~to ~~2011~~continue our operations.

~~With~~ We ~~revenue~~received ~~and~~$15.0 ~~gross~~million ~~profit~~in new orders in fiscal ~~2011~~2012 ~~and~~($19.0 million in fiscal ~~2010 almost~~2011 ~~identical,~~after ~~our~~accounting ~~reductions~~for ina ~~selling,~~cancellation ~~general~~of ~~and~~a ~~administrative~~$3.7 ~~expenses resulted~~million order in alate ~~reduced~~fiscal ~~pre-tax~~2012) ~~loss~~from ofkey ~~$1,647,484~~industries ~~for~~as ~~the~~represented ~~fiscal~~by ~~year~~backlog ~~2011~~orders of $3 million ~~compared~~as toof aJune ~~pre-tax~~30, ~~loss~~2010, $8.3 million as of $1June 30,~~885,635~~ ~~for~~2011 ~~the~~and ~~fiscal~~$7 ~~year~~million ~~2010~~as of June 30, 2012.

~~Operations~~ Revenue ~~used~~and ~~$1,085,451~~gross inprofit ~~cash reserves, ($3,791,040~~ in ~~2010)~~ ~~which~~fiscal we2012 ~~partially~~were ~~offset~~higher inthan fiscal 2011 ~~through~~but the establishment of a ~~common~~valuation ~~share~~allowance ~~rights issuance~~for tovalue-added ~~existing~~taxes ~~shareholders~~receivable ~~for~~and ~~net~~the ~~proceeds~~goodwill ofimpairment ~~$853~~more than offset reductions in selling,~~086.~~ ~~The~~general ~~cash~~and administrative ~~position~~expenses atand ~~June~~have ~~30,~~resulted ~~2011~~in ~~was~~an increased pre-tax loss of $1,~~674~~740,~~204~~932 for the fiscal year 2012 compared to a pre-tax loss of $21,~~036~~647,~~529~~484 atfor ~~June~~the ~~30, 2010~~fiscal year 2011.

~~Markets~~ Operations used $654,940 in cash reserves in fiscal 2012, ($1,085,451 in fiscal 2011 which we partially offset in fiscal 2011 through a common stock rights offering to existing stockholders for net proceeds of $853,086). The cash and cash equivalents position at June 30, 2012 was $1,066,719 compared to $1,674,204 at June 30, 2011.

Environmental Regulation

~~SO2 emission reduction regulations went into~~ ~~effect~~The onmarket ~~August 23, 2010,~~ for ~~coal-fired~~our ~~power~~air ~~plants,~~pollution ~~pulp~~control ~~and~~products ~~paper mills,metallurgical smelters~~ and ~~cement~~systems ~~kilns.~~is Indirectly ~~addition,~~dependent aupon ~~final rule went into effect on November 8, 2010, designed to reduce hazardous air pollutants from~~ the ~~Portland~~existence ~~cement~~and ~~manufacturing~~effective ~~industry.~~enforcement ~~The proposed Industrial Boiler MACT for industrial boiler emissions, expected to be law by December 2010, has been delayed until the earlier~~ of ~~the~~laws ~~settlement~~and ofregulations ~~court challenges~~that ~~and~~limit the ~~completion~~release of ~~EPA’s~~pollutants ~~reconsideration~~into of the ~~ruling.~~atmosphere ~~EPA currently~~and ~~estimates~~impose asubstantial ~~final~~penalties ~~rule by April 2012~~for non-compliance. ~~EPA~~Governments iscan ~~also~~change, ~~set~~modify toor ~~finalize~~amend ~~its Utility~~environmental ~~MACT~~regulations ~~for~~at ~~electric~~any ~~generating~~time ~~units~~through byan ~~November~~administrative ~~2011~~process, ~~and~~which ~~has~~could ~~recently issued~~have apositive ~~final~~or ~~CSAPR,~~negative ~~further~~effects ~~limiting~~upon ~~emissions~~our offuture ~~NOx~~revenues and ~~SO2~~prospects ~~from~~of ~~power plants~~profitability independing ~~certain~~on ~~designated states. We believe that these rules, if and when~~the ~~enacted,~~nature ~~will afford us significant sales opportunities as they will impact industries in which we have years~~ of ~~experience,~~the aregulatory ~~large client base, and proven technologies for compliance~~action.

~~According~~ The U.S. Environmental Protection Agency (“EPA”) is currently seeking to ~~The~~tighten ~~McIlvaine~~certain ~~Company~~emission standards, thereby forcing a ~~recognized~~number ~~independent market~~of ~~consulting~~industries ~~firm~~to adopt technologies, such as WESPs, in order to comply with ~~expertise~~those standards. These technologies may be more effective in meeting the ~~air~~new ~~pollution~~standards ~~control~~than ~~industry~~more traditional technologies, such as scrubbers. Court challenges and EPA’s own delays to the implementation of certain of the National Emission Standards for Hazardous Air ~~world~~Pollutants (“NESHAP”) in the U.S. market have delayed order placement by companies intending to be compliant. The standards set by the EPA under NESHAP for ~~air~~particular ~~pollution~~source ~~control~~categories ~~systems~~(such as (i) plywood and composite wood and (ii) boilers and process heaters) are known as Maximum Achievable Control Technology (“MACT”) standards. New national standards for SO2 emission went into effect on August 23, ~~products~~2010 but the EPA extended the date for designations of nonattainment until June 2013. NESHAP emission rules for Portland cement production facilities originally went into effect on November 8, 2010 though portions were reconsidered and ~~services~~re-proposed isin July 2012. Revised MACT rules for industrial boilers (Industrial ~~forecast~~Boiler toMACT), ~~grow~~originally ~~from~~issued ~~$65~~Spring ~~billion~~2011, were withdrawn for reconsideration and re-proposed in ~~2004~~December to2011. ~~$250~~They ~~billion~~are expected in final form by ~~2015~~early 2013. ~~Although~~MACT wefor electrical generating units (Mercury and Air Toxic Standards or "MATS") went ~~serve~~into aeffect ~~very~~in ~~small~~April ~~part~~2012, although the EPA withdrew for reconsideration a portion of ~~this~~the ~~massive~~rule ~~market~~for new units, with a final rule expected in Spring 2013. MATS requires compliance by 2015, though the ~~scale~~rule allows for some extensions. The EPA also proposed tightening national emissions standards for fine particulates in mid-2012 and stated it would finalize a rule before the end of ~~opportunity~~2012. isThe EPA's Cross-State Air Pollution Rule, which addressed fine particulate matter and ozone, has been ~~relevant~~vacated toby uscourt order.

Many of the standards discussed above, most notably MATS, are subject to ongoing litigation and congressional scrutiny, and bills are being considered to delay implementation of certain of the standards. Therefore, the timing of issuance and implementation of final rules in these areas is somewhat uncertain.

Markets

International expansion plays a key role in our long-term business plan. We continue to develop customers beyond our North American and European base and collaborate with other technology firms to offer unique solutions to pollution problems experienced around the globe. Some of these initiatives have focused on the non-regulatory market to offer our customers an economic payback to justify purchase decisions. We try to diversify in geography, industries, products and solutions to accommodate changes in politics, economics and technology. However, the global economic downturn has resulted in a reduced level of projects outside of North America, as evidenced by the 2012 geographic revenue distribution. Customers outside of North America collectively accounted for approximately 15% and 51% of our revenue during the fiscal years ended June 30, 2012 and 2011. We believe that this reduced level of projects outside of North America may be short-lived, as evidenced by recent bookings, although increases in North American bookings may temper such increased percentages.

– 17 –

Our New Technology

CGT™, a new patented technology to which TurboSonic has exclusive worldwide marketing rights, is a significant development in the control of volatile organic compounds (VOCs). CGT™ destroys VOCs such as formaldehyde from industrial air emissions, eliminating dependence on natural gas combustion in thermal oxidizers, the traditional approach to VOC control. CGT™ avoids CO2 and NOx generated by the combustion of natural gas. The addition of CGT™ technology provides an economic rather than solely regulatory-driven demand for our technologies. CGT™ technologies displace thermal oxidation and the corresponding use of natural gas for the destruction of VOCs, thereby providing a return on investment for our clients. Our latest CGT™ was determined through independent testing to exceed requirements for US EPA regulations relating to composite wood panel production.

~~CGT~~During ~~avoids~~recent ~~CO2~~years, ~~and NOx generated by~~ the ~~combustion~~ cost of ~~natural~~metals ~~gas.~~and ~~The~~alloys ~~CGT~~has ~~technology~~risen ~~offers~~to historic anhigh ~~opportunity~~levels, ~~for~~resulting ain ~~return~~increasingly onexpensive ~~investment~~equipment ~~from~~costs ~~the~~to achieve ~~savings~~environmental tocontrol. ~~the~~, ~~user~~SonicCharge™ ofCCM ~~natural~~is ~~gas.~~a ~~CGT~~proprietary ~~sales~~material ~~represented~~developed ~~approximately~~by $3TurboSonic ~~million~~to ofreplace ~~our~~the ~~closing~~use ~~backlog~~ of ~~$12~~expensive ~~million~~alloys ~~at June 30, 2011. There is considerable interest~~ in ~~the~~corrosive ~~CGT technology by potential~~gas ~~clients~~streams, ~~the~~including ~~EPA,~~those ~~and~~present ~~state~~in ~~and~~acid ~~provincial~~plants ~~agencies.~~and Wecoal-fired ~~are~~power ~~conducting~~boilers. ~~discussions~~Our ~~with~~first ~~numerous~~commercial ~~customers~~installation ~~regarding sales~~ of ~~these~~a ~~systems.~~WESP ~~According to~~using ~~The~~our ~~McIlvaine~~patent-pending ~~Company, the worldwide market for thermal oxidizers represents~~SonicCharge ~~40%~~Conductive ofComposite ~~the~~Material ~~total~~began ~~market~~operations ~~for VOC abatement equipment, which was estimated~~ in ~~2008 to~~the bethird ~~$4.25~~calendar ~~billion~~quarter ~~annually. We believe that CGT technology will apply to a sizeable portion~~ of ~~this market~~ 2012.

Intellectual Property

We have an ongoing program for the research, development and commercialization, as well as licensing of new industrial processing and air pollution control products, systems and technologies, and the enhancement of existing products and systems. We believe that ~~these~~our ~~investments~~intellectual ~~will~~property ~~contribute~~will ~~significantly~~contribute to our future growth.

The addition of CGT technology provides an economic rather than solely regulatory-driven demand for our technologies. CGT technologies displace thermal oxidation and the corresponding use of natural gas for the destruction of VOCs, thereby providing a return on investment for our clients.

A patent infringement case, related to our TurboSorb Spray-Dry Absorption (SDA) technology, was settled in fiscal 2011 at no material cost to us. As a result of this settlement, our competitor granted TurboSonic a patent license to pursue SDA opportunities in the US and Canada. We continue to freely pursue opportunities in other markets on a world-wide basis.

– 14 –

Income Statement Analysis:

12 MONTH COMPARATIVE INCOME STATEMENTS AT JUNE 30, ~~2011~~2012 AND ~~2010~~2011

	Fiscal 2011		% to		Fiscal 2010		% to		Increase (Decrease)
	Fiscal 2012		% to		Fiscal 2011		% to		Increase (Decrease)
			Total				Total
	$		Revenue		$		Revenue		$		%
Contract revenue & sales
OEM systems	1012,~~154~~547,~~521~~615		7477%		10,~~798~~154,~~683~~521		7874%		~~(644~~2,~~162~~393,094	)	(624%	)
Aftermarket parts & retrofits	3,~~584~~742,~~776~~180		2623%		3,~~087~~584,~~370~~776		2226%		~~497~~157,~~406~~404		164%
	13,739,297		100%		13,886,053		100%		(146,756	)	(1%	)
	16,289,795		100%		13,739,297		100%		2,550,498		19%
Contract costs & cost of sales
OEM systems	710,~~845~~195,~~111~~662		5762%		87,~~292~~845,~~748~~111		6057%		~~(447~~2,~~637~~350,551	)	(530%	)
Aftermarket parts & retrofits	2,~~154~~224,~~248~~644		1614%		12,~~842~~154,~~631~~248		1316%		~~311~~70,~~617~~396		173%
	9,999,359		73%		10,135,379		73%		(136,020	)	(1%	)
	12,420,306		76%		9,999,359		73%		2,420,947		24%
Gross profit
OEM systems	2,~~309~~351,~~410~~953		1715%		2,~~505~~309,~~935~~410		1817%		~~(196~~42,~~525~~543	)	(82%	)
Aftermarket parts & retrofits	1,~~430~~517,~~528~~536		109%		1,~~244~~430,~~739~~528		910%		~~185~~87,~~789~~008		156%
	3,739,938		27%		3,750,674		27%		(10,736	)	0%
	3,869,489		24%		3,739,938		27%		129,551		3%
Expenses
Selling, general & administrative	5,~~032~~076,~~042~~611		3731%		5,~~106~~032,~~408~~042		3837%		~~(74~~44,~~366~~569	)	(1%	)
Research & development costs	182,007		1%		332,193		2%		(150,186	)	(45%	)
Research & development	63,790		1%		182,007		1%		(118,217	)	(65%	)
Depreciation & amortization	170,786		1%		196,457		1%		(25,671	)	(13%	)
Goodwill Impairment	398,897		3%		--		--%		398,897		--%
	5,384,835		39%		5,635,058		41%		(250,223	)	(4%	)
Depreciation & amortization	67,106		--%		170,786		1%		(103,680	)	(61%	)
(Loss) from operations	(1,644,897	)	(12%	)	(1,884,384	)	(14%	)	239,487		(13%	)
	5,606,404		35%		5,384,835		39%		221,569		4%
(Loss) from operations	(1,736,915	)	(11%	)	(1,644,897	)	(12%	)	(92,018	)	(6%	)
Other expense
Interest, net	24,~~587~~017		0--%		12,~~251~~587		0--%		(1,~~336~~430	)	~~(107~~55%	)
(Loss) before taxes	(1,647,484	)	(12%	)	(1,885,635	)	(14%	)	238,151		13%
(Loss) before income taxes	(1,740,932	)	(11%	)	(1,647,484	)	(12%	)	(93,448	)	(6%	)
(Recovery of) income taxes	(53,340	)	(0%	)	(910,482	)	(7%	)	(857,142	)	(94%	)
Provision for (recovery of) income taxes	1,021,398		6%		(53,340	)	--%		1,074,738		(2,015%	)
Net (loss)	(12,~~594~~762,~~144~~330	)	(1217%	)	(~~975~~1,~~153~~594,144	)	(712%	)	(~~618~~1,~~991~~168,186	)	(6373%	)
Foreign currency translation adjustment	~~243~~(107,~~897~~693	)	2(1%	)	~~274~~243,~~374~~897		2%		(30351,~~477~~590	)	(11144%	)
Comprehensive (loss)	(12,~~350~~870,~~247~~023	)	(1018%	)	(~~700~~1,~~779~~350,247	)	(510%	)	(~~649~~1,~~468~~519,776	)	(93113%	)

~~OEM~~– ~~order~~18 backlog at the beginning of fiscal 2011 was $2.4 million ($9.7 million at the beginning of fiscal 2010) and orders during fiscal 2011were $19.0 million ($3.5 million during fiscal 2010). OEM systems revenue was $10.2 million in fiscal 2011 ($10.8 million in fiscal 2010) contributing to $11.7 million in backlog for the beginning of fiscal 2012 ($2.4 million for the beginning of fiscal 2011). Annual revenue decreased 6% year over year whereas the backlog of orders increased 400% for the reasons discussed above under “Results of Operations”. –

OEM order backlog at the beginning of fiscal 2012 was $8.0 million (adjusted) ($2.4 million at the beginning of fiscal 2011) and OEM orders during fiscal 2012 were $10.6 million ($15.3 million during fiscal 2011). OEM systems revenue was $12.5 million in fiscal 2012 ($10.2 million in fiscal 2011) contributing to $6.0 million in backlog for the beginning of fiscal 2013 ($8.0 million for the beginning of fiscal 2012). Annual revenue increased 24% year over year from fiscal 2011, primarily the result of a CGT order, which was in excess of $3 million, whereas the backlog of OEM orders decreased 51% as the result of a reduced level of bookings (lack of customer economic confidence and delays in the implementation of various environmental regulations) during fiscal 2012 and the recent cancellation of a $3.7 million WESP order that had been recorded in fiscal 2011. The cost of sales for OEM systems ~~decreased~~increased 530% for the ~~twelve month~~fiscal ~~period~~year ended June 30, ~~2011~~2012 which reflects both the ~~decrease~~increase in revenue (624%) over the same period in the prior year and the impact of new product introduction at low margin during fiscal 2012. As a result, gross profit on OEM systems was 2319% for ~~both~~fiscal 2012 and 23% for fiscal ~~years~~2011 and gross profit as a percentage of total revenue was 17 14% for fiscal ~~2011~~2012 and 1817% for fiscal ~~2010, which difference is due to a sales mix between OEM and Aftermarket reporting units~~2011.

Our Aftermarket revenue increased 164% for the ~~twelve~~fiscal ~~month period~~year ended June 30, ~~2011~~2012 over the same period in the prior fiscal year ~~due~~ mostly toas the result of an increase in semi-dry scrubbing orders ~~(14%)~~processed ,during anfiscal ~~increase~~2012, ~~in evaporative~~due ~~gas~~to ~~cooling~~a ~~orders~~major ~~(50%)~~retrofit ~~and~~by anone of ~~increase~~our ~~in field service orders (30%)~~clients.

The cost of sales for Aftermarket products increased 173% for the ~~twelve~~fiscal ~~month~~year ~~period~~ ended June 30, ~~2011which~~2012 which reflects the change in Aftermarket revenue over the same period in fiscal ~~2010~~2011. The gross profit attributable to Aftermarket products was 109% of total revenue for fiscal ~~2011~~ 2012 (910% in fiscal ~~2010~~2011). Gross profit on Aftermarket segment revenue in fiscal ~~2011~~ 2012 was 4041%, ~~unchanged~~up 1% from fiscal ~~2010~~2011.

The contribution of gross profit from OEM systems in fiscal ~~2011~~2012 ~~decreased~~increased 82% over fiscal ~~2010~~2011, and Aftermarket contribution of gross profit in fiscal ~~2011~~2012 increased 156% over fiscal ~~2010~~2011. This was due to ~~lower~~higher sales volumes in ~~the~~both ~~OEM~~segments ~~segment~~ for ~~2011~~2012 ~~compared~~over ~~to 2010 and higher sales volumes in Aftermarket products in~~ 2011 ~~over 2010~~.

Selling, general and administrative expenses ~~decreased~~increased $7444,~~366~~ 569 (1%) in fiscal ~~2011~~2012. This ~~decrease~~increase is represented by changes in the following: the addition of a ~~decrease~~ new employee ($60,000), an increase in ~~legal~~patent fees by ($~~297~~40,000) and the provision for a ~~decrease~~valuation inallowance ~~patent~~for ~~fees~~value-added bytaxes receivable ($48178,000), partially offset by ~~increased~~a ~~salaries~~decrease in professional fees (legal, audit and ~~benefits~~consulting) ofby $~~275~~230,000. ~~Legal~~The professional fees ~~had been~~from ~~high~~fiscal in2011 ~~2010~~included ~~due~~one-time ~~to our~~ defense and settlement expenses against a patent infringement claim by one of our competitors. ~~The increased salaries~~ and ~~benefits~~ infees ~~2011~~associated ~~represented~~with aestablishing ~~return~~the toDutchess ~~full~~Opportunity ~~salary~~Fund, ~~for staff after 4 months of a salary reduction plan in 2010~~II, ~~and~~LP ~~the~~equity ~~2011~~line ~~addition~~ of ~~a salesperson in our Italian operation~~credit. As a percentage of total revenue, selling, general and administrative expenses were 3731% in fiscal ~~2011~~2012 and 3837% in fiscal ~~2010~~2011.

– The 15decrease –of $118,127 in research and development costs is primarily due to the completion of WESP technology upgrades in fiscal years 2011 and 2010. This special initiative enhanced our product offering to address anticipated new regulatory announcements for boiler emission controls by the EPA.

~~The~~ We ~~decrease~~recorded ofgoodwill ~~$150,186~~impairment in ~~research~~fiscal ~~and~~2012 ~~development~~in ~~costs is primarily due to~~ the ~~completion~~amount of ~~WESP~~$398,897, ~~technology~~which ~~upgrades~~was inthe ~~2010.~~remaining ~~This special~~goodwill ~~initiative~~asset ~~enhanced~~related ~~our product offering~~ to ~~address~~our ~~anticipated~~Aftermarket ~~new regulatory~~business ~~announcements for boiler emission controls by the EPA~~segment.

The $103,680 decrease ofin ~~$1,336~~depreciation and amortization in ~~interest~~fiscal 2012 from the fiscal 2011 expense is($67,106 ~~due~~in fiscal 2012 compared to ~~the~~$170,786 ~~low interest~~in ~~rates~~fiscal ~~and~~2011) ~~early~~is ~~payment~~the result of our ~~bank~~decision ~~debt~~to temporarily forego a capital replacement program for certain assets in ~~2011~~favor of extended warranty purchases ($104,000).

~~Loss before taxes decreased by $238,151 year over year to a net~~ ~~loss~~The ofincrease ~~$1,647,484 in fiscal 2011 compared to a loss before taxes~~ of $1,~~885,635 in~~430 ~~fiscal 2010. This full year result reflects the decreased operating expenses experienced~~ in ~~fiscal 2011. We had a~~ net ~~loss~~interest ofis ~~$1,594,144~~due ~~in fiscal 2011 compared~~ to ~~a net loss of $975,153 in fiscal 2010. Our net loss for~~ the ~~2011 fiscal~~low ~~year~~interest ~~reflects~~rates ~~the~~and ~~effect~~early ofrepayment ~~a non-cash accounting adjustment~~ of ~~$722,834 which~~our isbank ~~attributable~~debt ~~to a reduction~~ in ~~the valuation of our deferred tax assets due to our incurrence of two consecutive years of losses~~2011. ~~This adjustment, by means of the establishment of a reserve, does not reduce the actual total deferred tax assets available to offset future taxes.~~

~~Recovery~~ Loss ofbefore income ~~tax~~taxes ~~for~~increased ~~fiscal~~by ~~2011 was~~ $5393,~~340~~448 ~~compared~~year over year to ~~recovery~~ ofa net loss before income ~~tax~~taxes of $~~910~~1,~~482~~740,932 in fiscal ~~2010.~~2012 ~~The~~compared ~~fiscal~~to ~~2011~~a ~~recovery~~loss ofbefore ~~tax~~income ~~includes~~taxes ~~decreases in deferred tax assets in the US~~ of $~~200~~1,~~493~~647,484 ~~and an increase~~ in ~~Canada~~fiscal of2011. ~~$240,753,~~This ~~together~~increase ~~with~~reflects ~~recovery~~a write-down of ~~Italian~~goodwill ~~tax of $14,387~~ and provision for USa ~~tax~~valuation ofallowance ~~$1,307.~~for ~~The~~value-added ~~fiscal~~taxes receivable, ~~2010~~partially ~~recovery~~offset ofby ~~tax~~a ~~includes increases~~decrease in ~~deferred~~professional ~~tax~~fees ~~assets in the US of $673~~(legal,~~229~~ audit and inconsulting) ~~Canada~~ of $34230,~~892, together~~000 ~~with recovery of Canadian tax of $18,320, provisions for US tax of $17,740~~ and ~~Italian~~increased ~~tax~~gross ofprofit ($44130,~~890,~~000) as ~~discussed in note 13 to~~ the ~~Consolidated~~result ~~Financial Statements. The US deferred tax assets includes a valuation allowance~~ of ~~$722,834,~~increased ~~after~~revenue an analysis identified that a portion of the deferred tax assets may not be recoverable through the criteria of “more likely than not”. Our effective tax rate for fiscal 2011 was (3%) versus the (48%) recorded in ~~fiscal~~ ~~2010. The recovery in~~ fiscal 2011 is primarily related to our Scientific Research and Experimental Development Investment Tax Credit (“ITC”) claims as part of our company’s fiscal 2011 and 2010 Canadian corporate tax filings2012.

~~The~~ Provision ~~other~~for ~~comprehensive~~ income ~~shown~~tax asfor ~~foreign~~fiscal ~~currency~~2012 was $1,021,398 compared to recovery of ~~translation~~income ~~adjustment~~tax ~~reflects~~of ~~the~~$53,340 ~~exchange~~in ~~values~~fiscal 2011. The fiscal 2012 provision for ~~Canadian~~tax ~~dollar~~includes a U.S. deferred tax provision of $750,000 and ~~Euro~~a Canadian deferred tax provision ~~accounts~~of on$300,925, ~~the~~together ~~balance~~with ~~sheet~~a ~~converted~~recovery toof USCanadian ~~dollars~~current income taxes of $32,815 and a provision for ~~financial~~U.S. ~~reporting~~current income taxes of $3,288. The ~~statement~~fiscal 2011 recovery of ~~comprehensive~~tax ~~income~~includes ~~reflects~~decreases ~~annual~~in ~~change~~deferred tax assets in the ~~carrying value~~U.S. of $200,493 ~~these~~and ~~accounts –~~ an increase in Canada of $~~243~~240,~~897~~753, intogether ~~fiscal~~with ~~2011~~recovery ~~and~~of Italian atax ~~increase~~ of $~~274~~14,~~374~~387 ~~during~~and ~~fiscal~~provision ~~2010~~for -U.S. ~~while~~tax ~~the~~of ~~Stockholders’~~$1,307, ~~equity~~as ~~carries~~discussed ~~the~~in ~~cumulative~~note ~~value~~12 ofto ~~currency~~the ~~exchange~~Consolidated ~~for~~Financial ~~balance sheet accounts~~Statements.

Liquidity and Capital Resources Analysis:
LIQUIDITY AND CAPITAL RESOURCES
	For the year ended June 30,
	2011		2010
Cash Summary	$		$
Cash (used in) provided by:
Operations	(1,085,451	)	(3,791,040	)
Purchase of equipment	(44,534	)	(46,041	)
Proceeds from common shares issued	853,086		6,000
Repayment of obligations under long-term debt	(152,953	)	(78,789	)
Foreign currency translation of cash	67,527		325,233
Net cash provided during the period	(362,325	)	(3,584,637	)
Cash beginning of period	2,036,529		5,621,166
Cash end of period	1,674,204		2,036,529
Working Capital Summary	2011		2010
	$		$
Current assets	6,376,233		5,672,158
Current liabilities	3,201,833		2,025,836
Net working capital	3,174,400		3,646,322
Current ratio	1.99:1		2.80:1
Summary of Contracts in Progress	2011		2010
	$		$
Contract value completed and to be invoiced	1,492,747		486,512
Contract advances invoiced	(1,152,869	)	(352,627	)
Net contracts in progress	339,878		133,885
Contract Backlog	2011		2010
	$		$
Contract value to be recognized as revenue	12,000,000		3,000,000

We had a net loss of $2,762,330 in fiscal 2012 compared to a net loss of $1,594,144 in fiscal 2011. Our net loss for both the 2012 and 2011 fiscal years principally reflects the effect of a non-cash accounting adjustment of $1,550,122 and $722,834, respectively, which is attributable to a reduction in the valuation of our deferred tax assets due to our incurrence of three consecutive years of losses. This adjustment, by means of the establishment of a valuation reserve, does not reduce the actual total deferred tax assets of $2,272,956 available to offset future taxes.

– The 16other comprehensive income (loss) shown as foreign currency translation adjustment reflects the exchange values for Canadian dollar and Euro accounts on the balance sheet converted to U.S. dollars for financial reporting. The statement of comprehensive income reflects the annual change in the carrying value of these accounts – a decrease of $107,693 in fiscal 2012 and an increase of $243,897 during fiscal 2011 - while the Stockholders’ equity carries the cumulative value of currency exchange for balance sheet accounts.

~~Cash~~– of19 $1,085,451 applied to operations in 2011 was primarily due to the net loss for the year, while net proceeds ($853,086) from the sale of shares (see below) recovered most of the cash loss. In 2010, cash of $3,791,040 applied to– operations accounted for the significant decline in working capital from 2009 without an offset of capital proceeds. Cash applied in 2010 was the result of decreased accounts payable, accrued charges and unearned revenue and contract advances partially offset by decreased accounts receivable, combined with the net loss recorded for the year. The net cash position $1,674,204 at June 30, 2011 is a decrease of $362,325 from the prior year.

On December 10, 2010 we completed a registered rights offering, which offered stockholders of record as of November 8, 2010 the right to acquire one share of our common stock for each two shares then held by such persons at a price of $0.34 per share. Stockholders exercised subscription rights to acquire 1,601,611 shares and oversubscription rights to acquire an additional 1,814,447 shares, resulting in our sale of an aggregate of 3,416,058 shares of common stock and our receipt of gross proceeds of $1,161,460 (net proceeds of $853,086). Such proceeds were added to our working capital for marketing opportunities stemming from both recent and anticipated enactments by the EPA of more stringent emission standards and rules for certain hazardous air pollutants and new products including CGT.

*Liquidity and Capital Resources Analysis:*
*LIQUIDITY AND CAPITAL RESOURCES*
	For the year ended June 30,
	2012		2011
Cash Summary	$		$
Cash (used in) provided by:
Operations	(654,940	)	(1,085,451	)
Purchase of equipment	--		(44,534	)
Proceeds from common shares issued	--		853,086
Repayment of obligations under long-term debt	--		(152,953	)
Foreign currency translation of cash	47,455		67,527
Net cash provided during the period	(607,485	)	(362,325	)
Cash beginning of period	1,674,204		2,036,529
Cash end of period	1,066,719		1,674,204

Working Capital Summary	2012		2011
	$		$
Current assets	6,601,352		6,376,233
Current liabilities	4,713,165		3,201,833
Net working capital	1,888,187		3,174,400
Current ratio	1.40:1		1.99:1

Summary of Contracts in Progress	2012		2011
	$		$
Contract value completed and to be invoiced	820,024		1,492,747
Contract advances invoiced	(2,083,925	)	(1,152,869	)
Net contracts in progress	(1,263,901	)	339,878

Contract Backlog	2012		2011
	$		$
Contract value to be recognized as revenue	7,000,000¹		8,300,000¹

~~Our~~1 ~~working~~adjusted ~~capital~~backlog ~~decreased~~after ~~$471,922~~taking ininto ~~2011~~account toa $3~~,174,400, and the current ratio decreased to 1~~.~~99:1~~7 million ~~from~~order ~~2.80:1.~~cancellation ~~This position continues to enable us to support a growth~~ in ~~sales~~late ~~anticipated~~fiscal ~~from our increased backlog, increased regulations and introduction of new CGT technology~~2012.

~~Our~~Cash ~~contract~~of ~~payment~~$654,940 ~~terms~~applied ~~provide~~to ~~for~~operations ~~funding~~in ~~the~~2012 ~~progression~~was ofentirely ~~work~~ due to the ~~point~~net ofloss ~~delivery.~~for Athe ~~final~~year. ~~holdback~~Cash ~~amount~~of is$1,085,451 ~~often~~was ~~dependent~~applied onto ~~commissioning,~~net ~~specified~~loss ~~performance~~in operations ~~criteria~~for or2011 and a ~~fixed~~repayment ~~time~~ of ~~operations.~~long Atterm ~~any~~debt ~~point in time~~($152,953) ~~the~~while net ~~contracts~~proceeds in($853,086) ~~process~~from ~~with costs that exceed invoicing may exceed~~ the ~~contracts~~sale ~~that~~of ~~have~~shares ~~been~~(see ~~invoiced~~below) inrecovered ~~advance~~most of ~~performance~~the cash decreases. AtThe ~~June 30, 2011, the~~ net cash position ~~of contracts in process is an investment of~~ $~~339~~1,~~878~~066,719 ~~compared~~at to June 30, ~~2010 with~~2012 anis ~~investment~~a decrease of $~~133~~607,~~885.~~485 ~~This~~from ~~investment is realized when full payment terms are achieved for issuance of invoicing to~~ the ~~client~~prior year.

InOn ~~March~~December ~~2011~~10, ~~our~~2010 ~~ability~~we tocompleted ~~request~~a ~~standby~~registered ~~letters~~rights offering, which offered stockholders of ~~credit~~record ~~under~~as of November 8, 2010 the right to acquire one share of our ~~credit~~common ~~facility~~stock ~~with~~for aeach ~~Canadian~~two ~~bank~~shares ~~was~~then ~~reduced~~held by ~~that~~such ~~bank~~persons toat ~~USD~~a price of $3.0.34 ~~million~~per ~~(from~~share. ~~USD~~Stockholders ~~$4.25~~exercised ~~million).~~subscription ~~The~~rights ~~standby~~to ~~letters~~acquire 1,601,611 ofshares ~~credit~~and ~~are~~oversubscription ~~secured~~rights byto aacquire ~~general~~an additional 1,814,447 ~~security~~shares, ~~interest~~resulting in our sale of an aggregate of 3,416,058 shares of common stock and ~~lien~~our ~~upon~~receipt of gross proceeds of $1,161,460 (net proceeds of $853,086). Such proceeds were added to our ~~assets~~working capital for marketing opportunities stemming from both recent and ~~guarantees~~anticipated ~~provided~~enactments by ~~Export~~the ~~Development~~EPA ~~Canada~~of more onstringent aemission ~~fee-~~standards and rules for~~-service~~ ~~basis~~certain hazardous air pollutants and new products including CGT™.

~~The~~Our ~~Canadian~~working ~~bank~~capital ~~also~~decreased ~~withdrew as of April 30, 2011 (i) our demand operating line of CAD~~ $1~~.5 million~~,286,213 ~~(ii)~~in ~~our~~2012 ~~demand~~to ~~credit for foreign exchange contracts of USD~~ $~~750~~1,~~000~~ 888,187, and ~~(iii)~~the ~~our~~current ~~demand~~ratio ~~term~~decreased ~~bank~~to ~~loan~~1.40:1 ~~for~~from ~~computer equipment~~1.99:1. ~~There~~This working capital ~~were~~level nocontinues ~~drawdowns~~to ~~against~~enable ~~the~~us ~~operating~~to orsupport ~~foreign~~a ~~exchange~~growth ~~credit~~in ~~lines~~sales ~~and~~anticipated wefrom ~~repaid~~our current ~~the~~backlog, ~~demand~~increased ~~term~~regulations ~~bank~~and ~~loan~~introduction onof ~~April~~new ~~29,~~CGT™ ~~2011~~technology.

Our contract payment terms provide for funding the progression Inof ~~May~~work ~~2011,~~to wethe ~~reached~~point anof ~~agreement~~delivery. ~~with~~A afinal ~~second~~holdback ~~Canadian~~amount ~~bank~~is often dependent on commissioning, ~~with~~specified ~~operating~~performance ~~affiliates~~criteria or a fixed time of operations. At any point in time, the UScontracts ~~and~~in ~~other~~process ~~countries,~~with ~~which~~costs ~~provides~~that ~~for~~exceed ainvoicing ~~credit~~may exceed ~~facility~~the ~~for~~contracts ~~standby~~that ~~letters~~have ofbeen ~~credit~~invoiced ~~for~~in ~~CAD~~advance $4of performance.25 ~~million~~At ~~that~~June 30, 2012, the net position of contracts in process is ~~secured~~an byadvance apayment ~~general~~of ~~security~~$1,263,901 ~~interest~~compared into June 30, ~~and~~2011 ~~lien~~with ~~upon~~an investment of $339,878. ~~our~~This advance ~~assets~~payment ~~and~~is ~~guarantees~~offset ~~provided~~when bycontract ~~Export~~costs ~~Development~~are ~~Canada~~completed on aprojects ~~fee-for-service basis~~in progress. This ~~credit~~investment ~~facility~~is ~~became~~realized ~~operational~~when infull ~~August~~payment ~~2011,~~terms atare ~~which~~achieved ~~time~~for issuance of invoicing to the client. The terms of payment of our ~~prior~~contracts ~~credit~~with customers ~~facilities,~~are ~~discussed~~negotiated ~~above~~on the basis of project milestones for each contract and may differ significantly from one contract to the next, ~~were~~and may result in ~~terminated~~swings bybetween ~~mutual~~investment ~~consent.~~and advance payment positions for each fiscal period.

At– ~~June~~20 30, 2011, we had standby letters of credit for approximately USD $1.4 million (USD $2.0 million at June 30, 2010) in place with various customers in order to receive cash proceeds ahead of delivery and end-of-warranty milestones. Export Development Canada have provided guarantees to the Canadian Bank for prior issued letters of credit and guarantees for subsequent letters of credit to be issued through a second Canadian bank to a total credit line of CAD $4.25 million. –

~~Financial~~In ~~covenants~~June ~~under~~2012, ~~the~~we renewed our agreement with HSBC Bank Canada, with operating affiliates in the ~~second~~U.S. ~~Canadian~~and ~~bank~~other countries, which provides for a credit facility for standby letters of credit that are: (secured by a) general security interest in, and lien ~~Total~~upon, ~~Liabilities~~our toassets ~~Tangible~~and ~~Net~~guarantees ~~Worth~~provided ~~Ratio~~by ~~does~~Export ~~not~~Development ~~exceed~~Canada 2(“EDC”).~~0:1~~ atThe ~~any~~guarantees ~~time~~provided by EDC are on a fee-for-service basis for standby letters of credit issued prior to May 31, 2012 and, for standby letters of credit issued after that date, are 50% guaranteed by EDC and ~~(b)~~50% ~~Current~~secured ~~Ratio~~by isour ~~not~~company ~~less~~in ~~than~~the ~~1.20:1~~form atof ~~any~~a ~~time~~term deposit or GIC pledged to the bank. WeThe ~~were~~financial covenant for this agreement provides that the borrower shall be in ~~compliance~~default of its obligations to ~~with~~the ~~these~~bank ~~terms~~under atthis ~~June~~credit 30facility should there be any material adverse change in the operations, ~~2011:~~ownership, ~~(a)~~or ~~Total~~financial ~~Liabilities~~condition toof ~~Tangible~~the ~~Net~~borrower, ~~Worth Ratio~~as ~~was~~reasonably 0determined by the bank.~~42:1~~ The issuance of standby letters of credit under this HSBC line of credit is subject to obtaining EDC guarantees and/or ~~(b)~~our ~~Current~~ability ~~Ratio~~to ~~was~~provide 1supporting collateral.~~99:1~~ Our current agreement with EDC, ~~and~~which wecomes ~~are~~up ~~not~~for ~~aware~~renewal in November 2012, currently provides for $225,000 of ~~any~~guarantees at 50% of the ~~issues~~standby ~~that~~letter ~~could~~of ~~result~~credit inface ~~our~~value, ~~non-compliance~~of inwhich ~~the~~a ~~proximate~~portion ~~future~~has already been committed for issued letters of credit.

OnAt ~~September~~June 1930, ~~2011~~2012, we ~~entered~~had ~~into~~standby anletters ~~Investment~~of ~~Agreement~~credit ~~with Dutchess Opportunity Fund, II, LP~~ for ~~the~~approximately ~~sale~~$600,000 ~~from time to time, at our discretion, of up to~~ ($31.04 million ofat ~~our~~June ~~common~~30, ~~stock~~2011) ~~during~~in aplace ~~three-year~~with ~~period~~various atcustomers ain ~~price~~order ~~equal~~ to ~~95%~~ ofreceive ~~the~~cash ~~recent~~proceeds ~~average~~ahead ~~market price at the time~~ of ~~sale. The~~delivery ~~extent to which we will need to access any portion~~ or ~~all~~ end-of-warranty ~~the~~milestones ~~proceeds~~We ~~available~~have ~~under the Investment Agreement will depend in substantial part upon the availability and adequacy of~~posted ~~our~~ cash ~~flows~~reserves ~~from~~of ~~operations~~nil soat asJune to30, ~~enable~~2012 us(nil toat ~~address~~June ~~timing~~30, ~~differences~~2011) ~~that~~representing ~~may arise in~~ our ~~need~~guarantee tofor ~~pay vendors and suppliers in advance of our receipt of contractual progress payments from our customers. A registration statement that registers such common stock must be declared effective by~~ the ~~SEC~~outstanding ~~prior~~letters ~~to our sale to Dutchess~~ of ~~any~~credit ~~common~~at ~~stock~~those ~~under the Investment Agreement~~dates.

AsOn ~~was~~October ~~the~~28, ~~case~~2011, we entered into an Investment Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) for the sale, from time to time, at our ~~previous~~discretion, ~~bank~~of ~~operating~~up ~~line~~to $3.0 million of ~~credit~~our ~~that~~common ~~was~~stock ~~never~~during ~~utilized~~a three-year period at a price equal to 95% of the recent average market price at the time of sale, provided that in no event shall such price be lower than $0.33 per share. The extent to which we will need to access any portion or all of the ~~Dutchess~~proceeds available under the Investment Agreement ~~for~~will andepend ~~equity~~in ~~line~~substantial part upon the availability and adequacy of ~~credit~~our ~~has~~cash ~~been~~flows ~~established~~from tooperations ~~provide~~so ~~back-up~~as ~~capabilities~~to ~~should~~enable ~~the~~us to address timing differences that may arise from time to time in our need to pay vendors and suppliers in advance of our receipt of contractual progress payments ~~prove~~from ~~temporarily~~our ~~insufficient~~customers. We refer to ~~pay~~our Current Report on Form 8-K, dated October 31, 2011, for further information regarding the Investment Agreement. As a registration statement registering such common stock was declared effective by the SEC, we are now able, at our ~~vendors~~discretion, to sell common stock to Dutchess pursuant to the terms and ~~suppliers~~conditions of the Investment Agreement. At September 30, 2012, our shares were quoted at $0.12 per share and thus, this financing was not accessible.

Our backlog as at June 30, ~~2011~~2012 was approximately $127,000,000, which we expect to record 90% as revenue in fiscal 2012, compared to the adjusted June 30, ~~2010~~2011 backlog of $38,~~000~~300,000. There is no assurance that backlog will be replicated, increased or transferred into higher revenues for the future.

–As 17of –June 30, 2012, we had cash and cash equivalents of approximately $1.1 million and working capital of approximately $1.9 million. In connection with the merger agreement executed on October 10, 2012, MEGTEC has made available to us a $1.0 million credit facility, which, if drawn down by us, will bear interest at 10% per annum and be due and payable on the first anniversary of the drawdown, subject to acceleration under certain circumstances described in the note. If the note is not paid, the entire outstanding principal balance and accrued and unpaid interest under certain circumstances will be applied to the payment of a license fee under an intellectual property license agreement entered into by MEGTEC and us at the same time as the merger agreement.

Based on a current usage rate of approximately $550,000 per month, our current cash position and working capital ~~at June 30~~, ~~2011;~~ our credit agreements with ~~the~~HSBC ~~second~~Bank ~~Canadian~~Canada ~~bank~~ and Export Development Canada~~; subject to the effectiveness of the registration statement described above~~, our ~~access~~anticipated torevenue anfrom ~~equity line~~operations ~~of credit with Dutchess; our recent increase in bookings;~~ and ~~anticipated~~the availability ~~sales~~of ~~orders~~the ~~through~~MEGTEC ~~fiscal~~credit ~~2012~~facility, we believe that: ~~we will have sufficient capital resources to support operations through June 30, 2012.~~

we will have sufficient capital resources to support our operations through the consummation of the merger (expected to close late in the fourth quarter of calendar 2012 or early in the first quarter of calendar 2013); or
if the merger is terminated or not approved at the special meeting of stockholders, we will have sufficient capital resources, after payment of expenses related to the merger, to support our operations for approximately six months following such termination or non-approval.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign transactions are conducted in Canadian dollars, USU.S. dollars or Euro to accommodate customers and all reporting is prepared in USU.S. dollars. A major portion of our selling, administrative and engineering expenses is denominated in Canadian dollars. As a result, fluctuations in currency exchange rates may affect operating results. We have not entered into forward or future foreign exchange contracts in fiscal ~~2011~~2012, and there were no outstanding forward foreign exchange contracts at June 30, ~~2011~~2012. To ~~further~~ mitigate currency exposure, we attempt to contract outsourcing, where practical, in the same currency as the sales contract or with fabricators where the all-in costs, including currency, are most favorable. At June 30, ~~2011~~ 2012, we were not using any bank borrowing facility, other than outstanding standby letters of credit totaling $1639,~~441~~139,~~757,~~ ~~that~~which could subject us to the risk of interest rate fluctuations.

– 21 –

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to pages F-1 through F-1820 comprising a portion of this Annual Report on Form 10-K.

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

Not applicable.

ITEM 9A: CONTROLS AND PROCEDURES

Our management has carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d- 15(e) under the ~~Securities~~ Securities Exchange Act of 1934) as of June 30, ~~2011~~2012. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, ~~2011~~2012.

There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d- 15(f) under the Exchange Act) that occurred during the quarter ended June 30, ~~2011~~2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of our principal executive and principal financial officers and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of our company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management determined that, as of June 30, 2012, our internal control over financial reporting was effective.

Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management determined that, as of June 30, 2011, our internal control over financial reporting was effective.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.

ITEM 9B: OTHER INFORMATION

On ~~September~~October 2210, ~~2011~~2012, we ~~issued~~entered ainto ~~press~~an ~~release~~Agreement ~~announcing~~and ~~our~~Plan ~~financial~~of ~~results~~Merger ~~for~~(which we refer to as the ~~year~~“merger ~~ended~~agreement”) ~~June~~with 30MEGTEC Systems, ~~2011~~Inc. Aand ~~copy~~MTS ofWSP, ~~the~~Inc. ~~press~~(which ~~release~~we isrefer ~~being~~to ~~furnished~~ as ~~Exhibit~~the 99“Merger Sub”), an entity wholly-owned by MEGTEC.1 Pursuant to ~~this~~the ~~report~~merger agreement, Merger Sub would be merged with and ~~incorporated~~into ~~herein~~TurboSonic byand ~~reference~~we would continue as the surviving corporation.

–If 18the –merger agreement is adopted by our stockholders and the merger is consummated, all of our outstanding shares of common stock (other than shares owned by stockholders perfecting dissenters’ rights under Delaware law) will be cancelled and converted automatically into the right to receive a cash payment equal to $0.21 per share. Consummation of the merger is subject to certain conditions, including, among others:

approval of the merger agreement by the holders of a majority of the outstanding shares of our common stock; and
the total number of dissenting shares shall not exceed 10% of the outstanding shares of our common stock.

Simultaneously with the merger agreement, MEGTEC entered into a voting agreement with our founder, executive officers and directors in which they have agreed to vote their shares of our common stock in favor of the adoption of the merger agreement. As of the date hereof, the stockholders who have signed the voting agreement collectively own of record shares of our common stock representing approximately 20.6% of the aggregate voting power entitled to vote on the merger agreement.

Under the terms of the merger agreement, we are permitted to solicit alternative acquisition proposals from third parties through October 24, 2012 and we intend to consider any such proposals. After that time and until November 7, 2012, we may, subject to certain conditions, continue negotiations with any person who has submitted a written alternative acquisition proposal by October 24, 2012 that the majority of the Board believes is a superior proposal to the proposed merger with MEGTEC. In addition, subject to the terms of the merger agreement, we may respond to unsolicited alternative acquisition proposals. There can be no assurance that any such proposal will be received or that any proposal will result in an alternative acquisition transaction.

– 22 –

The merger agreement may be terminated by either MEGTEC or us if the merger has not been consummated by April 10, 2013; provided that the right to terminate shall not be available to any party whose failure to perform its obligations under the merger agreement has been the cause of the failure of the merger to be consummated.

In connection with the merger agreement, we also entered into a secured promissory note and related security agreements with MEGTEC. Under the terms of the secured promissory note, MEGTEC agreed to make available to us a credit facility of $1,000,000, which we may draw down in whole, but not in part, at any time prior to the maturity date of the note and which we may use for working capital or general corporate purposes. The note bears interest at 10% per annum commencing on the date of the drawdown and matures on the first anniversary of the drawdown. Under certain circumstances described in the secured promissory note, including if we undergo an alternative transaction with another party, the maturity date of the note may be accelerated. In that event, the outstanding principal amount of the note and accrued and unpaid interest would be applied, under certain circumstances, to payment of the initial license fee under an intellectual property license agreement entered into with MEGTEC at the same time as the secured promissory note. The credit facility is collateralized by a second lien security agreement covering substantially all of our assets in the United States, separate United States trademark and patent security agreements and a general security agreement covering substantially all of our assets in Canada. The liens created by these security agreements are subordinate to the liens against our assets in favor of HSBC Bank Canada, our existing lender.

We also entered into an intellectual property license agreement with MEGTEC under which, subject to the terms and conditions of that agreement, MEGTEC is granted upon the occurrence of certain triggering events specified in the agreement, including termination of the merger agreement or if we undergo an alternative transaction with another party, a perpetual license in India, China and the United States (which is exclusive in India and China and non-exclusive in the United States) to use substantially all of our patents, trademarks, copyrighted materials and other intellectual property relating to air pollution control and liquid atomization technologies in industrial commercial and institutional applications, but specifically excluding any fossil fuel fired combustion units of more than 25 megawatts that serves a generator that produces electricity for sale. The license agreement provides for an initial license fee of $1,000,000, which may be paid by applying the unpaid principal amount and accrued and unpaid interest under the secured promissory note with MEGTEC. Under certain circumstances described in the license agreement, we have the right for 30 days after the occurrence of certain triggering events to buy back the license for $1,000,000 plus the amount of interest that would have accrued under the secured promissory note from the date of payment of the initial license fee to the date we exercise our buy-back right. The license agreement also requires MEGTEC to pay annual royalties of 3% of net sales, as defined in the license agreement, for the first five years of the license , after which the royalty is to be renegotiated in good faith. Beginning in the third year, if MEGTEC fails to pay at least $250,000 in royalties the license in India and China converts to a non-exclusive license.

Following the consummation of the merger, our common stock will no longer be quoted on the OTC Quote Board (OTCQB), the registration of our common stock under Section 12 of the Securities Exchange Act of 1934 will be terminated, and we will be a private company that is wholly-owned by MEGTEC.

The descriptions of the merger agreement, the secured promissory note, the intellectual property license agreement and the various security agreements in this Item 1.01 are qualified in their entirety by reference to the full text of such agreements, which are filed as Exhibits 2.1, 4.1, 10.1, 10.2, 10.3, 10.4 and 10.5 to our Current Report on Form 8-K, dated October 10, 2012, and are incorporated herein by this reference.

In connection with the proposed merger, we will file a proxy statement and relevant documents concerning the proposed merger with the SEC relating to the solicitation of proxies to vote at a special meeting of stockholders to be called to approve the proposed merger. The definitive proxy statement will be mailed to our stockholders in advance of the special meeting. Stockholders are urged to read the proxy statement and other relevant materials when they become available because they will contain important information about our company and the proposed merger. Stockholders may obtain a free copy of the proxy statement and other relevant documents filed by us with the SEC (when available) at the SEC’s website at www.sec.gov. We and our directors and certain executive officers may be deemed to be participants in the solicitation of proxies from our stockholders in respect of the proposed merger. Information about our directors and executive officers and their respective interests in our company as security holders or otherwise is set forth in our proxy statements and annual reports on Form 10-K, previously filed with the SEC. Investors may obtain additional information regarding the interest of the participants by reading the proxy statement regarding the merger when it becomes available. Each of these documents is, or will be, available for free at the SEC’s website at www.sec.gov and at the TurboSonic Investor Relations Web site at: http://www.turbosonic.com/investor-rel.

– 23 –

PART III

ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Our executive officers, directors and key persons are as follows:

Name	Age	Positions and Offices
Ken Kivenko	6970	Chairman of the Board
Edward F. Spink	5758	Chief Executive Officer and Director
Egbert Q. van Everdingen	5051	President, Secretary-Treasurer and Director
Carl A. Young	6970	Chief Financial Officer
Richard H. Hurd	7475	Director
Glen O. Wright	6263	Director
Raymond L. Alarie	5960	Director
F. Eugene Deszca	6364	Director
Robert A. Allan	6970	Vice President Engineering
David J. Hobson	6364	Vice President Finance & Administration
Richard C. Gimpel	63	Vice President Marketing & Sales
Luca Finzi	58	General Manager – Italian Branch (key person)
Luca Finzi	57	General Manager – Italian Branch (key person)

Ken Kivenko, P.Eng., has been a director of our company since February 2007. Mr. Kivenko, a member of the Professional Engineers of Ontario, is the founder and President of Kenmar Consulting. Kenmar acts as a private consultant in the areas of strategic planning, Total Quality, financing and governance, and was established in January 2001. Prior thereto, he was President and CEO of NBS Technologies, a supplier of credit and ID cards and card personalization equipment, from June 1995 to December 2000. He currently serves on the board of TSX-listed RDM Corporation (HR/Compensation committee and Chair of Governance Committee). He is the Advisory Committee Chairman for the Small Investor Protection Association in Canada, a member of the board of the Excellence Canada (formerly National Quality Institute) and is a former member of the Ontario Securities Commission Continuous Disclosure Advisory Committee. We believe that Mr. Kivenko’s extensive engineering background, his many years as senior executive with a number of diversified companies, his role with ~~the~~ ~~National~~Excellence ~~Quality Institute~~Canada, over ten years of public board experience and his ~~background~~ background for good corporate disclosure and governance qualify him to serve as a director of our company.

Edward F. Spink, Chief Executive Officer and director, has completed 25 years as a Senior Executive with us and has participated in the development of our company and our technology. He served as Chairman of the Board of Directors from June 1999 to December 2007, at which time he nominated an outside director as chairman to improve our corporate governance practises. He has been instrumental in the expansion of product lines and the development of our intellectual property base and has authored, participated and directed numerous patents. Mr. Spink has served as a director with The Bank of Akron in New York state since 2005. We believe that Mr. Spink’s unique position in working alongside our founder for 19 years, his 25 years as a senior executive with TurboSonic and the role that he has played in the development of our technology qualify him to serve as a director of our company.

Egbert Q. van Everdingen has served as our President, Secretary-Treasurer and as a director, since June 2006. From August 2003 until June 2006, he was Executive Vice President, with responsibility for all sales, marketing, design and project engineering. Prior thereto and from August 1997, Mr. van Everdingen served as our Vice President Marketing & Sales, Air Pollution Control Systems. Prior thereto and from 1986, he served as project manager and in various product development, sales and marketing positions with Turbotak. We believe that Mr. van Everdingen’s knowledge and understanding of the industry and over 2025 years experience regarding business operations and strategic planning qualify him to serve as a director of our company.

Carl A. Young, CA., has served as our Chief Financial officer on a part-time basis since October 2006. A Chartered Accountant, he had served as an officer and director of several private industrial corporations through 1989, then becoming owner of Mentor Dynamics Inc., which designed, manufactured and installed custom material handling equipment and industrial overhead cranes, and Provincial International Cranes Inc., which designed and sub-contracted fabrication of industrial and shipyard cranes to international markets. After selling these businesses in 1999, Mr. Young has provided interim management services as a senior financial officer and director, and other business consulting services to a number of clients in industry, commerce and services.

– 1924 –

Richard H. Hurd served as President from August 1993 to August 1997 and Treasurer from April 1994 to August 1997 of Sonic Environmental Systems, Inc., the predecessor to our company. He has been a director since February 1993 and currently serves as our audit committee chairperson. Mr. Hurd has been President and sole owner of RHB Capital Company Inc., a financial consulting company since 1987. He is presently Chief of Staff to the Director of the New Jersey Division of Medical Assistance and Health Services and was a Special Assistant to the Treasurer of the State of New Jersey. We believe that Mr. Hurd’s extensive finance and accounting background, his close involvement with Sonic Environmental Systems, Inc. and TurboSonic over the past seventeen years, and his experience in investing and managing small and medium-sized businesses qualify him to serve as a director of our company.

Glen O. Wright has been a director of our company since December 2005. Mr. Wright founded Wright, Mogg and Associates Ltd., a pension and benefits consulting firm and served as its Chief Executive Officer from 1980 to 1986, and its Chairperson and Chief Executive Officer until 1996. It was sold in 2000 to Cowan Insurance Group and he continued as Chairman of the Cowan Insurance Group until October 2002. He served as the Chairman of the Workplace Safety and Insurance Board in Ontario from June 1996 to February 2004 and served as Chairman of Hydro One, the agency responsible for electric transmission in Ontario from June 2002 to May 2003. Since February 2004, he has been working on a number of consulting projects through GPark Consulting Ltd., of which he is President. He is currently a director of PrinterOn Corporation, Waterloo North Hydro and LeanCor Logistics LLC, and was formerly a director for the Institute for Work and Health, Gore Mutual Insurance and the Canadian Broadcasting Corporation, a member of the Wilfrid Laurier University Foundation, the 2010 Chair of the Joint Public Advisory Committee of the Commission for Environmental Cooperation and a member of the Council for Canadian Unity. We believe that Mr. Wright’s executive business experience, including founding a pension consulting firm, serving in senior executive roles for twenty years, and Chairman positions with major provincial organizations, qualify him to serve as a director of our company.

Raymond L. Alarie, P.Eng., ICD.D, has been a director of our company since December 2008. Mr. Alarie, a member of the Professional Engineers of Ontario, was the founder and CEO of Paragon Engineering Ltd., an infrastructure consulting engineering company from 1979 to 1997 until its acquisition by Stantec Inc. He served as Executive Vice President for Stantec Inc. from 2003 until he retired in 2006, with responsibility for several professional disciplines and regional operations in Canada and in the USA totaling some 2,500 staff. Stantec provides professional design and consulting services in planning, engineering, architecture, surveying, and project management. Prior thereto and concurrent with the most recent position, he was a member of Stantec’s Executive Leadership Team from 1997 to 2006 and contributed to Stantec’s growth from 1,500 to over 5,500 employees. ~~Since his retirement from Stantec in January 2006, he has continued to provide occasional services to that firm as a senior consultant.~~ In 2005, he received his corporate director designation through the Institute of Corporate Directors of Canada. We believe that Mr. Alarie’s founding role and senior executive positions in a large engineering consulting firm, his position as senior executive in a large public firm, and his experience and training as a director qualify him to serve as a director of our company.

Dr. F. Eugene Deszca, Ph.D., has been a director of our company since December 2008. Dr. Deszca has been a Professor since 1982 at Wilfrid Laurier University in the School of Business and Economics, where he is currently the Associate MBA Director. He has taught at Queen’s University, York University, the University of Western Ontario’s Graduate Program in Engineering Management, and at St. Francis Xavier University, and is a past member of the board of directors of the ~~Society~~ Society of Management Accountants of Canada. As an educator and consultant, he has focused on the development of organizations and the people who work there, change management and the enactment of strategy. His consulting work is conducted through ~~Gene~~ Gene Deszca and Associates, of which he is President. We believe that Mr. Deszca’s experience ranging from university faculty, research and consulting work with organizations and senior management groups on matters related to strategy, organizational change, implementation and conflict management qualify him to serve as a director of our company.

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

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

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

– 20 –

Luca Finzi has served as General Manager Europe since February 2006. From 1996 to 2005 he was a General Manager with Hamon Research Cottrell, part of the Belgian-based Hamon Group, including three years as President of Hamon Research Cottrell USA, based in New Jersey. Prior thereto, from 1985 to 1996, he was a manager with Cifa Progetti, an Italian company focused on environmental systems and bulk solids handling. He holds a Master's degree in Mechanical Engineering from the Politecnico di Milano.

– 25 –

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

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own beneficially more than 10% of our common stock to file reports of ownership and changes in ownership of such common stock with the SEC, and to file copies of such reports with us. Based solely upon a review of the copies of such reports filed with us, we believe that during the year ended June 30, ~~2011~~2012 such reporting persons complied with the filing requirements of Section 16(a).

Our Board of Directors has determined that each of our non-employee directors (Messrs. Kivenko, Hurd, Wright, Alarie and Deszca), who collectively constitute a majority of our Board, meets the general independence criteria set forth in the Nasdaq Marketplace rules. In addition, our Board has made a subjective determination as to each of the foregoing individuals that no relationships exist that, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

Our audit committee consists of three directors,: Richard H. Hurd as chairperson, Raymond L. Alarie and Ken Kivenko. ~~The~~Our Board of Directors has determined that each of Messrs. Hurd, Alarie and Kivenko ~~meet~~meets the Nasdaq Marketplace ~~Rule~~Rules ~~definition~~for ofbeing an "independent" ~~for~~member of our audit committee ~~purposes~~. The Board of Directors has also determined that Richard Hurd ~~meets~~satisfies the SEC definition of an "audit committee financial expert."

Our audit committee has adopted a Code of Ethics applicable to all of our ~~employees~~management, ~~including~~ our ~~Chief~~employees ~~Executive Officer, Chief Financial Officer,~~ and ~~Vice President Finance, as well as~~ the members of our board of directors. The Code of Ethics was filed as Exhibit 14 to the Form 10-KSB for the year ended June 30, 2004, and is also posted on the Investor Relations page of our website at www.turbosonic.com.

Our compensation committee consists of three directors,: Glen O. Wright as chairperson, F. Eugene Deszca and Raymond L. Alarie. The Board of Directors has determined that each member of the Compensation Committee meets the Nasdaq general definition of independence for members of the board of directors.

–Our 21Board –of Directors has appointed a special committee of the Board of Directors to evaluate expressions of interest received from third parties with respect to potential sale, merger, debt or equity financing or other strategic transactions involving our company. Each member of the special committee, consisting of Glen O. Wright (chairperson), Ken Kivenko and Raymond L. Alarie, meets the Nasdaq general definition of independence for members of the board of directors.

– 26 –

ITEM 11: EXECUTIVE COMPENSATION

Summary Compensation

Set forth below is the aggregate compensation for services rendered in all capacities to us during the three fiscal years ended June 30, 2012 ~~2011~~ by our chief executive officer and by our four other most highly ~~compensated~~ compensated executive officers during fiscal ~~2011~~2012 (collectively the “Named Officers”).

	SUMMARY COMPENSATION TABLE (1)
Name and	Year	Salary	Option	All Other
Name and	Year	Salary	Option	Non-equity	All Other
Principal Position	Ended		Awards (1)	Compensation	Total
Principal Position	Ended		Awards (2)	Incentive Plan	Compensation		Total
	June 30
	June 30			Compensation (3)
		$	$	$	$
		$	$	$	$		$
Edward F. Spink	2012	229,886	643	—	230,529
Edward F. Spink	2011	224,596	722	—	—		225,318
Chief Executive Officer	2011	224,596	722	—	225,318
Chief Executive Officer	2010	191,576	1,840	—	—		193,416
	2010	191,576	1,840	—	193,416
	2009	193,121	4,452	96,561	1,287	(4)	295,421
Egbert Q. van Everdingen,	2012	204,346	643	—	204,989
Egbert Q. van Everdingen,	2011	199,641	722	—	—		200,363
President, Secretary-Treasurer	2011	199,641	722	—	200,363
President, Secretary-Treasurer	2010	171,664	1,840	—	—		173,504
	2010	171,664	1,840	—	173,504
	2009	171,664	4,452	85,832	1,287	(4)	263,235
Carl A. Young	2012	160,179	1,031	—	161,210
Carl A. Young	2011	137,454	961	—	—		138,415
Chief Financial Officer	2011	137,454	961	—	138,415
Chief Financial Officer	2010	140,958	1,840	—	—		142,798
	2010	140,958	1,840	—	142,798
	2009	96,973	—	42,916	—		139,889
Richard C. Gimpel,	2012	127,403	—	—	127,403
Richard C. Gimpel,	2011	122,173	—	—	—		122,173
VP – Marketing & Sales (3)	2011	122,173	—	—	122,173
VP – Marketing & Sales	2010	104,584	—	—	13,432	(5)	118,016
	2010	104,584	—	13,432(2)	118,016
	2009	123,600	—	18,540	12,963	(5)	155,103
Robert A. Allan	2012	122,575	—	—	122,575
Robert A. Allan	2011	119,786	—	—	—		119,786
VP – Engineering	2011	119,786	—	—	119,786
VP – Engineering	2010	105,075	—	—	—		105,075
	2010	105,075	—	—	105,075
	2009	98,692	—	15,321	—		114,013

1) ~~No bonus awards were made except for bonus awards under Non-Equity Incentive Plan Compensation. We have no pension or deferred compensation plans to which we contribute. 2)~~ This column represents the aggregate grant date fair value of option awards granted in fiscal ~~2009~~2010, ~~2010~~2011 and ~~2011~~2012, calculated in accordance with ASC Topic 718, “Compensation – Stock Compensation”. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The fair value of the option award was calculated using the closing price of our common stock on the date of grant. For additional information, refer to note 1213 of our financial statements in this Form 10-K. Amounts in this column reflect our accounting expense for these awards and may not correspond to the actual value that will be recognized by the named executive officers. 32) ~~Amounts~~This inrepresents ~~this~~commission ~~column~~paid ~~represent~~on ~~discretionary~~orders ~~bonuses~~received ~~approved~~prior byto ~~our Board of Directors in~~ fiscal ~~2009 for the named executive officers~~2007. ~~There were no discretionary bonuses approved by our Board of Directors in fiscal 2010 or 2011. 4~~3) ~~This represents directors fees received during the corresponding fiscal year~~Mr. 5)Gimpel ~~This~~left ~~represents~~our ~~commission~~company ~~paid~~ on ~~orders~~July ~~received~~23, ~~prior to fiscal 2007~~2012.

The recognized stock-based compensation expense listed as Option Awards for Mr. Spink in the above Summary Compensation Table was derived from an award of 2025,000 options as aan ~~director~~employee made on December 11, ~~2008~~2009 at an exercise price of $0.3079, an award of 25,000 options as ana ~~employee~~director made on December 119, ~~2009~~2010 at an exercise price of $0.7931 and an award of 25,000 options as as an employee made on December 98, ~~2010~~2011 at an exercise price of $0.3127.

The recognized stock-based compensation expense listed as Option Awards for Mr. ~~Van~~van Everdingen in the above Summary Compensation Table was derived from an award of 2025,000 options as aan ~~director~~employee made on December 11, ~~2008~~2009 at an exercise price of $0.3079, an award of 25,000 options as ana ~~employee~~director made on December 119, ~~2009~~2010 at an exercise price of $0.7931 and an award of 25,000 options as an employee made on December 98, ~~2010~~2011 at an exercise price of $0.3127.

The recognized stock-based compensation expense listed as Option Awards for Mr. Young in the above Summary Compensation Table was derived from an award of 15,000 options as an employee made on December 11, 2009 at an exercise price of $0.79, ~~and~~ an award of 25,000 options as an employee made on December 9, 2010 at an exercise price of $0.31 and an award of 25,000 options as an employee made on December 8, 2011 at an exercise price of $0.27.

–The 22options –reflected in the table as having been granted December 11, 2009 to Messrs. Spink, van Everdingen and Young, in their respective capacities as employees will not become exercisable prior to December 11, 2012 for Mr. Young and prior to December 11, 2014 for Messrs. Spink and van Everdingen. The options reflected in the table as having been granted December 9, 2010 to Messrs. Spink, van Everdingen and Young, in their respective capacities as employees will not become exercisable prior to December 9, 2013 for Mr. Young and prior to December 9, 2015 for Messrs. Spink and van Everdingen. The options reflected in the table as having been granted December 8, 2011 to Messrs. Spink, van Everdingen and Young, in their respective capacities as employees will not become exercisable prior to December 8, 2014 for Mr. Young and prior to December 8, 2016 for Messrs. Spink and van Everdingen.

~~The~~– ~~options~~27 reflected in the above Summary Compensation Table as having been granted to Messrs. Spink and van Everdingen, in their respective capacities as members of our Board were immediately exercisable upon their grant date. The options reflected in the table as having been granted December 11, 2009 to Messrs. Spink, van Everdingen and Young, in their respective capacities as employees will not become exercisable prior to December 11, 2012 for Mr. Young and prior to December 11, 2014 for Messrs. Spink and van Everdingen. The options reflected in the table as having been granted December 9, 2010 to Messrs. Spink, van Everdingen and Young, in their respective capacities as employees will not become exercisable prior to December 9, 2013 for Mr. Young and prior to December 9, 2015 for Messrs. Spink and van Everdingen. –

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

OUTSTANDING EQUITY AWARDS AT JUNE 30, ~~2011~~2012

	Number of Shares	Number of Shares
	Number of Shares Underlying Unexercised Options Exercisable	Number of Shares Underlying Unexercised Options Unexercisable	Exercise Price	Expiration Date
	Underlying	Underlying	Exercise	Expiration
Edward F. Spink	20,000	—	$0.84	12/11/2015
	Unexercised Options	Unexercised Options	Price	Date
	Exercisable	Unexercisable
Edward F. Spink	35,000	—	$1.10	1/05/2012
	20,000	—	$0.84	12/11/2015
	20,000	—	$0.30	12/11/2016
	—	25,000 (1)	$0.79	12/11/2017
	—	25,000 (3)	$0.31	12/1109/2018
Egbert Q. van Everdingen	35,000	—	$1.10	1/05/2012
	—	25,000 (5)	$0.27	12/08/2019
	20,000	—	$0.84	12/11/2015
Egbert Q. van Everdingen	20,000	—	$0.84	12/11/2015
	20,000	—	$0.30	12/11/2016
	—	25,000 (1)	$0.79	12/11/2017
	—	25,000 (3)	$0.31	12/1109/~~20187~~2018
	—	25,000 (5)	$0.27	12/08/2019
Carl A. Young	—	15,000 (2)	$0.79	12/11/2017
	—	25,000 (4)	$0.31	12/1109/2018
Richard C. Gimpel	12,500	—	$1.10	1/05/2012
	—	25,000 (6)	$0.27	12/08/2019
Robert A. Allan	12,500	—	$1.10	1/05/2012

1) Options vest on December 11, 2014.	2) Options vest on December 11, 2012.
3) Options vest on December 9, 2015.	4) Options vest on December 9, 2013.

1)	Options vest on December 11, 2014.
2)	Options vest on December 11, 2012.
3)	Options vest on December 9, 2015.
4)	Options vest on December 9, 2013.
5)	Options vest on December 8, 2016.
6)	Options vest on December 8, 2014.

COMPENSATION OF DIRECTORS

	Fees Earned or Paid in
		Fees Earned		Option Awards (1)	Total
	Cash	Option Awards (1)	Total
		$		$	$
	$	$	$
Richard R. Hurd		28,000		4,400	32,400
Richard R. Hurd	23,750	4,125	27,875
Ken Kivenko		23,923		4,400	28,323
Ken Kivenko	21,711	4,125	25,836
Glen O. Wright		19,936		4,400	24,336
Glen O. Wright	24,206	4,125	28,331
Raymond L. Alarie		18,690		4,400	23,090
Raymond L. Alarie	23,707	4,125	27,832
F. Eugene Deszca		15,700		4,400	20,100
F. Eugene Deszca	13,975	4,125	18,100

1) This column represents the aggregate grant date fair value of option awards granted in fiscal ~~2011~~2012, calculated in accordance with ASC Topic 718, “Compensation – Stock Compensation”. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The fair value of the option award was calculated using the closing price of our common stock on the date of grant. For additional information, refer to note 1213 of our financial statements in this Form 10-K. Amounts in this column reflect our accounting expense for these awards and do not correspond to the actual value that will be recognized by the named directors.

–Our 23non-executive –directors are paid $3,000 per quarter and $500 for each regularly scheduled board meeting or committee meeting attended in person and $250 for each meeting attended by phone. In addition to the above-noted fees, the board and the audit committee chairperson each receive $3,000 per quarter and the compensation committee chairperson receives $750 per quarter. The special committee members each receive $3,000 per quarter, plus $500 per quarter in which they attend committee meetings. All of our non-executive directors are periodically granted stock options, typically on a yearly basis. Non-executive directors receive reimbursement of out-of-pocket expenses incurred for each board meeting or committee meeting attended. During the fiscal year ended June 30, 2012, there was a grant of 20,000 options to each non-executive director, which vested immediately, had an exercise price of $0.27 and an expiration date of December 7, 2019.

~~Our~~– ~~non-executive~~28 ~~directors~~– are paid $3,000 per quarter and $500 for each regularly scheduled board meeting or committee meeting attended in person and $250 for each meeting attended by phone. In addition to the above-noted fees, the board and the audit committee chairperson each receive $3,000 per quarter and the compensation committee chairperson receives $750 per quarter. All of our non-executive directors are periodically granted stock options, typically on a yearly basis. Non-executive directors receive reimbursement of out-of-pocket expenses incurred for each board meeting or committee meeting attended. During the fiscal year ended June 30, 2011, there was a grant of 20,000 options to each non-executive director, which vested immediately, had an exercise price of $0.31 and an expiration date of December 9, 2018.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of September 21, ~~2011~~2012 the shares of our common stock beneficially owned by each person who, to our knowledge, is the holder of 5% or more of our common stock, by each of our directors, by the Named Officers and by all of our executive officers and directors as a group.

	Number of Shares	~~Number of Shares~~	Approximate Percentage of	~~Approximate Percentage of~~
Name and Address of Beneficial Owner or Identity or Group*	Beneficially Owned (1)	~~Beneficially Owned (1)~~	Class	~~Class~~
Dr. Donald R. Spink, Sr.	1,223,599	~~1,223,599~~(2)	~~(2)~~6.4%	~~6.6%~~
Edward F. Spink	1,297,527	~~1,332,437~~(3)	~~(3)~~6.8%	~~7.2%~~
Egbert Q. van Everdingen	365,827	~~400,827~~(3)	~~(3)~~1.9%	~~2.2%~~
Richard H. Hurd	176,137	~~176,137~~(4)	~~(4)~~**	**
Glen O. Wright	151,000	~~151,000~~(4)	~~(4)~~**	**
Ken Kivenko	122,500	~~122,500~~(4)	~~(4)~~**	**
Raymond L. Alarie	430,000	~~410,000~~(5)	~~(5)~~2.2%	~~2.2%~~
F. Eugene Deszca	230,000	~~210,000~~(5)	~~(5)~~1.2%	~~1.1%~~
Carl A. Young	154,058	~~154,058~~	**	**
Richard C. Gimpel		62,500	(6)	**
David J. Hobson	47,662		**
Robert A. Allan	155,000	~~167,500~~	~~(6)~~**	**
Bard Associates, Inc. (7)		3,745,350		20.2%
Richard C. Gimpel	50,000		**
Perritt Funds, Inc. (8)		1,055,000		5.7%
Bard Associates, Inc. (6)	3,567,303		18.6%
All Executive Officers and Directors as a group (11 persons)		3,247,120	(9)	16.9%
Perritt Funds, Inc. (7)	1,110,000		5.8%
All Executive Officers and Directors as a group (10 persons)	3,179,621	(8)	16.6%

(*)	Unless otherwise indicated, address of each person is c/o TurboSonic Technologies, Inc. 550 Parkside Drive, Suite A-14, Waterloo, Ontario, N2L 5V4, Canada.
(**)	Less than 1%.
	(1)	Unless otherwise indicated, all persons named below have sole voting and investment power over listed shares.
	(2)	Includes ~~764~~781,~~609~~749 TurboSonic Canada Shares owned by Canadian numbered corporation, over which shares Dr. Spink exercises voting control.
	(3)	Includes 7540,000 shares issuable upon exercise of vested options.
	(4)	Includes 100,000 shares issuable upon exercise of vested options.
	(5)	Includes 6080,000 shares issuable upon exercise of vested options
	(6)	~~Includes~~Pursuant 12to a Schedule 13G filed on January 31,~~500~~ 2012, Bard Associates, Inc., an investment adviser, has the sole power to direct the disposition of 3,567,303 shares ~~issuable~~and ~~upon~~the ~~exercise~~sole power to direct the vote of ~~vested~~153,750 ~~options~~shares. The address of the beneficial owner is 135 South LaSalle St., Suite 3700, Chicago, IL 60603.
	(7)	Pursuant to a Schedule 13G filed on ~~January~~February 1014, ~~2011~~2012, ~~Bard~~Perritt ~~Associates~~Funds, Inc. , ana registered investment ~~adviser~~company, has the ~~sole~~shared power to direct the disposition of 3,~~745,350~~ ~~shares~~ and the ~~sole~~shared power to direct the vote of, ~~153~~1,~~750~~110,000 shares. The address of the beneficial owner is ~~135~~300 South ~~LaSalle~~Wacker ~~St.~~Drive, Suite ~~2320~~2880, Chicago, IL ~~60603~~60606.
	(8)	~~Pursuant~~Includes ~~to a Schedule 13G filed on February 8~~540, ~~2011, Perritt Funds, Inc., a registered investment company,. has the shared power to direct the disposition of, and the shared power to direct the vote of, 1,055,~~000 shares. ~~The~~issuable ~~address~~upon exercise of ~~the~~vested ~~beneficial owner is 300 South Wacker Drive, Suite 2880, Chicago, IL 60606~~options.
	(9)	Includes 607,500 shares issuable upon exercise of vested options.

– 24 –

Securities Authorized for Issuance Under Equity Compensation Plans:

The following table provides information as of June 30, ~~2011~~2012 about our equity compensation plans:

	Number of Securities to		Weighted Average –
Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights		Weighted Average – Exercise Price of Outstanding Options, Warrants and Rights	Number of Securities Remaining Available for Future Issuance
	be Issued upon Exercise		Exercise Price of	Number of Securities
	of Outstanding Options,		Outstanding Options,	Remaining Available
Plan Category	Warrants and Rights		Warrants and Rights	for Future Issuance
Equity compensation plans approved by security holders:
- 2008 Stock Plan	~~440~~540,000	$	0.~~5364~~4870	~~360~~260,000
- 2003 Stock Plan	~~395~~215,000	$	0.~~9116~~4112	~~117~~297,500
Total	~~835~~755,000	$	0.~~7139~~4740	~~477~~557,500

– 29 –

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Our Board of Directors has determined that Ken Kivenko, Richard H. Hurd, Glen O. Wright, Raymond L. Alarie and F. Eugene Deszca, who collectively constitute a majority of the members of our board of directors, each meets the general independence criteria set forth in the Nasdaq Marketplace ~~Rules~~rules.

There has not been any reportable transaction since July 1, ~~2008~~2010, and there are no currently proposed transactions, between us and any “related person” as defined in the rules of the SEC.

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

	2011	2010
	2012	2011
Fees billed by Deloitte & Touche LLP:	$	$
Audit fees	~~161~~119,~~731~~191	95161,~~167~~731
Audit-related fees	—	—
Tax fees	2916,~~674~~714	1029,~~792~~674
Other	—	~~40,059~~—
	191,405	146,018
	135,905	191,405

Audit fees services include fees associated with the annual audit, quarterly reviews, assistance with and review of documents filed with the Securities and Exchange Commission, including registration statements in fiscal ~~2011~~2012. Audit-related fees principally would consist of accounting consultations and internal control reviews outside the scope of the audit. Tax fees include tax compliance and tax consultations. ~~In fiscal 2010, other fees consisted of capital markets analysis.~~

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.

– 2530 –

PART IV

ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

Exhibit Number	Exhibit Description
2.1	Agreement and Plan of Merger, dated as of October 10, 2012, by and among MEGTEC Systems, Inc., MTS WSP, Inc. and TurboSonic Technologies, Inc. (10)
3.1	Certificate of Incorporation of TurboSonic Technologies (1)
3.2	Certificate of Amendment of Certificate of Incorporation of TurboSonic Technologies (2)
3.3	Certificate of Correction of Certificate of Amendment of TurboSonic Technologies (3)
3.4	Certificate of Designation, Number, Powers, Preferences and Relative, Participating, Optional, and other Special Rights and the Qualifications, Limitations, Restrictions, and other distinguishing characteristics of Special Voting Preferred Stock (2).
3.5	Amended and Restated By-laws of TurboSonic Technologies (4)
4.1	Form of certificate evidencing share of common stock (2)
10.1	* 2003 Stock Plan (5)
4.2	Secured Promissory Note, dated as of October 10, 2012, among TurboSonic Technologies, Inc., TurboSonic Canada, Inc. and TurboSonic Inc., as borrowers, and MEGTEC Systems, Inc., as lender thereto (10)
10.2	* 2008 Stock Plan (6)
10.1 *	2003 Stock Plan (5)
10.3	Facility Agreement dated May 12, 2011 by and between TurboSonic Inc. and HSBC Bank Canada
10.2 *	2008 Stock Plan (6)
10.4	General Security Agreement dated June 20, 2011 by and between TurboSonic Inc. and HSBC Bank Canada
10.3	Facility Agreement dated May 12, 2011 by and between TurboSonic Inc. and HSBC Bank Canada (11)
10.4	General Security Agreement dated June 20, 2011 by and between TurboSonic Inc. and HSBC Bank Canada (11)
10.5	General Security Agreement dated June 20, 2011 by and between TurboSonic Canada Inc. and HSBC Bank Canada (11)
10.6	Guarantee dated as of June 20, 2011 by and between TurboSonic Canada Inc. and HSBC Bank Canada (11)
10.7	Investment Agreement, dated as of October 28, 2011, by and between TurboSonic Technologies and Dutchess Opportunity Fund, II, LP, a Delaware Limited Partnership (7)
10.8	Registration Rights Agreement, dated as of October 28, 2011, by and between TurboSonic Technologies and Dutchess Opportunity Fund, II, LP, a Delaware Limited Partnership (8)
10.9	Intellectual Property License Agreement, dated as of October 10, 2012, by and between MEGTEC Systems, Inc., and its direct, wholly-owned subsidiaries, as licensee, and TurboSonic Technologies Inc. and TurboSonic Inc. and their direct wholly-owned subsidiaries, as Licensor (10)
10.10	Second Lien Security Agreement, dated as of October 10, 2012, is by and between TurboSonic Technologies, Inc., as debtor, and MEGTEC Systems, Inc., as secured party (10)
10.11	Trademark Security Agreement, dated as of October 10, 2012, by and between TurboSonic Technologies, Inc., as debtor, and MEGTEC Systems, Inc., as secured party (10)
10.12	Patent Security Agreement, dated as of October 10, 2012, by and between TurboSonic Technologies, Inc., as debtor, and MEGTEC Systems, Inc., as secured party (10)
10.13	General Security Agreement, dated as of October 10, 2012, by and among TurboSonic Technologies, Inc., TurboSonic Canada, Inc. and TurboSonic Inc., as debtors, and MEGTEC Systems, Inc., as secured party (10)
14.1	Code of Ethics (9)
21.1	Subsidiaries of TurboSonic Technologies
23.1	Consent of Deloitte & Touche LLP
31.1	Rule 13a-14(a)/15d-14(a) Certifications
31.2	Rule 13a-14(a)/15d-14(a) Certifications
32.1	Section 1350 Certifications
101	The following financial information from TurboSonic Technologies, Inc.'s Annual Report on Form 10- K for the year ended June 30, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at June 30, 2012 and 2011, (ii) Consolidated Statements of (Loss) and Comprehensive (Loss) for the years ended June 30, 2012 and 2011, (ii) Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2012 and 2011, (iv) Consolidated Statements of Cash Flows for the years ended June 30, 2012 and 2011, (v) Notes to Consolidated Financial Statements.

10.5	General Security Agreement dated June 20, 2011 by and between TurboSonic Canada Inc. and HSBC Bank Canada
10.6	Guarantee dated as of June 20, 2011 by and between TurboSonic Canada Inc. and HSBC Bank Canada
10.7	Investment Agreement, dated as of September 19, 2011, by and between TurboSonic Technologies and Dutchess Opportunity Fund, II, LP, a Delaware Limited Partnership (7)
10.8	Registration Rights Agreement, dated as of September 19, 2011, by and between TurboSonic Technologies and Dutchess Opportunity Fund, II, LP, a Delaware Limited Partnership (7)
14.1	Code of Ethics (8)
21.1	Subsidiaries of TurboSonic Technologies
23.1	Consent of Deloitte & Touche LLP
31.1	Rule 13a-14(a)/15d-14(a) Certifications
31.2	Rule 13a-14(a)/15d-14(a) Certifications
32.1	Section 1350 Certifications
99.1	Full Year Operating Results Press Release issued September 22, 2011

– 31 –

* Compensatory Plan

(1)	Filed on April 9, 1993 as an exhibit to our Registration Statement on Form S-1 (File Number 33-60856) and incorporated herein by reference.
(2)	Filed on November 18, 1997 as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended April 30, 1996 and incorporated herein by reference.
(3)	Filed on September 30, 2002 as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2002 and incorporated herein by reference.
(4)	Filed on August 26, 2010 as an exhibit to our Current Report on Form 8-K dated August 23, 2010 and incorporated by reference.
(5)	Filed on November 12, 2002 as an exhibit to our proxy statement for the 2002 annual meeting, and incorporated herein by reference.
(6)	Filed on November 6, 2007 as an exhibit to our proxy statement for the 2007 annual meeting, and incorporated herein by reference.
(7)	Filed on ~~September~~November 2210, 2011 as an exhibit to Amendment No. 1 to our ~~Current~~Registration ~~Report~~Statement on Form 8S-K1 ~~dated~~(File ~~September~~Number ~~19,~~333-177647) ~~2011~~ and incorporated herein by reference.
(8)	Filed on ~~September~~October 2831, ~~2004~~2011 as an exhibit to our ~~Annual~~Current Report on Form 108-~~KSB~~K ~~for~~dated ~~the~~October ~~year ended June 30~~28, ~~2004~~2011 and incorporated herein by reference.
(9)	Filed on September 28, 2004 as an exhibit to our Annual Report on Form 10-KSB for the year ended June 30, 2004 and incorporated herein by reference.
(10)	Filed on October 15, 2012 as an exhibit to our Current Report on Form 8-K, dated October 10, 2012, and incorporated herein by reference.
(11)	Filed on September 23, 2011 as an exhibit to our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 and incorporated herein by reference.

– 2632 –

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

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of TurboSonic Technologies, Inc. and its subsidiaries (the “Company”) as of June 30, ~~2011~~2012 and ~~2010~~2011, and the related consolidated statements of (loss) and comprehensive (loss), stockholders’ equity, and cash flows for each of the two years in the period ended June 30, ~~2011~~2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of TurboSonic Technologies, Inc. and its subsidiaries as of June 30, ~~2011~~2012 and ~~2010~~2011, and the results of their operations and their cash flows for each of the two years in the period ended June 30, ~~2011~~2012, in conformity with accounting principles generally accepted in the United States of America.

~~/s/~~The ~~Deloitte~~accompanying &consolidated ~~Touche~~financial ~~LLP Independent~~statements ~~Registered~~for ~~Chartered~~the ~~Accountants Licensed~~year ~~Public~~ended ~~Accountants~~June ~~Kitchener~~30, ~~Canada~~2012 ~~September~~have 23been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, ~~2011~~ the Company’s recurring losses from operations and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants
Licensed Public Accountants
Kitchener, Canada
October 15, 2012

F-1

TURBOSONIC TECHNOLOGIES, INC. AND ~~SUBSIDIARIES~~SUBSIDIARIESIncorporated ~~Incorporated~~ Under the Laws of Delaware, United States

CONSOLIDATED BALANCE SHEETS

As at June 30 [expressed in United States dollars]




As at June 30		[expressed in United States dollars]

		2012		2011
		$		$
ASSETS
Current
Cash and cash equivalents		1,066,719		1,674,204
Accounts and other receivables, net [note 5]		4,086,913		2,755,570
Retentions receivable		437,097		244,974
Inventories [note 6]		128,211		96,625
Deferred contract costs and unbilled revenue [note 7]		820,024		1,492,747
Income taxes recoverable		40,252		24,538
Other current assets		22,136		87,575
Total current assets		6,601,352		6,376,233
Property and equipment, less accumulated depreciation and amortization [note 8]		50,263		123,262
Goodwill [note 10]		--		398,897
Deferred income taxes [note 14]		--		1,070,592
Other assets		10,947		13,915
		61,210		1,606,666
Total assets		6,662,562		7,982,899

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current
Accounts payable		1,761,105		1,249,391
Accrued compensation charges		467,227		444,374
Accrued warranty provision [note 9]		63,017		60,000
Accrued other charges		337,891		295,199
Unearned revenue and contract advances [note 7]		2,083,925		1,152,869
Total current liabilities		4,713,165		3,201,833

Commitments and contingencies [note 11]
Stockholders’ 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
18,460,096	common shares [2011 – 18,435,773]
94,016	common shares reserved for the conversion of the subsidiary’s Class B exchangeable shares [2011 – 118,339]	2,900,434		2,900,434
Additional paid-in capital		4,246,312		4,207,958
		7,146,746		7,108,392
Accumulated other comprehensive income		888,314		996,007
Accumulated deficit		(6,085,663	)	(3,323,333	)
Total stockholders’ equity		1,949,397		4,781,066
Total liabilities and stockholders’ equity		6,662,562		7,982,899

See accompanying notes

	2011		2010
	$		$
ASSETS
Current
Cash and cash equivalents	1,674,204		2,036,529
Accounts receivable, net [note 4]	2,755,570		2,251,476
Retentions receivable	244,974		709,554
Inventories [note 5]	96,625		96,410
Deferred contract costs and unbilled revenue [note 6]	1,492,747		486,512
Income taxes recoverable	24,538		111,481
Other current assets	87,575		79,995
Total current assets	6,376,233		5,771,957
Property and equipment, less accumulated depreciation
and amortization [note 7]	123,262		230,155
Goodwill	398,897		398,897
Deferred income taxes [note 13]	1,070,592		1,021,343
Other assets	13,915		13,915
	1,606,666		1,664,310
Total assets	7,982,899		7,436,267
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current
Accounts payable	1,249,391		814,567
Accrued compensation charges	444,374		260,042
Accrued warranty provision [note 8]	60,000		94,214
Accrued other charges [note 17]	295,199		525,902
Long-term debt, current portion [note 9]	—		78,283
Unearned revenue and contract advances [note 6]	1,152,869		352,627
Total current liabilities	3,201,833		2,125,635
Long term debt [note 9]	—		65,236
	3,201,833		2,190,871
Commitments and contingencies [note 10]
Stockholders’ equity [note 12]
Share capital
Authorized
30,000,000 common shares, par value $0.10 per share
1,500 preferred shares, no par value
Issued
18,435,773 common shares [2010 – 14,982,542]
118,339 common shares reserved for the conversion of the subsidiary’s Class B exchangeable shares[2010 – 155,512]	2,900,434		2,558,806
Additional paid-in capital	4,207,958		3,663,669
	7,108,392		6,222,475
Accumulated other comprehensive income	996,007		752,110
Accumulated deficit	(3,323,333	)	(1,729,189	)
Total stockholders’ equity	4,781,066		5,245,396
Total liabilities and stockholders’ equity	7,982,899		7,436,267

See accompanying notes

F-2

TURBOSONIC TECHNOLOGIES, INC. AND ~~SUBSIDIARIES~~ ~~Incorporated~~SUBSIDIARIESIncorporated Under the Laws of Delaware, United States

CONSOLIDATED STATEMENTS OF (LOSS) AND COMPREHENSIVE (LOSS)

Years ended June 30 [expressed in United States dollars]

Years ended June 30	[expressed in United States dollars]


	2012		2011
	$		$
CONTRACT REVENUE AND SALES
OEM systems revenue	12,547,615		10,154,521
Aftermarket revenue	3,742,180		3,584,776
	16,289,795		13,739,297

CONTRACT COSTS AND COST OF SALES
OEM systems contract costs and costs of sales	10,195,662		7,845,111
Aftermarket contract costs and cost of sales	2,224,644		2,154,248
	12,420,306		9,999,359
Gross profit	3,869,489		3,739,938

EXPENSES
Selling, general and administrative	5,076,611		5,032,042
Research and development	63,790		182,007
Depreciation and amortization [note 8]	67,106		170,786
Goodwill impairment [note 10]	398,897		--
	5,606,404		5,384,835

(Loss) from operations	(1,736,915	)	(1,644,897	)
Interest income	732		3,489
Interest expense	(4,749	)	(6,076	)
(Loss) before income taxes	(1,740,932	)	(1,647,484	)
Provision for (recovery of) income taxes [note 14]	1,021,398		(53,340	)
Net (loss)	(2,762,330	)	(1,594,144	)
Other comprehensive (loss) income:
Foreign currency translation adjustment	(107,693	)	243,897
Comprehensive (loss)	(2,870,023	)	(1,350,247	)

Basic (loss) per share *[note 15]*	($0.15	)	($0.09	)
Diluted (loss) per share *[note 15]*	($0.15	)	($0.09	)

Basic weighted average number of shares [note 15]	18,554,112		17,037,418
Diluted weighted average number of shares [note 15]	18,554,112		17,037,418

See accompanying notes

	2011		2010
	$		$
CONTRACT REVENUE AND SALES
OEM systems revenue	10,154,521		10,798,683
Aftermarket revenue	3,584,776		3,087,370
	13,739,297		13,886,053
CONTRACT COSTS AND COST OF SALES
OEM systems contract costs and costs of sales	7,845,111		8,292,748
Aftermarket contract costs and cost of sales	2,154,248		1,842,631
	9,999,359		10,135,379
Gross profit	3,739,938		3,750,674
EXPENSES
Selling, general and administrative	5,032,042		5,106,408
Research and development	182,007		332,193
Depreciation and amortization	170,786		196,457
	5,384,835		5,635,058
(Loss) from operations	(1,644,897	)	(1,884,384	)
Interest income	3,489		7,561
Interest expense	(6,076	)	(8,812	)
(Loss) before recovery of income taxes	(1,647,484	)	(1,885,635	)
(Recovery of) income taxes [note 13]	(53,340	)	(910,482	)
Net (loss)	(1,594,144	)	(975,153	)
Other comprehensive income:
Foreign currency translation adjustment	243,897		274,374
Comprehensive (loss)	(1,350,247	)	(700,779	)
Basic (loss) per share [note 14]	($0.09	)	($0.06	)
Diluted (loss) per share [note 14]	($0.09	)	($0.06	)
Basic weighted average number of shares [note 14]	17,037,418		15,137,528
Diluted weighted average number of shares [note 14]	17,037,418		15,137,528

See accompanying notes

F-3

TURBOSONIC TECHNOLOGIES, INC. AND ~~SUBSIDIARIES~~ ~~Incorporated~~SUBSIDIARIESIncorporated Under the Laws of Delaware, United States

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

As at June 30 [expressed in United States dollars]

As at June 30						[expressed in United States dollars]


						Accumulated
	Common shares		Additional			other		Total
	[Note 13]		paid-in	Accumulated		comprehensive		stockholders’
	Shares	Amount	capital	Deficit		Income		equity
	#	$	$	$		$		$
Balance – June 30, 2010	15,138,054	2,558,806	3,663,669	(1,729,189	)	752,110		5,245,396
Net (loss)	—	—	—	(1,594,144	)	—		(1,594,144	)
Stock-based compensation [note 13]	—	—	32,831	—		—		32,831
Translation adjustment	—	—	—	—		243,897		243,897
Issuance of shares[note 13]	3,416,058	341,628	511,458	—		—		853,086

Balance – June 30, 2011	18,554,112	2,900,434	4,207,958	(3,323,333	)	996,007		4,781,066
Net (loss)	—	—	—	(2,762,330	)	—		(2,762,330	)
Stock-based compensation [note 13]	—	—	38,354	—		—		38,354
Translation adjustment	—	—	—	—		(107,693	)	(107,693	)


Balance – June 30, 2012	18,554,112	2,900,434	4,246,312	(6,085,663	)	888,314		1,949,397

See accompanying notes

							Accumulated
	Common shares		Additional				other	Total
	[Note 12]		paid-in		Accumulated		comprehensive	stockholders’
	Shares	Amount	capital		Deficit		Income	equity
	#	$	$		$		$	$
Balance – July 1, 2009	15,130,054	2,549,446	3,587,660		(754,036	)	477,736	5,860,806
Net (loss)	—	—	—		(975,153	)	—	(975,153	)
Stock-based compensation [note 12]	—	—	79,369		—		—	79,369
Translation adjustment	—	—	—		—		274,374	274,374
Issuance of shares [note 12]	8,000	9,360	(3,360	)	—		—	6,000
Balance – June 30, 2010	15,138,054	2,558,806	3,663,669		(1,729,189	)	752,110	5,245,396
Net (loss)	—	—	—		(1,594,144	)	—	(1,594,144	)
Stock-based compensation [note 12]	—	—	32,831		—		—	32,831
Translation adjustment	—	—	—		—		243,897	243,897
Issuance of shares[note 12]	3,416,058	341,628	511,458		—		—	853,086
Balance – June 30, 2011	18,554,112	2,900,434	4,207,958		(3,323,333	)	996,007	4,781,066

See accompanying notes

F-4

TURBOSONIC TECHNOLOGIES, INC. AND ~~SUBSIDIARIES Incorporated~~SUBSIDIARIESIncorporated Under the Laws of Delaware, United States

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended June 30 [expressed in United States dollars]

Years ended June 30	[expressed in United States dollars]


	2012		2011
	$		$
OPERATING ACTIVITIES
Net (loss)	(2,762,330	)	(1,594,144	)
Add charges to operations not requiring a current cash payment:
Stock-based compensation expense [note 13]	38,354		32,831
Depreciation and amortization [note 8]	67,106		170,786
Goodwill impairment [note 10]	398,897		--
Deferred income taxes	1,050,925		(40,260	)
Net change in non-cash assets and liabilities related to operations [note 16]	552,108		345,336
Cash (used in) operating activities	(654,941	)	(1,085,451	)

INVESTING ACTIVITY
Purchase of property and equipment	--		(44,534	)
Cash (used in) investing activity	--		(44,534	)

FINANCING ACTIVITIES
(Repayment) of obligations under long-term debt and capital leases	--		(152,953	)
Proceeds from issuance of common shares [note 13]	--		853,086
Cash provided by financing activities	--		700,133

Effect of exchange rate changes on cash and cash equivalents	47,456		67,527

Net cash (used) during year	(607,485	)	(362,325	)
Cash and cash equivalents, beginning of year	1,674,204		2,036,529
Cash and cash equivalents, end of year	1,066,719		1,674,204

Supplemental cash flow information:
Interest paid	(4,749	)	(6,075	)
Interest received	732		3,489
Income taxes paid	(3,691	)	(10,558	)

See accompanying notes

	2011		2010
	$		$
OPERATING ACTIVITIES
Net (loss)	(1,594,144	)	(975,153	)
Add charges to operations not requiring a current cash payment:
Stock-based compensation expense [note 12]	32,831		79,364
Depreciation and amortization [note 7]	170,786		196,457
Deferred income taxes	(40,260	)	(708,121	)
Net change in non-cash assets and liabilities related to operations [note 15]	345,336		(2,383,587	)
Cash (used in) operating activities	(1,085,451	)	(3,791,040	)
INVESTING ACTIVITIES
Purchase of property and equipment	(44,534	)	(46,041	)
Cash (used in) investing activities	(44,534	)	(46,041	)
FINANCING ACTIVITIES
(Repayment) of obligations under long-term debt and capital leases	(152,953	)	(78,789	)
Proceeds from issuance of common shares [note 12]	853,086		6,000
Cash provided by (used in) financing activities	700,133		(72,789	)
Effect of exchange rate changes on cash and cash equivalents	67,527		325,233
Net cash (used) during year	(362,325	)	(3,584,637	)
Cash and cash equivalents, beginning of year	2,036,529		5,621,166
Cash and cash equivalents, end of year	1,674,204		2,036,529
Supplemental cash flow information:
Interest paid	(6,075	)	(8,812	)
Interest received	3,489		6,963
Income taxes paid	(10,558	)	(350,626	)

See accompanying notes

F-5

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, ~~2011~~2012

1. ORGANIZATION AND BUSINESS DESCRIPTION

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

2. ~~SUMMARY~~GOING OFCONCERN ~~SIGNIFICANT ACCOUNTING POLICIES~~ UNCERTAINTY

These audited 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. We have incurred significant losses during the three fiscal years ended June 30, 2012, which losses have reduced our cash and stockholders' equity. These conditions raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on achieving a profitable level of operations, and our ability to secure additional sources of financing. We are actively pursuing additional financing and subsequent to year end, we entered into a series of related transactions designed to address these concerns (Note 18). However, there can be no certainty with respect to the timing and receipt of any additional financing or the success of the proposed transactions described in Note 18.

These audited consolidated financial statements do not include any of the adjustments to the amounts or classification of assets and liabilities that may be required should we be unable to continue as a going concern.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of consolidation

The consolidated financial statements include the accounts of our company and our wholly-owned subsidiaries. All 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

~~Since~~Goodwill, which resides entirely in the ~~adoption~~Aftermarket business segment, represents the excess of ~~ASC~~purchase ~~Topic~~price ~~350~~over asthe fair value of net assets acquired at ~~July~~the 1time of the combination of Turbotak Technologies Inc. and Sonic Environmental Systems, ~~2001~~Inc. into TurboSonic Technologies, weInc. ~~have~~in 1997. ~~completed~~Goodwill ~~the~~is ~~transitional~~tested annually for impairment ~~test~~during asthe atfourth ~~July~~quarter 1,or ~~2001~~more frequently if it is warranted by changes in events and ~~annual~~circumstances that ~~impairment~~indicate ~~tests~~goodwill ~~through~~is ~~April~~more 1,likely ~~2011~~than not impaired. These events and circumstances ~~additionally~~may atinclude ~~June~~a ~~30,~~significant ~~2011,~~change ~~to identify~~in iflegal ~~there~~factors isor ~~any~~in ~~impairment~~the business toclimate, a significant decline in the ~~goodwill~~Company’s ~~using~~share aprice, ~~fair~~an ~~value~~adverse ~~methodology~~action byor ~~reporting~~assessment ~~unit.~~by ~~The~~a ~~goodwill~~regulator, ~~relates~~unanticipated ~~only~~competition, toa ~~the~~loss ~~Aftermarket~~of key ~~reporting~~personnel, ~~unit~~significant disposal activity and wethe ~~conclude~~testing ~~there~~of ~~has~~recoverability ~~not~~for ~~been~~a significant ~~any~~asset ~~impairment~~group, among other factors.

Goodwill is tested for impairment using a two-step process. The first step involves comparing the segment’s estimated fair value to its carrying amount, including goodwill. If the estimated fair value of the segment exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and the second step of the goodwill impairment test is performed to measure the impairment amount. The second step involves determining an implied fair value of goodwill for the segment, which is calculated by measuring the excess of the estimated fair value of the Company over the aggregated estimated fair values of identifiable assets and liabilities. The second step involves significant judgment on the selection of assumptions necessary to arrive at an implied fair value of goodwill. These assumptions include, but are not limited to, development of multi-year business cash flow forecasts, the selection of discount rates and the identification and valuation of unrecorded assets. If, after conducting the second step of the test, the carrying amount of goodwill exceeds its implied fair value, a non-cash impairment loss is recognized in an amount equal to that excess.

Property and equipment

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

Office equipment	2 – 5 years
Other equipment	5 – 10 years
Leasehold improvements	shorter of lease term [5 – 6 years] or assets’ useful life

F-6

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES	*Notes to Consolidated Financial Statements*
	*Year ended June 30, 2012*

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

Revenues and long-term contracts

We derive revenue from long-term contracts, which require performance [i.e., design, construction and performance testing] over a time span and which may extend one or more accounting periods. For long-term contracts, we employ two methods of recognition – the percentage of completion method for all of such projects being undertaken except in instances of uncertainty, and the completed contract method for contracts with significant uncertainty, such as the use of new technology. Aftermarket revenue recorded is based on persuasive evidence of an existing arrangement, price is fixed or determinable, products are shipped, services are performed or billings are rendered, which approximates actual performance, and collection is reasonably assured.

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.

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. There were no material contract claims filed in either fiscal ~~2011~~2012 or ~~2010~~2011.

F-6

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, 2011

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

Cash and cash equivalents

We consider all highly liquid temporary cash investments with original maturities 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.

Retentions Receivable

Retentions receivable represents amounts withheld from progress billings by our customers and may not be paid to us until the completion of a project. Retentions receivable may also be subject to restrictive conditions such as performance or fulfillment guarantees.

Investment tax credits

Investment tax credits are accrued when qualifying expenditures are made and there is reasonable assurance that the credits will be realized. Refundable 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 income tax expenses. With respect to capital expenditures, these tax credits are applied to reduce the cost of the related capital assets. Non-refundable investment tax credits are recorded as a reduction of the provision for income taxes in the year in which the related provision is recorded.

Research and development expenditures

Research and development costs [other than capital expenditures] are expensed as incurred. Income tax expense is reduced by any related investment tax credits and government support program proceeds.

Income taxes

ASC Topic 740, “Income Taxes” (“ASC Topic 740”), 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.

F-7

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES	*Notes to Consolidated Financial Statements*
	*Year ended June 30, 2012*

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

Accounting for Uncertainty in Income Taxes

In accordance with FIN 48, as codified in ASC Subtopic 740-10, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“ASC Subtopic 740-10”) we recognize, measure, present, and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return that are more likely than not to be sustained under examination by the taxing authorities, based on the technical merits of the positions. Claims under the Canadian “Scientific Research & Development” program for fiscal year ~~2011~~2012 have yet to be submitted [see note 1312].

Advertising costs

All costs associated with advertising and promoting products are expensed as incurred. Advertising and promotion expense was $~~106~~78,~~024~~282 in ~~2011~~2012 [$~~101~~106,~~464~~024 in ~~2010~~2011].

Stock-based compensation

We account for ~~share~~stock-based payments in accordance with ASC Topic 718, “Compensation – Stock Compensation” (“ASC Topic 718”), which requires compensation cost relating to ~~share~~stock-based payment transactions be recognized in the financial statements based on the estimated fair value of the equity or liability instrument issued.

We use the Black-Scholes option pricing model to estimate the fair value of such awards. ASC Topic 718 requires forfeitures of ~~share~~stock-based awards to be estimated at the time of the grant and revised in subsequent periods, if actual forfeitures differ from initial estimates. Therefore, expenses related to ~~share~~stock-based payments and recognized in the years ended June 30, ~~2011~~2012 and ~~2010~~2011 have been reduced for estimated forfeitures. Forfeitures and expected terms were estimated based on historical experience. See Note 1211 for more information regarding the assumptions used in estimating the fair value of stock options.

Warranty

We carry a reserve based upon historical warranty claims experience. Additionally, warranty accruals are established on the basis of anticipated future expenditures as specific warranty obligations are identified, and are expensed directly to cost of sales. Expenditures have not exceeded accruals in any year.

~~F-7~~Loss per share

~~TURBOSONIC~~ Basic ~~TECHNOLOGIES~~(loss) per share is computed by dividing net (loss) available to common stockholders by the weighted average number of common shares outstanding during the year. In computing the (loss) per share, ~~INC~~the TurboSonic Canada Inc. ~~AND~~Class ~~SUBSIDIARIES~~B exchangeable ~~Notes~~shares, todisclosed ~~Consolidated~~in ~~Financial~~note ~~Statements~~11, ~~Year~~are ~~ended~~considered ~~June~~outstanding 30common stock of TurboSonic Technologies, ~~2011~~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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

Earnings (Loss) per share

Basic earnings (loss) per share is computed by dividing net earnings(loss) available to common stockholders by the weighted average number of common shares outstanding during the year. In computing the earnings (loss) per share, the TurboSonic Canada Inc. Class B exchangeable shares, disclosed in note 12, are considered outstanding common stock of TurboSonic Technologies, Inc. Diluted earnings (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.

Foreign currency translation

The functional currency of TurboSonic is the United States dollar. European and Canadian-based operations maintain their accounts in their respective local currencies. Transactions incurred in currencies other than the functional currency are converted to the functional currency at the transaction date. All foreign currency transaction gains and losses are included in net ~~income~~ (loss). The financial statements of our foreign subsidiaries have been translated into United States dollars in in accordance with ASC Subtopic 830-30, “Translation of Financial Statements” (“ASC Subtopic 830-30”). 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 monthly average exchange rates. The gains and losses resulting from the changes in exchange rates from year to year have been reported separately in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity.

Use of estimates

The preparation of the consolidated financial statements, in accordance with US GAAP, 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. Estimates have been employed in the areas of revenue recognition, allowance for doubtful accounts, deferred taxes, investment tax credits, uncertain tax positions, stock-based compensation expense, contingencies, goodwill impairment testing, inventory obsolescence, warranty provision and valuation of long-lived assets and liabilities. Actual results could differ from those estimates.

Comprehensive income (loss)

We report comprehensive income (loss), in addition to net income (loss) from operations, as required by ASC Topic 220, “Comprehensive Income” (“ASC Topic 220”). Comprehensive income (loss) is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of (loss) net income. Comprehensive income (loss) is defined as a change in equity during the financial reporting period of a business enterprise resulting from non-owner sources. Components of accumulated other comprehensive income (loss) are disclosed in the Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss). All reported comprehensive income (loss) is the result of the foreign exchange changes to our balance sheet year-to-year.

Impact of recently issued accounting standards

In January 2010, the FASB issued ASU 2010-06 Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC Topic 820 to add new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for the first reporting period beginning after December 15, 2009, which is our reporting period ending March 31, 2010, except for the requirement to provide the Level 3 activity of purchases, sales issuances, and settlements on a gross basis, which is effective for fiscal years beginning after December 15, 2010, which is our fiscal year beginning July 1, 2011. The adoption of ASU 2010-06 has not had a material impact on our company. We are currently assessing the impact of adoption of revised Level 3 disclosures.

Multiple Deliverable Revenue Arrangements

In October 2009, the FASB issued ASU 2009-13, —Multiple Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 amends ASC Subtopic 605-25 - Revenue Recognition: Multiple-Element Arrangements (“ASC Subtopic 605-25”). Specifically ASU 2009-13 amends the criteria for separating consideration in multiple-deliverable arrangements and establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The guidance eliminates the use of the residual method, requires entities to allocate revenue using the relative-selling-price method, and significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010, which is our fiscal year beginning July 1, 2010. Early adoption is permitted. There was no material impact as the result of the adoption of ASU 2009-13 commencing with fiscal 2011.

F-8

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, ~~2011~~2012

2 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

Impact of recently issued accounting standards

Improving Disclosures about Fair Value Measurements

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 amends ASC Topic 820, Fair Value Measurements and Disclosures, (“ASC Topic 820”), to add new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for the first reporting period beginning after December 15, 2009, which is our reporting period ending March 31, 2010, except for the requirement to provide the Level 3 activity of purchases, sales issuances, and settlements on a gross basis, which is effective for fiscal years beginning after December 15, 2010, which is our fiscal year beginning July 1, 2011. The adoption of ASU 2010-06 and the revised Level 3 disclosures has not had a material impact on our company.

Common Fair Value Measurement and Disclosure

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends the wording used to describe many of ~~the~~ the requirements in US GAAP for measuring fair value and for disclosing information about fair value measures. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, ~~which~~with isthe ~~our~~option ~~fiscal~~of ~~year beginning~~early ~~July 1, 2012~~adoption. The adoption of this ~~amendment~~standard ison ~~not~~January ~~expected~~1, to2012 did not have a material impact on our results of operations or disclosures.

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires the presentation of the statement of income and other comprehensive income consecutively. ASU 2011-05 is effective for ~~condensed~~interim and annual periods beginning after December 15, 2011, ~~which~~and isearly ~~our~~adoption is ~~fiscal~~permitted. ~~year~~In ~~beginning~~December ~~July~~2011, 1the FASB issued ASU 2011-12, ~~2012~~“Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income” (“ASU 2011-12”). ASU 2011-12 defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The ~~adoption~~effective dates of ~~this~~ASU ~~amendment~~2011-12 are consistent with the effective dates of ASU 2011-05, which is ~~not~~effective for fiscal years and interim periods ~~expected~~beginning toafter December 15, 2011 and early adoption is permitted. We adopted standards ASU 2011-05 and ASU 2011-12 on July 1, 2011 and they have not had a material impact on our results of operations or disclosures.

3. Testing ~~FINANCIAL~~Goodwill ~~INSTRUMENTS~~for Impairment

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08 (“ASU 2011-08”), Testing Goodwill for Impairment. ASU 2011-08 provides an entity the option to first assess qualitative factors in determining whether the existence of certain events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the performance of the two-step impairment test is unnecessary. If, however, an entity determines that is it more likely than not that the fair value is less than the carrying amount, the first step of the impairment test (calculation of the reporting unit’s fair value) is required. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal periods beginning after December 15, 2011. Early adoption is permitted, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. We performed our annual goodwill impairment test as of April 1 and performed a retest as of June 30, primarily the result of a drop in our share price below previous levels at which impairment may be indicated, to identify if there is any impairment to the goodwill using a fair value methodology by reporting unit. We have early adopted the provisions of ASU 2011-08 as of June 30, 2012. The adoption of this amendment did not have a material impact on our results of operations.

F-9

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES	*Notes to Consolidated Financial Statements*
	*Year ended June 30, 2012*

4. FINANCIAL INSTRUMENTS

Fair value disclosure and interest rate risk

We did not have any financial instruments carried at fair value for which the fair value hierarchy disclosure is required. Long-Term Debt – Our long-term debt obligations bear interest at an annual interest rate of Canadian bank prime plus 1.25% . Total long-term debt outstanding as at June 30, 2011 amounted to $ nil (bank loan) (2010 - $143,519). The fair value of our long-term debt obligations are not materially different than their respective carrying values due to their relative short-term maturities and the borrowing rates available as of June 30, 2011 and June 30, 2010 for debt obligations with similar terms and conditions.

Credit risk

Trade accounts receivable potentially subject us to credit risk. Sales are made to accredited end users of all sizes located primarily in North America and Europe. We provide an allowance for doubtful accounts equal to the estimated losses expected to be incurred in the collection of accounts receivable.

As at June 30, ~~2011~~2012, we had ~~three~~two customers that comprised 4644% of of the total trade receivable balance and had three customers that comprised 6146% of of the total trade receivable balance at June 30, ~~2010~~2011.

Our cash balances are maintained in one United States chartered bank, which is an AA rated (deposit and senior debt) financial institution, in two Canadian chartered banks, which are AA rated financial institutions and in one Italian chartered bank, which is a BBB rated financial institution.

Currency Risk

Currency risk is the risk to our earnings that arises from fluctuations of foreign exchange rates and the degree of volatility of these rates. We may use forward contracts to reduce our exposure to foreign currency risk. There are no outstanding instruments at this time. Our actual currency risks relate to appreciation of the Euro and Canadian dollar opposite the USU.S. dollar.

4. ACCOUNTS RECEIVABLE
5. ACCOUNTS AND OTHER RECEIVABLE
	2011		2010
	2012		2011
	$		$
Trade accounts receivable	23,~~323~~719,~~726~~947		12,~~926~~323,~~671~~726
Value-added taxes receivable	~~433~~545,~~552~~331		~~365~~433,~~837~~552
Allowance for doubtful accounts	(1,708	)	(41,032	)
Valuation allowance for value-added taxes receivable	(178,365	)	--
	2,755,570		2,251,476
Allowance for doubtful accounts	--		(1,708	)
	4,086,913		2,755,570

Bad debt expense related to trade accounts receivable was $~~1,890~~ nil in ~~2011~~2012 and $191,~~405~~890 in ~~2010~~2011. Recovery of doubtful accounts was recorded for fiscal ~~2011~~2012 of $~~2,322~~ nil and $~~125~~2,~~474~~322 for fiscal ~~2010~~2011. The valuation allowance for value added taxes relates to the denial on appeal of the refund of value-added taxes in a foreign jurisdiction. We are preparing an additional appeal based on the reasons for rejection of the first appeal.

F-9

6. INVENTORIES
	2012		2011
	$		$
Finished goods	143,563		119,617
Reserve for obsolescence	(15,352	)	(22,992	)
	128,211		96,625

7. COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
	2012		2011
	$		$
Costs incurred on uncompleted contracts	23,440,462		23,205,796
Estimated earnings	7,844,505		8,961,009
	31,284,967		32,166,805
Less: billings to date	(32,548,868	)	(31,826,927	)
	(1,263,901	)	339,878

~~TURBOSONIC~~The ~~TECHNOLOGIES,~~above ~~INC.~~is ~~AND~~included ~~SUBSIDIARIES~~in ~~Notes~~the toaccompanying ~~Consolidated~~consolidated ~~Financial~~balance sheets ~~Statements~~under ~~Year~~the ~~ended~~following ~~June 30, 2011~~captions:

5. INVENTORIES

	2012		2011
	$		$
Deferred contract costs and unbilled revenue	820,024		1,492,747
Unearned revenue and contract advances	(2,083,925	)	(1,152,869	)
	(1,263,901	)	339,878

	2011		2010
	$		$
Finished goods	119,617		131,278
Reserve for obsolescence	(22,992	)	(34,868	)
	96,625		96,410

F-10

6.TURBOSONIC ~~COST~~TECHNOLOGIES, INC. AND ~~ESTIMATED~~SUBSIDIARIES ~~EARNINGS~~Notes ONto ~~UNCOMPLETED~~Consolidated ~~CONTRACTS~~ Financial Statements Year ended June 30, 2012

	2011		2010
	$		$
Costs incurred on uncompleted contracts	23,205,796		27,629,728
Estimated earnings	8,961,009		7,254,724
	32,166,805		34,884,452
Less: billings to date	(31,826,927	)	(34,750,567	)
	339,878		133,885

8. PROPERTY AND EQUIPMENT

Included in the accompanying balance sheets under the following captions:

		Accumulated	Net Book
	Cost	Depreciation	Value
		& Amortization
2012	$	$	$
Office equipment	1,292,778	1,261,796	30,982
Other equipment	732,195	712,963	19,232
Leasehold improvements	73,608	73,559	49
	2,098,581	2,048,318	50,263

		Accumulated	Net Book
	Cost	Depreciation	Value
		& Amortization
2011	$	$	$
Office equipment	1,351,363	1,258,516	92,847
Other equipment	758,458	729,996	28,462
Leasehold improvements	77,393	75,440	1,953
	2,187,214	2,063,952	123,262

	2011		2010
	$		$
Deferred contract costs and unbilled revenue	1,492,747		486,512
Unearned revenue and contract advances	(1,152,869	)	(352,627	)
	339,878		133,885

Total depreciation and amortization incurred during fiscal 2012 was $67,106 [2011 - $170,786].

79. ~~PROPERTY~~WARRANTY ~~AND EQUIPMENT~~

		Accumulated	Net Book
	Cost	Depreciation	Value
		& Amortization
2011	$	$	$
Office equipment	1,351,363	1,258,516	92,847
Other equipment	758,458	729,996	28,462
Leasehold improvements	77,393	75,440	1,953
	2,187,214	2,063,952	123,262

		Accumulated	Net Book
	Cost	Depreciation	Value
		& Amortization
2010	$	$	$
Office equipment	1,229,721	1,063,470	166,251
Other equipment	687,594	627,181	60,413
Leasehold improvements	70,593	67,102	3,491
	1,987,908	1,757,753	230,155

Total depreciation and amortization incurred during fiscal 2011 was $170,786 [2010 - $196,457].

8. WARRANTY

As part of the normal sale of OEM systems, we have provided our customers with performance guarantees and product warranties. Most of our OEM system sales have an element of performance guarantee to ensure our custom-engineered equipment provided to our clients meets the level of performance anticipated. Performance tests for projects are completed and resolved to the clients’ satisfaction prior to final acceptance and closure of the contract. Expenses incurred to that time are treated as project costs.

The warranties generally extend for twelve months from the date of start-up or eighteen months after shipment to the customer. Commensurate warranties are provided by engineered product suppliers, such as those of pumps, fans and valves, whose products are incorporated into our systems. Warranty accruals are established on the basis of anticipated future expenditures based on historical warranty claims experience. As specific warranty obligations are identified, they are charged to the accrual account. The following summarizes the accrual of product warranties that is recorded as accrued warranty provision in the accompanying consolidated balance sheets:

F-10

	2012		2011
	$		$
Balance, beginning of year	60,000		94,214
Payments	(62,490	)	(30,544	)
Provisions (recoveries)	66,007		(10,782	)
Foreign exchange adjustments	(500	)	7,112
Balance, end of year	63,017		60,000

~~TURBOSONIC TECHNOLOGIES, INC~~10. ~~AND~~GOODWILL ~~SUBSIDIARIES~~IMPAIRMENT ~~Notes to Consolidated Financial Statements Year ended June 30, 2011~~

8At April 1, 2012, we performed the first step of the annual impairment test and determined that an impairment charge to goodwill was not warranted. ~~WARRANTY~~Primarily ~~cont’d~~as the result of a significant drop in our share price at June 30, 2012, combined with the additional factors discussed below, we once again performed the first step of the annual impairment test as at June 30, 2012 and determined that an impairment charge to goodwill was warranted. The estimated fair value of the segment was determined utilizing a discounted cash flow approach. We believe that the main factors leading to the impairment was a decline in its share price below book value and significant doubt over our ability to continue as a going concern. Other factors considered in this analysis included delays in regulations, slower than expected bookings and continued losses in operations. The result of this analysis was that the carrying value of the segment exceeded its estimated fair value as at the balance sheet date, and as such, the second step of the goodwill impairment test was performed.

	2011		2010
	$		$
Balance, beginning of year	94,214		86,242
Payments made	(30,544	)	(14,910	)
Provisions (recovered) made	(10,782	)	14,910
Foreign exchange adjustments	7,112		7,972
Balance, end of year	60,000		94,214

In the second step of the impairment test, the impairment loss was measured by estimating the implied fair value of the segment’s goodwill and comparing it with its carrying value. Using the segment’s fair value determined in the first step as the acquisition price in a hypothetical acquisition of the segment, the implied fair value of goodwill was calculated as the residual amount of the acquisition price after allocations made to the fair value of net assets, including working capital, plant and equipment and both recognized and unrecognized intangible assets. Based on the results of the second step of the goodwill impairment test, it was concluded that the carrying value of goodwill was impaired. Consequently, the Company recorded a goodwill impairment charge of $398,897 and reported this amount as a separate line item in the Consolidated Statements of (Loss) and Comprehensive (Loss).

9. LONG-TERM DEBT OBLIGATIONS

In fiscal 2009, we entered into a 36-month computer loan with monthly repayments, an annual interest rate of the Canadian bank prime (1.0% at June 30, 2011) plus 1.25% and secured under a General Security Agreement with our Canadian bank. The bank loan was repaid in full at the end of April 2011. The assets are recorded on our Consolidated Balance Sheet as Property and Equipment.

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

	2011	2010
	$	$
Total minimum loan payments	—	146,613
Less amount representing interest	—	3,094
	—	143,519
Less current portion	—	78,283
Long-term portion	—	65,236

10. COMMITMENTS AND CONTINGENCIES [a] Operating leases

We have entered into operating leases, expiring through 2014, for office equipment and premises. Total minimum annual payments under these leases for the years after June 30, 2011 are as follows:

		$
2012		110,283
2013		102,824
2014		21,283
		234,390

Rental expense for office equipment and premises was $148,639 in 2011 [$151,189 in 2010].

[b] Contingencies General

In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Accruals are made in instances where it is probable that liabilities have been incurred and where such liabilities can be reasonably estimated. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company does not believe that the ultimate outcome of these matters will have a material impact on its consolidated financial position.

On October 6, 2005 a statement of claim was filed against our company in the Ontario Superior Court of Justice (Canada) by Abuma Manufacturing Limited (“Abuma”), one of our vendors, in which they claimed additional charges for work performed and refute our claim for back charges on a specific project. The claim is for CAD $95,647 in respect of unpaid accounts, CAD $50,000 for aggravated, punitive and/or exemplary damages, interest on the past due accounts and costs of the action. It is our position that the claims are without merit and we have filed a statement of defense and counter-claim. Legal counsel for Abuma has filed its Trial Record (February 2011) indicating its readiness to proceed to trial and a pre-trial conference is set for late October 2011 and a trial date has been established for mid-April 2012. It is still our contention that the claims are without merit, and therefore, there is a remote possibility of loss. As such, there is no accrual for an adverse outcome.

F-11

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, ~~2011~~2012

~~On November 10, 2009 a statement of claim was served against~~ our company and one of our customers in the United States District Court, Western District of Pennsylvania by a competitor, in which it was claimed that a contract awarded to our company in June 2009 had infringed on one of their patents11. ~~This~~COMMITMENTS ~~patent~~AND infringement case, related to our TurboSorb Spray-Dry Absorption (SDA) technology, was settled in fiscal 2011. As a consequence of this settlement, TurboSonic is granted a patent license to pursue SDA opportunities in the US and Canada and continues to freely pursue opportunities in all international markets. The settlement did not have a material effect on our Company.CONTINGENCIES

[a] Operating leases

We have entered into operating leases, expiring through 2017, for office equipment and premises. Total minimum annual payments under these leases for the years after June 30, 2012 are as follows:

		$
2013		100,314
2014		29,583
2015		18,773
2016		18,773
2017		3,129
		170,572

Rental expense for office equipment and premises was $141,264 in 2012 [$148,639 in 2011].

[b] Contingencies

General

On October 6, 2005 a statement of claim was filed against our company in the Ontario Superior Court of Justice (Canada) by Abuma Manufacturing Limited, one of our vendors, in which they claimed additional charges for work performed and refute our claim for back charges on a specific project. The claim was for CAD $95,647 in respect of unpaid accounts, CAD $50,000 for aggravated, punitive and/or exemplary damages, interest on the past due accounts and costs of the action. The claim was settled during pre-trial conference in October 2011. The settlement was not material to our company.

On November 10, 2009 a statement of claim was served against our company and one of our customers in the United States District Court, Western District of Pennsylvania by a competitor, in which it was claimed that a contract awarded to our company in June 2009 had infringed on one of their patents. This patent infringement case, related to our TurboSorb Spray-Dry Absorption (SDA) technology, was settled in fiscal 2012. As a consequence of this settlement, TurboSonic is granted a patent license to pursue SDA opportunities in the U.S. and Canada and continues to freely pursue opportunities in all international markets. The settlement did not have a material effect on our company.

Letters of Guarantee and Bonding

In order to favorably affect our cash position, it is our practice to issue standby letters of ~~guarantee~~credit to foreign customers in return ~~for~~ for the early release of advance payments prior to shipment and holdbacks which ~~span~~ span the warranty period of the projects. Collateral for these standby letters of credit ~~guarantee~~ is provided by Export Development Canada (“EDC”) on a paid-fee basis. We have also purchased insurance against wrongful call of these standby letters of guarantee for up to 95% of their face value.

In March 2011, our ability to request standby letters of credit under our credit facility with the Canadian Imperial Bank of Commerce (“CIBC”) was reduced by that bank to $3.0 million (from $4.25 million). The ~~following~~standby letters isof credit are secured by a ~~list~~general security interest in, and lien upon, our assets and guarantees provided by EDC on a fee-for-service basis. In July 2011, the value of the credit facility was reduced to reflect only the outstanding standby letters of credit and was to automatically reduce as standby letters of credit atexpired. At June 30, ~~2011~~2012, ~~together~~outstanding ~~with~~standby ~~the~~letters ~~reason~~of credit ~~for~~totaling ~~issuance~~$96,777 ~~and~~remained ~~the~~issued ~~expiry~~under this letter of credit facility, ~~dates:~~with 100% guaranteed by EDC.

Expiry Dates	Reason		US$
July 20, 2011	Advance payment	151,833 USD	151,833
July 31, 2011	Holdback	180,000 EUR	259,038
September 6, 2011	Advance payment	35,000 EUR	50,369
September 17, 2011	Advance payment	173,000 EUR	248,964
October 31, 2011	Holdback	15,750 USD	15,750
November 30, 2011	Advance payment	240,000 EUR	345,384
February 25, 2012	Holdback	25,035 USD	25,035
September 28, 2012	Holdback	67,000 EUR	96,420
March 5, 2013	Performance	173,000 EUR	248,964
			1,441,757

In May 2011, we reached an agreement with HSBC Bank Canada, with operating affiliates in the U.S. and other countries, which provides for a credit facility for standby letters of credit that is secured by a general security interest in, and lien upon, our assets and guarantees provided by EDC on a fee-for-service basis. This credit facility became operational in August 2011, at which time future use of our prior CIBC credit facilities, discussed above, was terminated.

Additionally, at the time of negotiation of certain contracts, we are requested by our customers to provide performance and labor and material bonds, although no performance or labor and material bonds are outstanding at this time. Collateral for these standby letters of credit and bonds is provided by Export Development Canada on a paid-fee basis. We have agreed to fully indemnify Export Development Canada should there be any call on these standby letters of credit and bonds.

11: CREDIT FACILITY

In March 2011, our ability to request standby letters of credit under our credit facility with a Canadian bank was reduced by that bank to USD $3.0 million (from USD $4.25 million). The standby letters of credit are secured by a general security interest in, and lien upon, our assets and guarantees provided by Export Development Canada on a fee-for-service basis.

The Canadian bank also withdrew as of April 30, 2011 (i) our demand operating line of CAD $1.5 million, (ii) our demand credit for foreign exchange contracts of USD $750,000 and (iii) our demand term bank loan for computer equipment. There were no drawdowns against the operating or foreign exchange credit lines and we repaid the demand term bank loan on April 29, 2011.

In May 2011, we reached an agreement with a second Canadian bank, with operating affiliates in the US and other countries, which provides for a credit facility for standby letters of credit for CAD $4.25 million that is secured by a general security interest in, and lien upon, our assets and guarantees provided by Export Development Canada on a fee-for-service basis. This credit facility became operational in August 2011, at which time our prior credit facilities, discussed above, were terminated by mutual consent.

At June 30, 2011, we had standby letters of credit for approximately USD $1.4 million (USD $2.0 million at June 30, 2010) in place with various customers in order to receive cash proceeds ahead of delivery or end-of-warranty milestones. Export Development Canada has provided guarantees to the Canadian Bank for prior issued letters of credit and guarantees for subsequent letters of credit to be issued through a second Canadian bank to a total credit line of CAD $4.25 million.

Common stock

We have total authorized share capital of 30,000,000 shares of common stock. In connection with our consolidation with Turbotak Technologies Inc., on August 27, 1997, the stockholders of Turbotak Technologies Inc. exchanged their shares for the Class B exchangeable shares of a wholly owned subsidiary of our company. These shares are exchangeable, at any time, at the election of the holders of such shares, into an equivalent number of shares of our common stock. The Class B exchangeable shares have voting rights through a trustee. During fiscal 2011, 37,173 Class B exchangeable shares [251,461 in 2010] were exchanged for our common stock, leaving 118,339 Class B exchangeable shares outstanding as of June 30, 2011 [155,512 at June 30, 2010].

F-12

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, ~~2011~~2012

12 11. ~~STOCKHOLDERS’~~COMMITMENTS ~~EQUITY~~AND CONTINGENCIES continued

OnUnder ~~December~~this ~~10,~~letter ~~2010~~of wecredit ~~completed~~facility, aour ~~registered~~financial ~~rights offering,~~covenant ~~which~~was ~~offered~~that ~~stockholders~~1) ofthe ~~record~~Current asRatio ofshall ~~November~~exceed 8,1.20 ~~2010~~to ~~the~~1 ~~right~~at toall ~~acquire one~~times, ~~share~~and of2) ~~our~~the Debt ~~common~~to ~~stock~~Tangible ~~for~~Net ~~each~~Worth ~~two~~ratio ~~shares~~shall ~~then~~not ~~held~~exceed by2.00 ~~such~~to ~~persons~~1 at ~~a price~~all ~~of $0~~times.34 ~~per~~At June ~~share.~~30, ~~Stockholders~~2011 ~~exercised~~and ~~subscription~~all ~~rights~~months toin ~~acquire 1~~fiscal 2012,~~601,611~~ ~~shares~~our ~~and~~Current ~~oversubscription~~Ratio ~~rights~~exceeded tothe covenant ~~acquire~~of an1.20 ~~additional~~to 1~~,814,447 shares,~~. ~~resulting~~At inJune ~~our~~30, ~~sale~~2011, ofour anDebt ~~aggregate~~to ofTangible ~~3,416,058~~Net ~~shares~~Worth ~~of common~~ratio ~~stock~~did ~~and~~not ~~our~~exceed ~~receipt~~the covenant of ~~gross~~2.00 ~~proceeds~~to ~~of $~~1~~,161,460~~. ~~(net~~In ~~proceeds~~September of2011 ~~$853,086, due~~and tofor ~~issuance~~the ~~costs).~~months December ~~Such~~2011 ~~proceeds~~to ~~were~~April ~~added~~2012, to our ~~working~~Debt ~~capital~~to ~~for marketing~~Tangible ~~opportunities~~Net ~~stemming~~Worth ~~from~~ratio ~~both~~exceeded ~~recent~~the covenant ~~and~~of ~~anticipated~~2.00 ~~enactments~~to ~~by the U~~1.S. ~~EPA~~These ~~(EPA)~~financial ofcovenants ~~more~~were ~~stringent~~removed ~~emission~~in ~~standards~~the ~~and~~renewed credit ~~rules~~facility ~~for~~signed ~~certain hazardous~~in ~~air~~June ~~pollutants~~2012.

In June 2012, we renewed our credit facility with HSBC Bank Canada, which provides for a credit facility for standby letters of credit that is secured by a general security interest in, and lien upon, our assets and 100% guarantees provided by EDC on a fee-for-service basis for standby letters of credit issued to May 31, 2012 and, for standby letters of credit issued after that date, which are 50% guaranteed by EDC plus 50% cash secured by our company in the form of a term deposit or GIC pledged to the bank.

The financial covenant for this facility provides that the borrower shall be in default of its obligations to the bank under this credit facility should there be any material adverse change in the operations, ownership, or financial condition of the borrower, as reasonably determined by the bank. We are in compliance with the afore-mentioned covenant with HSBC Bank Canada.

Note that the issuance of standby letters of credit under this HSBC line of credit is subject to obtaining EDC guarantees, 100% or other, and our ability to provide additional supporting collateral up to the value of such standby letters of credit. Our current agreement with EDC, which comes up for renewal in November 2012, currently provides for $225,000 of guarantees at 50% of the standby letter of credit face value, of which a portion has already been committed for issued letters of credit.

At June 30, 2012, we had standby letters of credit for approximately USD $600,000 (USD $1.4 million at June 30, 2011) in place with various customers in order to receive cash proceeds ahead of delivery or end-of-warranty milestones. EDC has provided 100% guarantees to HSBC Bank Canada and CIBC for issued letters of credit prior to May 31, 2012 and 50% guarantees for subsequent letters of credit to be issued through our HSBC Bank Canada facility. We have posted $nil cash reserves at June 30, 2012 ($nil at June 30, 2011) representing our portion of the guarantee for the outstanding letters of credit at those dates.

The following is a list of the outstanding standby letters of credit at June 30, 2012, together with the reason for issuance and the expiry dates:

Expiry Dates	Reason		US$

September 28, 2012	Holdback	67,000 EUR	84,259
November 29, 2012	Holdback	12,518 USD	12,518
June 30, 2013	Performance	276,153 USD	276,153
July 30, 2013	Performance	211,680 EUR	266,209
			639,139

Additionally, at the time of negotiation of certain contracts, we are requested by our customers to provide performance and labor and material bonds, although no performance or labor and material bonds are outstanding at this time. Collateral for these standby letters of credit and bonds is provided by EDC on a paid-fee basis. We have agreed to fully indemnify EDC should there be any call on these standby letters of credit and bonds.

12: CREDIT FACILITY

On September 19, 2011, we entered into an Investment Agreement with Dutchess Opportunity Fund, II, LP for the sale, from time to time, at our discretion, of up to $3.0 million of our common stock during a three-year period at a price equal to 95% of the recent average market price at the time of sale. The extent to which we will need to access any portion or all of the proceeds available under the Investment Agreement will depend in substantial part upon the availability and adequacy of our cash flows from operations so as to enable us to address timing differences that may arise in our need to pay vendors and suppliers in advance of our receipt of contractual progress payments from our customers. The Investment Agreement provides for a floor price of $0.33 per share that applies to any transactions under the Agreement. A registration statement that registers such common stock was declared effective by the SEC in November 2011.

No draw was made to June 30, 2012 against this equity line of credit. As the market price at June 30, 3012 was $0.18, there was no possibility of a draw at that time.

F-13

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES	*Notes to Consolidated Financial Statements*
	*Year ended June 30, 2012*

13. STOCKHOLDERS’ EQUITY

We have total authorized share capital of 30,000,000 shares of common stock. In connection with our consolidation with Turbotak Technologies Inc., on August 27, 1997, the stockholders of Turbotak Technologies Inc. exchanged their shares for the Class B exchangeable shares of a wholly owned subsidiary of our company. These shares are exchangeable, at any time, at the election of the holders of such shares, into an equivalent number of shares of our common stock. The Class B exchangeable shares have voting rights through a trustee. During fiscal 2012, 24,323 Class B exchangeable shares [37,173 in 2011] were exchanged for our common stock, leaving 94,016 Class B exchangeable shares outstanding as of June 30, 2012 [118,339 at June 30, 2011].

On December 10, 2010 we completed a registered rights offering, which offered stockholders of record as of November 8, 2010 the right to acquire one share of our common stock for each two shares then held by such persons at a price of $0.34 per share. Stockholders exercised subscription rights to acquire 1,601,611 shares and oversubscription rights to acquire an additional 1,814,447 shares, resulting in our sale of an aggregate of 3,416,058 shares of common stock and our receipt of gross proceeds of $1,161,460 (net proceeds of $853,086, due to issuance costs). Such proceeds were added to our working capital for marketing opportunities stemming from both recent and anticipated enactments by the U.S. Environmental Protection Agency (“EPA”) of more stringent emission standards and rules for certain hazardous air pollutants.

Stock-based compensation

A stock plan [the “2003 Plan”] was approved by our stockholders at our annual meeting held December 10, 2002. The plan provides for the grant of non-qualified options, stock awards and stock purchase rights. Collectively, these are referred to as the stock rights.

A stock plan [the “2008 Plan”] was approved by our stockholders at our annual meeting held December 11, 2007. The 2008 Plan has terms similar to the 2003 Plan [collectively the “Plans”] with one difference – commencing on December 11, 2007 and thereafter on the date of each successive annual meeting of stockholders during the term of the 2008 Plan, each person who is elected or re-elected as a director of our company will be granted a non-qualified stock option to purchase 20,000 shares of our common stock at a purchase price per share of the fair market value of a share of common stock on the date of grant of such options.

The Plans are administered by the Board of Directors or a committee established by the Board of Directors. The Board shall determine to whom such stock options may be granted, determine at which times the stock options 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 stock, subject to stock rights, shall be authorized unissued shares of our common stock or shares of common stock reacquired by us in any manner. As originally adopted, the aggregate number of shares that could be issued pursuant to the Plans was 625,000 under the 2003 Plan and 800,000 under the 2008 Plan, subject to certain adjustments. At June 30, 2012, the remaining number of shares that could be issued pursuant to the Plans was 260,000 under the 2003 Plan and 297,500 under the 2008 Plan.

Stock-based compensation ~~expenses~~expense of $3238,~~831~~354 for the fiscal ~~year~~ year ended June 30, ~~2011~~2012 ($7932,~~369~~831 for the fiscal year ended June 30, ~~2010~~2011) ~~are~~is included asin selling, general and administrative expenses in our consolidated ~~financial~~ statements of (loss).

A summary of the significant assumptions used in calculating the fair value, using the Black-Scholes method, of our fiscal ~~2011~~2012 and ~~2010~~2011 stock option grants is as follows:

				FY 2011 and 2010 Grants
				FY 2012 and 2011 Grants
		Independent		Executive		Independent		Executive
		Directors		Officers		Directors		Officers
		December 9, 2010		December 9, 2010		December 10, 2009		December 10, 2009
		December 8, 2011		December 8, 2011		December 9, 2010		December 9, 2010
Expected dividends		0.00%		0.00%		0.00%		0.00%
Expected volatility		94132.6240%		94115.6379%		9894.6362%		~~110~~94.8463%
Risk-free interest rate		10.3539%		10.3591%		1.4635%		21.3335%
Expected term (years)		4.00		6.00		4.00		6.00
Forfeiture rate		0.00%		0.00%		0.00%		0.00%
Stock price on date of grant	$	0.3127	$	0.3127	$	0.7931	$	0.7931
Number of stock options granted		100,000		75,000		100,000		6575,000
Fair value per option on date of grant	$	0.2122	$	0.2423	$	0.5421	$	0.6624

For the grants in both fiscal years, the estimated volatility was based on the historical volatility of our common stock, vesting of the options granted to Directors was immediate and vesting of the options granted to executive officers was after three years for one officer and after five years for two officers.

A summary of the status of stock options under our 2003 and 2008 Plans as at June 30, 2010 and June 30, 2011, together with changes during fiscal 2011, is as follows:

F-13

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, 2011

12. STOCKHOLDERS’ EQUITY cont’d

							Average
				Weighted		Weighted	Remaining		Aggregate
				Average		Average Grant	Contractual		Intrinsic
	Shares			Exercise Price		Date Fair Value	Life (In Years)		Value
Stock options outstanding at June 30, 2010	840,000		$	0.8006	$	0.5148	3.7	$	14,000
Stock options exerciseable at June 30, 2010	775,000		$	0.8015	$	0.5026	3.4	$	14,000
Stock options forfeited	0		$	0.0000	$	0.0000
Stock options expired	(180,000	)	$	0.7500	$	0.4200
Stock options granted	175,000		$	0.3100	$	0.2149
Stock options exercised	0		$	0.0000	$	0.0000
Stock options outstanding at June 30, 2011	835,000		$	0.7139	$	0.4792	4.5	$	29,750
2011 Stock options vested in fiscal 2011	100,000		$	0.3100	$	0.2100
Stock options exerciseable at June 30, 2011	695,000		$	0.7504	$	0.4881	4.0	$	23,000

As of June 30, 2011, there was $14,705 of total unrecognized compensation expense related to nonvested stock options granted under our 2003 Plan in fiscal 2011. This cost is expected to be recognized over a straight-line period of 54 months, commencing July 2011. The total fair value of stock options that vested during fiscal 2011 and 2010 was $20,625 and $162,455, respectively. As of June 30, 2011, there was no unrecognized compensation expense related to nonvested stock options granted under our 2008 Plan.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value or the aggregate difference between the closing price of our common stock on June 30, 2011 of $0.40 and the excess over the exercise price for in-the-money options that would have been received by optionees if all options had been exercised on June 30, 2011.

13. INCOME TAXES

We believe our income tax provision at June 30, 2011 reflects a full accounting of our tax filings. We are not currently under Internal Revenue Service, state, local or foreign jurisdiction tax examinations. We recognize interest, as estimated or incurred, as other interest expense and we recognize penalties as selling, general and administrative expense. We are subject to ongoing review by tax authorities in the jurisdictions in which we operate. We regularly assess the status of any examinations and the potential for adverse outcomes to determine the adequacy of the provision for income taxes. Our Scientific Research and Experimental Investment Tax Credit (“ITC”) claims as part of our company’s fiscal 2011 Canadian corporate tax filings are not yet complete nor filed. As a result, we have estimated the size of the claims at $124,400 ($120,605 in fiscal 2010), related to Scientific Research and Experimental ITCs and have accrued this amount in fiscal 2011. As part of our FY 2011 deferred tax analysis, we have established this fiscal year a valuation allowance totaling $722,834.

Details of the recovery of income taxes are as follows:

	2011		2010
	$		$
Current: - U.S.	1,307		1,967
- Canadian	—		(264,991	)
- Italian	(14,387	)	44,890
Total current taxes	(13,080	)	(218,134	)
Deferred: - U.S.	200,493		(657,456	)
- Canadian	(240,753	)	(34,892	)
Total deferred taxes	(40,260	)	(692,348	)
Income tax recovery	(53,340	)	(910,482	)

F-14

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, ~~2011~~2012

13. ~~INCOME~~STOCKHOLDERS’ ~~TAXES~~EQUITY continued

~~Components~~For the grants in both fiscal years, the estimated volatility was based on the historical volatility of our common stock, vesting of the options ~~tax~~granted ~~recovery~~to ~~are~~Directors aswas ~~follows:~~immediate and vesting of the options granted to executive officers was after three years for one officer and after five years for two officers.

	2011		2010
	$		$
Provision for income tax based on U.S. tax rates	(519,281	)	(580,485	)
Provision for income tax based on U.S. state tax rates	(21,763	)	(83,048	)
Provision for income taxes based on basic Canadian federal income tax rates	(28,527	)	(20,977	)
Provision for income taxes based on basic Canadian provincial income tax rates	(19,845	)	(15,874	)
Provision for income taxes based on basic Italian federal income tax rates	—		48,448
Non-deductible permanent differences	26,854		(32,305	)
Investment tax credits recognized	(119,784	)	(215,486	)
Provincial transitional tax debit (utilized) recognized	(18,074	)	7,376
Italian foreign tax credit	(57,552	)	—
Other	18,201		(18,131	)
Valuation allowance	722,834		—
	(53,340	)	(910,482	)

A summary of the status of stock options under our 2003 and 2008 Plans as at June 30, 2011 and June 30, 2012, together with changes during fiscal 2012, is as follows:

							Weighted Average
				Weighted		Weighted	Remaining		Aggregate
				Average		Average Grant	Contractual		Intrinsic
	Shares			Exercise Price		Date Fair Value	Life (In Years)		Value
Stock options outstanding at June 30, 2011	835,000		$	0.7139	$	0.4792	4.5	$	29,750
Stock options expired	(255,000	)	$	1.1196	$	0.5365
Stock options granted	175,000		$	0.2700	$	0.2243
Stock options outstanding at June 30, 2012	755,000		$	0.4740	$	0.3417	5.4	$	0

Stock options exercisable at June 30, 2011	695,000		$	0.7504	$	0.4881	4.0	$	23,000
Stock options expired	(255,000	)	$	1.1196	$	0.5365
2012 Stock options vested in fiscal 2012	100,000		$	0.2700	$	0.2200
Stock options exercisable at June 30, 2012	540,000		$	0.4870	$	0.3330	5.1	$	0

As of June 30, 2012, there was $14,638 of total unrecognized compensation expense related to nonvested stock options granted under our 2003 Plan in fiscal 2012. This cost is expected to be recognized over a straight-line period of 54 months, commencing July 2012. The total fair value of stock options that vested during fiscal 2012 and 2011 was $22,030 and $20,625, respectively. As of June 30, 2012, there was no unrecognized compensation expense related to nonvested stock options granted under our 2008 Plan.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value or the aggregate difference between the closing price of our common stock on June 30, 2012 of $0.18 and the excess over the exercise price for in-the-money options that would have been received by optionees if all options had been exercised on June 30, 2012.

14. INCOME TAXES

We believe our income tax provision at June 30, 2012 reflects a full accounting of our tax filings. We are not currently under Internal Revenue Service, state, local or foreign jurisdiction tax examinations. We recognize interest, as estimated or incurred, as other interest expense and we recognize penalties as selling, general and administrative expense. We are subject to ongoing review by tax authorities in the jurisdictions in which we operate. We regularly assess the status of any examinations and the potential for adverse outcomes to determine the adequacy of the provision for income taxes. Our Scientific Research and Experimental Investment Tax Credit (“ITC”) claims as part of our company’s fiscal 2012 Canadian corporate tax filings are not yet complete nor filed. As a result, we have estimated the size of the claims at $ 84,869 ($120,605 in fiscal 2011), related to Scientific Research and Experimental ITCs and have accrued this amount in fiscal 2012. As part of our fiscal 2012 deferred tax analysis, we have established this fiscal year a valuation allowance totaling $2,272,957.

Details of the deferred income tax asset are as follows:

Valuation

U.S.

International

Allowance

Total

Opening balance

1,472,834

320,592

(722,834

)

1,070,592

Deferred tax asset increase (decrease)

542,516

(45,900

)

496,616

Increase in U.S. valuation allowance

(1,292,516

)

(1,292,516

)

Increase in international valuation allowance

(257,606

)

(257,606

)

Foreign exchange adjustments

(17,086

)

(17,086

)

Closing balance

2,015,350

257,606

(2,272,956

)

These adjustments, by means of increases to our valuation allowances, do not reduce the total amount of deferred tax assets in the U.S. of $2,015,350 and international of $257,606 that are available to offset future taxes.

F-15

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES	*Notes to Consolidated Financial Statements*
	*Year ended June 30, 2012*

14. INCOME TAXES continued

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

	2012		2011
	$		$

Current: - U.S.	3,288		1,307
- Canadian	(32,815	)	—
- Italian	—		(14,387	)
Total current tax (recovery)	(29,527	)	(13,080	)
Deferred: - U.S.	750,000		200,493
- Canadian	300,925		(240,753	)
Total deferred taxes	1,050,925		(40,260	)
Income tax provision (recovery)	1,021,398		(53,340	)

Components of the tax provision (recovery) are as follows:

	2012		2011
	$		$

Provision for income tax based on U.S. tax rates	(480,770	)	(519,281	)
Provision for income tax based on U.S. state tax rates	(39,866	)	(21,763	)
Provision for income taxes based
on basic Canadian federal income tax rates	18,987		(28,527	)
Provision for income taxes based
on basic Canadian provincial income tax rates	14,269		(19,845	)
Non-deductible permanent differences	(15,135	)	26,854
Investment tax credits recognized	(37,456	)	(119,784	)
Provincial transitional tax debit (utilized)	4,329		(18,074	)
Italian foreign tax credit	—		(57,552	)
Other	6,918		18,201
Valuation allowance	1,550,122		722,834
	1,021,398		(53,340	)

Italian taxes are applicable to the European branch office and are included in our Canadian subsidiary.

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

	2011			2010
	2012			2011
	%			%
U.S.	34.0			34.0
U.S state	67.31			67.31
Canadian federal	1715.38			1817.53
Canadian provincial	1211.05			1412.0
Italian federal	27.5			27.5
(Loss) before provision for income taxes:
(Loss) before income taxes:
	2011			2010
	2012			2011
	$			$
U.S.	(1,~~537~~812,~~749~~905	)		(1,~~707~~537,~~309~~749	)
Canadian	~~(109~~71,~~735~~973	)		(~~178~~109,~~326~~735	)
(Loss) before provision for income taxes	(1,647,484	)		(1,885,635	)
(Loss) before income taxes	(1,740,932	)		(1,647,484	)
Income taxes paid are as follows:
	2011			2010
	$			$
Italian federal	9,808			72,521
U.S. federal	—			2,000
U.S. state	750			13,970
Canadian federal	—			134,030
Canadian provincial	—			128,105
	10,558			350,626
Income tax refunds received are as follows:
	2011			2010
	$		$	$
Canadian federal	50,502			85,636
Canadian provincial	67,093			47,576
	117,595			133,212

F-15

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, 2011

13. INCOME TAXES continued

We have unutilized operating losses in the United States of approximately $4,024,000 available for carry forward to reduce income taxes otherwise payable in future years from 2023 to 2033.

In Canada, we have unutilized operating taxable losses of approximately $152,615 available for carry forward to reduce income taxes otherwise payable in future years up to 2031.

As it is more likely than not that we will realize the benefits of deductible temporary differences (including losses, reserves, investment tax credits and foreign tax credits), we are required under ASC Subtopic 740-10 to record deferred income tax assets. Deferred tax liabilities and assets are comprised of the following as at June 30:

	2011		2010
	$		$
Difference between tax and accounting basis of property and equipment	4,553		8,914
Reserves not currently deductible	13,843		27,558
Net operating loss carryforward	1,475,897		966,528
Investment tax credits, not currently deductible	212,497		106,261
Provincial transitional tax debit	(13,509	)	(21,931	)
Foreign tax credits – Italy	100,145		—
Total deferred tax assets	1,793,426		1,087,330
Valuation allowance for deferred tax assets	(722,834	)	(65,987	)
Net deferred tax asset	1,070,592		1,021,343

14. (LOSS) PER SHARE

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

	2011		2010
	$		$
Numerator
Net (loss)	(1,594,144	)	(975,153	)
Denominator
Denominator for earnings per share -
weighted average shares outstanding	17,037,418		15,137,528
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions	17,037,418		15,137,528
Basic (loss) per share	($0.09	)	($0.06	)
Diluted (loss) per share	($0.09	)	($0.06	)

The dilutive loss per common share calculated for the fiscal year ended June 30, 2011 excludes the effect of all options outstanding. These amounts were excluded since their inclusion would be anti-dilutive.

15. SUPPLEMENTARY INFORMATION ON CASH FLOWS
	2011		2010
	$		$
Changes in non-cash assets and liabilities related to operations:
(Increase) decrease in accounts receivable	(282,654	)	2,844,963
Decrease (increase) in retentions receivable	495,500		(196,129	)
Decrease in inventories	9,453		34,144
(Increase) decrease in deferred contract costs and unbilled revenue	(911,208	)	562,539
Decrease (increase) in income taxes receivable	95,407		(405,925	)
(Increase) decrease in other current assets	(3,386	)	11,664
Decrease (increase) in other assets	316		(133	)
Increase (decrease) increase in accounts payable	341,277		(2,557,080	)
Increase (decrease) increase in accrued compensation charges	142,937		(492,688	)
(Decrease) in accrued warranty charges	(41,524	)	—
(Decrease) increase in accrued other charges	(268,673	)	(159,361	)
Increase (decrease) in unearned revenue and contract advances	767,891		(2,025,581	)
	345,336		(2,383,587	)

F-16

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, ~~2011~~2012

1614. ~~SEGMENTED~~INCOME ~~INFORMATION~~TAXES continued

Income taxes paid are as follows:

	2012	2011
	$	$

Italian federal	—	9,808
U.S. federal	—	—
U.S. state	3,265	750
Canadian federal	426	—
Canadian provincial	—	—
	3,691	10,558
Income tax refunds received are as follows:
	2012	2011
	$	$

Canadian federal	—	50,502
Canadian provincial	—	67,093
	—	117,595

We have unutilized operating losses in the United States of approximately $5,447,281 available for carry forward to reduce income taxes otherwise payable in future years from 2018 to 2032. We have unutilized ITCs in Canada of approximately $199,000 available for carry forward to reduce income taxes otherwise payable in future years from 2030 to 2032 and foreign tax credits (Italy) of approximately $58,000 available for carry forward to reduce income taxes otherwise payable in future years from 2019 to 2020.

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

	2012		2011
	$		$

Difference between tax and accounting basis of property and equipment	20,525		4,553
Reserves not currently deductible	10,738		13,843
Net operating loss carryforward	2,015,350		1,475,897
Investment tax credits, not currently deductible	140,002		212,497
Provincial transitional tax debit	(8,532	)	(13,509	)
Foreign tax credits – Italy	94,873		100,145
Total deferred tax assets	2,272,956		1,793,426
Valuation allowance for deferred tax assets	(2,272,956	)	(722,834	)
Net deferred tax asset	—		1,070,592

15. (LOSS) PER SHARE

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

	2012		2011
	$		$
Numerator
Net (loss)	(2,762,330	)	(1,594,144	)
Denominator
Denominator for earnings per share -
weighted average shares outstanding	18,554,112		17,037,418
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions	18,554,112		17,037,418
Basic (loss) per share	($0.15	)	($0.09	)
Diluted (loss) per share	($0.15	)	($0.09	)

The dilutive loss per common share calculated for the fiscal year ended June 30, 2012 excludes the effect of all options outstanding. These amounts were excluded since their inclusion would be anti-dilutive.

F-17

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES	*Notes to Consolidated Financial Statements*
	*Year ended June 30, 2012*

16. SUPPLEMENTARY INFORMATION ON CASH FLOWS

	2012		2011
	$		$
Changes in non-cash assets and liabilities related to operations:
(Increase) in accounts receivable	(1,491,524	)	(282,654	)
(Increase) decrease in retentions receivable	(226,374	)	495,500
(Increase) decrease in inventories	(37,195	)	9,453
Decrease (increase) in deferred contract costs and unbilled revenue	586,347		(911,208	)
(Increase) decrease in income taxes receivable	(18,578	)	95,407
Decrease (increase) in other current assets	63,000		(3,386	)
Decrease in other assets	3,036		316
Increase in accounts payable	580,551		341,277
Increase in accrued compensation charges	65,866		142,937
Increase (decrease) in accrued warranty charges	4,679		(41,524	)
Increase (decrease) in accrued other charges	53,631		(268,673	)
Increase in unearned revenue and contract advances	968,669		767,891
	552,108		345,336

17. SEGMENTED INFORMATION

We offer a range of products and systems, incorporating diverse technologies, to address the industrial process, air pollution control and other environmental management needs of our customers. We report to stockholders on the two business segments into which the chief operating decision maker (CEO) classifies the business – OEM systems and Aftermarket. OEM systems generally involve 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. The Aftermarket business segment involves upgrades to air pollution systems supplied by ourselves and others, together with service and spare parts for OEM systems and nozzles to be incorporated in systems to be provided by others.

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:
	2011	2010
	$	$
United States	6,510,200	9,245,400
Canada	322,200	503,000
Asia	—	259,300
Greece	1,497,700	1,198,300
Italy	1,507,800	837,100
Other Europe	755,700	687,500
Brazil	2,603,700	—
South and Central America	472,700	948,800
Other	69,297	206,653
	13,739,297	13,886,053

Contract revenue and sales are broken down geographically as follows:

The long-lived assets of the two business segments are located in Canada and the US. The following table summarizes certain financial data for the customers whom accounted for 10.0% or more of contract revenue or accounts receivable. No other customer accounted for 10.0% or more of revenue in any of the years presented.

	2012	2011
	$	$
United States	13,127,000	6,510,200
Canada	703,000	322,200
Asia	196,000	—
Greece	218,400	1,497,700
Italy	736,000	1,507,800
Other Europe	810,600	755,700
Brazil	302,500	2,603,700
Other South and Central America	158,500	472,700
Other	37,795	69,297
	16,289,795	13,739,297

	2011	2010
	$	$
Single largest customer
Revenue	11%	29%
Accounts receivable	21%	15%
Second largest customer
Revenue	11%	15%
Accounts receivable	13%	32%
Third largest customer
Revenue	8%	9%
Accounts receivable	12%	14%
Contract revenue and sales are broken down by product line as follows:
	2011	2010
	$	$
Catalytic Gas Treatment Systems	886,200	3,790,500
SoniCool™ Evaporative Gas Cooling and Conditioning Systems	1,951,000	1,691,200
SonicKleen™ Wet Electrostatic Precipitation Systems (WESP)	2,225,800	2,486,500
TurboSorb Semi-dry Scrubber Systems	1,621,200	2,997,500
Wet Scrubbers and Gas Absorbers	4,186,400	2,142,500
SCR DeNox Systems	2,246,200	—
Atomizing Nozzles, Service and Spare Parts	622,497	777,853
	13,739,297	13,886,053

The long-lived assets of the two business segments are located in Canada and the U.S. The following table summarizes certain financial data for the customers whom accounted for 10.0% or more of contract revenue or accounts receivable. No other customer accounted for 10.0% or more of revenue in any of the years presented.

F-17

	2012	2011
	$	$
Single largest customer
Revenue	20%	11%
Accounts receivable	23%	21%
Second largest customer
Revenue	14%	11%
Accounts receivable	21%	13%
Third largest customer
Revenue	10%	8%
Accounts receivable	--	12%

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Year ended June 30, 2011

16. SEGMENTED INFORMATION cont’d

Industry segments

	OEM
	Systems		Aftermarket		Other	Total
2011	$		$		$	$
Contract revenue and sales
OEM systems	10,154,521		—		—	10,154,521
Aftermarket	—		3,584,776		—	3,584,776
Total contract revenue and sales	10,154,521		3,584,776		—	13,739,297
(Loss) income from operations	(2,204,151	)	559,254		—	(1,644,897	)
Interest income	2,579		910		—	3,489
Interest expense	(4,491	)	(1,585	)	—	(6,076	)
(Loss) income before (recovery of) income taxes	(2,206,063	)	558,579		—	(1,647,484	)
Recovery of income taxes	(39,423	)	(13,917	)	—	(53,340	)
Net (loss) income	(2,166,640	)	572,496		—	(1,594,144	)
Depreciation and amortization	136,628		34,158		—	170,786
Capital expenditures	35,627		8,907		—	44,534
Segment assets	5,000,234		1,308,461		1,674,2041	7,982,899
Property and equipment	98,610		24,652		—	123,262
Goodwill	—		398,897		—	398,897

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

	OEM
	Systems		Aftermarket		Other	Total
2010	$		$		$	$
Contract revenue and sales
OEM systems	10,798,683		—		—	10,798,683
Aftermarket	—		3,087,370		—	3,087,370
Total contract revenue and sales	10,798,683		3,087,370		—	13,886,053
(Loss) income from operations	(2,189,802	)	305,418		—	(1,884,384	)
Interest income	5,880		1,681		—	7,561
Interest expense	(6,853	)	(1,959	)	—	(8,812	)
(Loss) income before (recovery of) income taxes	(2,190,775)		305,140		—	(1,885,635	)
Recovery of income taxes	(708,049	)	(202,433	)	—	(910,482	)
Net (loss) income	(1,482,726	)	507,573		—	(975,153	)
Depreciation and amortization	157,166		39,291		—	196,457
Capital expenditures	32,229		13,812		—	46,041
Segment assets	4,164,909		1,234,829		2,036,5291	7,436,267
Property and equipment	184,124		46,031		—	230,155
Goodwill	—		398,897		—	398,897

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

17. ACCRUED CHARGES - OTHER

Accrued charges - other are as follows:

	2011	2010
	$	$
Accrued charges – payable to customer	—	130,000
Accrued charges - other	295,199	395,902
	295,199	525,902

18. SUBSEQUENT EVENT

On September 19, 2011, we entered into an Investment Agreement with Dutchess Opportunity Fund, II, LP for the sale, from time to time, at our discretion, of up to $3.0 million of our common stock during a three-year period at a price equal to 95% of the recent average market price at the time of sale. The extent to which we will need to access any portion or all of the proceeds available under the Investment Agreement will depend in substantial part upon the availability and adequacy of our cash flows from operations so as to enable us to address timing differences that may arise in our need to pay vendors and suppliers in advance of our receipt of contractual progress payments from our customers. A registration statement that registers such common stock must be declared effective by the SEC prior to our sale to Dutchess of any common stock under such agreement.

F-18

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES	*Notes to Consolidated Financial Statements*
	*Year ended June 30, 2012*

17. SEGMENTED INFORMATION continued

Contract revenue and sales are broken down by product line as follows:

	2012	2011
	$	$

Catalytic Gas Treatment Systems	3,420,900	886,200
SoniCool™ Evaporative Gas Cooling and Conditioning Systems	2,280,600	1,951,000
SonicKleen™ Wet Electrostatic Precipitation Systems (WESP)	5,359,300	2,225,800
TurboSorb Semi-dry Scrubber Systems	2,834,400	1,621,200
Wet Scrubbers and Gas Absorbers	1,368,300	4,186,400
SCR DeNo_xSystems	276,900	2,246,200
Atomizing Nozzles, Service and Spare Parts	749,395	622,497
	16,289,795	13,739,297

Industry segments

OEM Systems

Aftermarket

Other

Total

2012

Contract revenue and sales

OEM systems

12,547,615

—

12,547,615

Aftermarket

—

3,742,180

—

3,742,180

Total contract revenue and sales

12,547,615

3,742,180

—

16,289,795

(Loss) income from operations

(1,986,692

)

249,777

—

(1,736,915

)

Interest income

564

168

—

732

Interest expense

(3,658

)

(1,091

)

—

(4,749

)

(Loss) income before income taxes

(1,989,786

)

248,854

—

(1,740,932

)

Provision for income taxes

786,757

234,641

—

1,021,398

Net (loss) income

(2,776,543

)

14,213

—

(2,762,330

)

Depreciation and amortization

53,701

13,405

—

67,106

Goodwill impairment

—

398,897

—

398,897

Capital expenditures

—

Segment assets

4,627,681

968,162

1,066,719¹

6,662,562

Property and equipment

40,210

10,053

—

50,263

Goodwill

—

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

Industry segments
	OEM Systems		Aftermarket		Other	Total
2011	$		$		$	$
Contract revenue and sales
OEM systems	10,154,521		—		—	10,154,521
Aftermarket	—		3,584,776		—	3,584,776
Total contract revenue and sales	10,154,521		3,584,776		—	13,739,297
(Loss) income from operations	(2,204,151	)	559,254		—	(1,644,897	)
Interest income	2,579		910		—	3,489
Interest expense	(4,491	)	(1,585	)	—	(6,076	)
(Loss) income before income taxes	(2,206,063	)	558,579		—	(1,647,484	)
Recovery of income taxes	(39,423	)	(13,917	)	—	(53,340	)
Net (loss) income	(2,166,640	)	572,496		—	(1,594,144	)

Depreciation and amortization	136,628		34,158		—	170,786
Capital expenditures	35,627		8,907		—	44,534
Segment assets	5,000,234		1,308,461		1,674,204¹	7,982,899
Property and equipment	98,610		24,652		—	123,262
Goodwill	—		398,897		—	398,897
¹– Cash and cash equivalents are not allocated between business segments.

F-19

TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES	*Notes to Consolidated Financial Statements*
	*Year ended June 30, 2012*

18. SUBSEQUENT EVENT

On October 10, 2012, we entered into an Agreement and Plan of Merger (which we refer to as the “merger agreement”) with MEGTEC Systems, Inc. (“MEGTEC”) and MTS WSP, Inc. (which we refer to as “Merger Sub”), an entity wholly-owned by MEGTEC. Pursuant to the merger agreement, Merger Sub would be merged with and into TurboSonic and we would continue as the surviving corporation. If the merger agreement is adopted by our stockholders and the merger is consummated, all of our outstanding shares of common stock (other than shares owned by stockholders perfecting dissenters’ rights under Delaware law) will be cancelled and converted automatically into the right to receive a cash payment equal to $0.21 per share.

Consummation of the merger is subject to certain conditions, including, among others, approval of the merger agreement by the holders of a majority of the outstanding shares of our common stock and the total number of dissenting shares shall not exceed 10% of the outstanding shares of our common stock. Our founder, executive officers and directors, who collectively own of record approximately 20.6% of the aggregate voting power entitled to vote on the merger agreement, have agreed with MEGTEC to vote their respective shares in favor of the adoption of the merger agreement.

In connection with the merger agreement, we also entered into a secured promissory note and related security agreements with MEGTEC. Under the terms of the secured promissory note, MEGTEC agreed to make available to us a credit facility of $1,000,000, which we may draw down in whole, but not in part, at any time prior to the maturity date of the note and which we may use for working capital or general corporate purposes. The note bears interest at 10% per annum commencing on the date of the drawdown and matures on the first anniversary of the drawdown. Under certain circumstances described in the secured promissory note, including if we undergo an alternative transaction with another party, the maturity date of the note may be accelerated. In that event, the outstanding principal amount of the note and accrued and unpaid interest would be applied, under certain circumstances, to payment of the initial license fee under an intellectual property license agreement entered into with MEGTEC at the same time as the secured promissory note which is described in further detail below. The credit facility is collateralized by a second lien security agreement covering substantially all of our assets in the United States, separate United States trademark and patent security agreements and a general security agreement covering substantially all of our assets in Canada. The liens created by these security agreements are subordinate to the liens against our assets in favor of HSBC Bank Canada, our existing lender.

We also entered into an intellectual property license agreement with MEGTEC under which, subject to the terms and conditions of that agreement, MEGTEC is granted upon the occurrence of certain triggering events specified in the agreement, including termination of the merger agreement or if we undergo an alternative transaction with another party, a perpetual license in India, China and the United States (which is exclusive in India and China and non-exclusive in the United States) to use substantially all of our patents, trademarks, copyrighted materials and other intellectual property relating to air pollution control and liquid atomization technologies in industrial commercial and institutional applications, but specifically excluding any fossil fuel fired combustion units of more than 25 megawatts that serves a generator that produces electricity for sale. The license agreement provides for an initial license fee of $1,000,000, which may be paid by applying the unpaid principal amount and accrued and unpaid interest under the secured promissory note with MEGTEC. Under certain circumstances described in the license agreement, we have the right for 30 days after the occurrence of certain triggering events to buy back the license for $1,000,000 plus the amount of interest that would have accrued under the secured promissory note from the date of payment of the initial license fee to the date we exercise our buy-back right. The license agreement also requires MEGTEC to pay annual royalties of 3% of net sales, as defined in the license agreement, for the first five years of the license, after which the royalty is to be renegotiated in good faith. Beginning in the third year, if MEGTEC fails to pay at least $250,000 in royalties the license in India and China converts to a non-exclusive license.

F-20

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TURBOSONIC TECHNOLOGIES, INC.
	By: /s/ Edward F. Spink
	Edward F. Spink
	Chief Executive Officer
Date: September 23, 2011

TURBOSONIC TECHNOLOGIES, INC.

By: /s/ Edward F. Spink
Edward F. Spink
Chief Executive Officer

Date: October 15, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, 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	Chief Executive Officer (Principal Executive Officer)	~~September~~October 2315, ~~2011~~2012
Edward F. Spink	And Director
/s/ Egbert Q. van Everdingen	President, Secretary, Treasurer and Director	~~September~~October 2315, ~~2011~~2012
Egbert Q. van Everdingen
/s/ Carl A. Young	Chief Financial Officer	~~September~~October 2315, ~~2011~~2012
Carl A. Young	(Principal Financial Officer)
/s David J. Hobson	VP Finance and Administration	~~September~~October 2315, ~~2011~~2012
David J. Hobson	(Principal Accounting Officer)
/s/ Ken Kivenko	Chairman of the Board of Directors	~~September~~October 2315, ~~2011~~2012
Ken Kivenko
/s/ Richard H. Hurd	Director	~~September~~October 2315, ~~2011~~2012
Richard H. Hurd
/s/ Glen O. Wright	Director	~~September~~October 2315, ~~2011~~2012
Glen O. Wright
/s/ Raymond L. Alarie	Director	September 23, 2011
	Director
Raymond L. Alarie
/s/ F. Eugene Deszca	Director	~~September~~October 2315, ~~2011~~2012
F. Eugene Deszca

Filing Compare · TURBOSONIC TECHNOLOGIES INC