UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended December 31, 2011

Commission File Number: 0-21832

TurboSonic Technologies, Inc.
(Exact name of Registrant as specified in its charter)

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

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.

[X] Yes      [_] 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).

[X] Yes      [_] No

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

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

[_] Yes      [X] No

As of February 10, 2012, there were 18,554,112 shares of common stock outstanding.

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, such as: our dependence on environmental regulation to drive sales; the concentration of our revenues among a small group of customers who may vary from year to year; and economic downturns and other factors that may negatively affect our customers’ demands for our products. These risks and uncertainties could cause actual results to differ materially from historical results or those we anticipate. In evaluating these statements, you should specifically consider the risks discussed in this report, our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 and other reports or documents that we have filed from time to time with the SEC. Our statements are based upon information known to us as of the date this report is filed with the SEC, and we assume no obligation to update or alter our forward-looking statements within this report, whether as a result of new information, future events or otherwise, except when required by applicable federal securities laws.

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PART I: FINANCIAL INFORMATION ITEM 1

See accompanying notes

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CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

See accompanying notes

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See accompanying notes

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1: GENERAL

TurboSonic Technologies, Inc., directly and through subsidiaries, designs and markets integrated air pollution control and liquid atomization technology, including industrial gas cooling/conditioning systems, to ameliorate or abate industrial environmental problems. We currently have two reportable business segments – OEM systems and Aftermarket.

The unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and footnotes required in audited consolidated financial statements. The unaudited interim consolidated condensed financial statements reflect all adjustments which are, in the opinion of management, necessary to report a fair statement of the results for the interim periods presented. Operating results for the three and six month periods ended December 31, 2011 are not necessarily indicative of the results that may be expected for the full year ending June 30, 2012. These unaudited interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2011.

Future Accounting Changes:

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 perform our annual goodwill impairment test as of April 1 and will early adopt the provisions of ASU 2011-08 as of that date. The adoption of this amendment is not expected to have a material impact on our results of operations.

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 interim and annual periods beginning after December 15, 2011 and early adoption is permitted. We adopted this standard on July 1, 2011 and it has not had a material impact on our results of operations or disclosures. In December 2011, the FASB issued ASU 2011-12, “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 effective dates of ASU 2011-12 are consistent with the effective dates of ASU 2011-05, which is effective for fiscal years and interim periods beginning after December 15, 2011 and early adoption is permitted.

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 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 is our interim period beginning January 1, 2012. We adopted this standard on July 1, 2011 and it has not had a material impact on our results of operations or disclosures.

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 was our reporting period ended 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.

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NOTE 2: 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 contain a 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 client’s 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 in the accompanying consolidated condensed balance sheets:

NOTE 3: COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

Included in accompanying consolidated condensed balance sheets under the following captions:

NOTE 4: INCOME TAXES

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

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NOTE 4: INCOME TAXES CONT’D

The cumulative tax loss carryforward for the US is $1,880,935 at December 31, 2011. After two consecutive years of substantial losses and continuing uncertainty surrounding the U.S. and global economies, we reassessed the valuation of deferred tax assets during the fourth quarter of fiscal 2011 and recorded a valuation reserve totaling $722,834. Due to our recent history of losses in the US, lower than expected order activity year to date, and continuing uncertainty surrounding the US & global economies, a valuation allowance was recognized during the quarter ended December 31, 2011 for the remaining $1,158,101.

Details of the deferred tax asset are as follows:

NOTE 5: SHARE CAPITAL

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 (final 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. EPA (EPA) of more stringent emission standards and rules for certain hazardous air pollutants.

Pursuant to the terms of the 2008 Stock Plan, options to purchase 20,000 shares of common stock were granted to each of the five independent directors of our company (100,000 in total) who were elected to serve at the December 8, 2011 annual meeting of stockholders. Such options have an exercise price equal to the market value of our common stock at the close of business on December 8, 2011 ($0.27 per share [Black-Scholes fair value $0.22]), vest immediately and expire eight years from the date of grant.

Pursuant to the terms of the 2003 Stock Plan, options to purchase 25,000 shares of common stock were granted to each of our Chief Executive Officer, President and Chief Financial Officer (75,000 in total) at the December 8, 2011 board meeting. Such options have an exercise price equal to the market value of our common stock at the close of business on December 8, 2011 ($0.27 per share [Black-Scholes fair value $0.23]), vest in five years from the date of grant with respect to our Chief Executive Officer and to our President and three years from the date of grant with respect to our Chief Financial Officer and expire eight years from the date of grant.

Stock-based compensation expenses of $25,787 for the three months ended December 31, 2011 and $29,289 for the six months ended December 31, 2011 [$23,347 for the three months ended December 31, 2010 and $25,287 for the six months ended December 31, 2010] are included as selling, general and administrative expenses in our financial statements.

A summary of the significant assumptions used in calculating the fair value of our stock option grants is as follows:

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NOTE 5: SHARE CAPITAL CONT’D

The following table summarizes activity of stock options granted under our 2003 and 2008 Stock Plans for the six months ended December 31, 2011:

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 December 31, 2011 of $0.30 and the exercise price for in-the-money options that would have been received by option holders if all options had been exercised on December 31, 2011.

NOTE 6: EARNINGS PER SHARE

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

For the three and six month periods ended December 31, 2011 and 2010, we incurred net losses; therefore, the diluted loss per common share excludes the effects of all options outstanding, since their inclusion would be anti-dilutive.

NOTE 7: SEGMENT INFORMATION

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

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NOTE 8: CONTINGENT LIABILITIES

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.

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 it claimed additional charges for work performed and refuted our claim for back charges on a specific project. Its claims were 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 late October 2011. The settlement was not material to our company.

NOTE 9: CREDIT FACILITY

In May 2011, we entered into an agreement with HSBC Bank Canada, which agreement 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 (“EDC”) on a fee-for-service basis. Currently the guarantees provided by EDC are being approved on a case-by-case basis. This credit facility became operational in August 2011, at which time our prior credit facilities were terminated by mutual consent.

At December 31, 2011, we had standby letters of credit for approximately $0.9 million ($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 guarantees for these letters of credit to HSBC Bank Canada and another Canadian bank with whom we had an agreement for previously issued letters of credit.

On October 28, 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, 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 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 from time to time in our need to pay vendors and suppliers in advance of our receipt of contractual progress payments from our customers. As a registration statement registering such common stock was declared effective by the SEC, we are now able, at our discretion, to sell common stock to Dutchess pursuant to the terms and conditions of the Investment Agreement.

NOTE 10: FAIR VALUE MEASUREMENT

Fair value disclosure

We did not have any financial instruments carried at fair value for which the fair value hierarchy disclosure is required.

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.

Our cash balances are maintained in two United States chartered banks, which are AA rated (deposit and senior debt) financial institutions, 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 relative to the US dollar.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Our Business

TurboSonic Technologies, Inc. designs and supplies 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.

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 meet the demanding requirements of multinational firms that we believe can provide a series of sales opportunities over many years.

We perform all process engineering and provide the detailed design and specifications for all applicable electrical, mechanical and chemical components of our systems. We subcontract the manufacturing of equipment and when customer contracts include installation we subcontract the service. Our project managers and quality assurance personnel supervise and manage all aspects of our contracts in order for us to meet the performance criteria agreed with our customers.

We conduct business in Canadian, US and European currencies to accommodate customers and mitigate our exchange risk through matching the sales currency with the supplier currency where practical. 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.

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. The Catalytic Gas Treatment (CGT) ™ technology is expected to contribute to revenue growth commencing in the current fiscal year and significantly in fiscal 2013 and the foreseeable future.

Q2 Operating Results

Revenue increased by 38% to $2.3 million in the three months ended December 31, 2011 over the same period ended December 31, 2010. A loss before income taxes of $715,013 was recorded for the three months ended December 31, 2011 compared to a loss before income taxes of $1,118,880 in the same period ended December 31, 2010. Our second quarter of fiscal year 2012 began with a backlog of $8.2 million ($2.1 million in 2011), with $5.6 million in order bookings in the second quarter of fiscal 2012 ($8.0 million in the second quarter of fiscal 2011). Our backlog of orders at December 31, 2011 was $11.4 million ($8.4 million at December 31, 2010).

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. After two consecutive years of substantial losses and continuing uncertainty surrounding the U.S. and global economies, we reassessed the valuation of deferred tax assets during the fourth quarter of fiscal 2011 and recorded a valuation reserve totaling $722,834, and capped the deferred tax amount for the US at $750,000. Due to our recent history of losses in the US, lower than expected order activity year to date, and continuing uncertainty surrounding the US & global economies, a valuation allowance was recognized during the quarter ended December 31, 2011 for the remaining $1,158,101. The cumulative tax loss carryforward for the US is $1,880,935 at December 31, 2011, of which none is recognized as a deferred tax asset.

International deferred tax amounts are more likely than not recoverable and no valuation adjustment has been recorded. The operating result for the six months of fiscal 2012 is a tax provision of $792,712 compared to a recovery of taxes for the comparable period in fiscal 2011 of $412,423.

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Markets

Orders increased from $2.0 million in the first quarter of fiscal 2012 to $5.5 million in the second quarter of fiscal 2012 building our backlog from $8.2 million to $11.4 million at December 31, 2011, despite continuing economic challenges. We anticipate a weak third quarter for revenue recognition but expect further growth in orders and backlog. Our focus on cost control, resource allocation and target markets is contributing to our financial recovery.

Environmental Regulation

Government initiatives taken to mitigate effects of air pollution are the primary driver for the traditional air pollution control technology market. Several new rules have been issued or are soon to be issued by the U.S. Environmental Protection Agency (EPA) that could have significant impact on emissions from the power and manufacturing sectors, among others. For example, EPA's Cross State Air Pollution Rule (CSAPR) was finalized in August 2011 and was to go into effect January 1, 2012, mandating new limits on sulfur dioxide and nitrogen oxides from power plants in 28 eastern, midwestern and southern states. CSAPR was challenged in court, and on December 31, 2011 the D.C. Circuit Court of Appeals stayed the rule’s implementation pending review of the merits of the judicial challenge. The Court ordered extremely expedited briefing and will hear the merits of the challenge on April 13, 2012. Thus, at this time it is unclear what impact CSAPR may have on the market for control technology until the Court rules on the challenge. In the meantime, EPA is reissuing allowances for continued implementation of the Clean Air Interstate Rule (CAIR).

Further, on December 21, 2011, the EPA released its Mercury and Air Toxics Standards (MATS, also known as Utility MACT), which will impose further control requirements on mercury, metallic toxins, acid gases and particulate matter from coal and oil-fired power plants. MATS would allow facilities three years to come into compliance, with procedures that could allow one or two year extensions for some facilities. EPA has stated it will publish MATS in Federal Register in February 2012, and the rule would then become effective 60 days thereafter. If and when fully implemented, these rules are expected to impact the need for further air control technologies from the power sector. However, it is likely these rules, too, will be challenged in court, and there have been Congressional efforts to slow or repeal them and other related EPA proposals.

In addition to these aforementioned rules, EPA is working on other rules that could impact emissions from power plants and manufacturing, including proposed rules on controls of greenhouse gas emissions from utilities and refineries, on coal combustion residue, and on toxic emissions from industrial, commercial and institutional boilers (Boiler MACT, proposed on December 2, 2011 and currently due April 2012). EPA was about to issue a new rule instituting stricter controls on ground level ozone regulations in the Summer of 2011, but these were delayed by a White House directive until 2013. EPA also announced it would propose new fine particulate matter standards in 2013.

While we believe that these and other recently issued and anticipated regulations will affect industries in our markets, we expect that further actions by the EPA, legal challenges or legislative developments could potentially modify the stringency of their provisions or delay their effective dates. It is because of these potential delays that we are continuing to pursue the development of current and new technologies, which do not depend on new regulation and can augment our suite of environmental technologies.

New Technology

During the second quarter of fiscal 2012, we commenced our first contract incorporating our patent-pending SonicCharge™ Conductive Composite Material (CCM) for Wet electrostatic Precipitators (“WESP”). SonicCharge™ CCM can displace high cost alloy construction, providing a significant benefit over conventional alloys. Its electrical properties are proven to be at least equal to stainless steels while offering superior spark erosion resistance and corrosion resistance, which can make it ideal for use in coal-fired utility and metallurgical acid plant WESP applications.

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Three Months ended December 31, 2011 Compared with Three Months ended December 31, 2010

3 MONTH COMPARATIVE INCOME STATEMENTS AT DECEMBER 31, 2011 AND 2010

The opening backlog of OEM orders for the second quarter of fiscal year 2012 was $7.7 million ($1.5 million for the second quarter of fiscal year 2011) and orders received in the second quarter were $4.8 million ($7.3 million in the same period in the prior year). Revenue recognition for these orders is determined on the percentage of completion method, with completion typically ranging over a production period of 6 to 12 months depending on the scope and terms of the individual contracts.

OEM systems revenue for the three month period ended December 31, 2011 increased 87% over the comparable period ended December 31, 2010 as the result of progress on a number of system projects. The balance of OEM backlog at December 31, 2011 was $11.0 million ($8.0 million at December 31, 2010), which will contribute to revenues over the next several quarters.

The cost of sales for OEM systems increased 50% for the three month period ended December 31, 2011 over the comparable period in the prior year, which reflects the increased revenue volume in the second quarter of fiscal 2012.

As a result, gross profit on OEM systems in the second quarter of fiscal 2012 was 19% and in the same comparable period in fiscal 2011 was -1%. OEM systems contributed a gross profit of $298,885 (13% of total revenue) in the second quarter of fiscal 2012 compared to a gross loss of $7,000 (0% of total revenue) for the same period in fiscal 2011. This low margin for the second quarter of fiscal 2011 was due to an isolated cost overrun on a contract.

The opening backlog of Aftermarket orders for the second quarter of fiscal 2012 was $0.5 million ($0.6 million for fiscal 2011) and orders received in the quarter were $0.8 million ($0.7 million in the same period in the prior year). Revenue recognition for these orders is determined on a billing basis, which approximates actual performance and usually occurs in the first or second month following the order.

Aftermarket revenues decreased 10% for the three-month period ended December 31, 2011 over the same period in the prior fiscal year primarily because a large semi-dry scrubber component order in fiscal 2011 was not repeated in fiscal 2012. The balance of Aftermarket backlog at December 31, 2011 is $0.4 million ($0.4 million at December 31, 2010) which will contribute to revenues in the next three months.

The cost of sales for Aftermarket products decreased 26% for the three-month period ended December 31, 2011 over the same period in fiscal 2011. Gross profit on Aftermarket products increased 32% between the comparable periods in fiscal 2011 and

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2012, which reflects a lower revenue volume and higher gross profit (40%) earned in the quarter ended December 31, 2011 over gross profits (27%) earned in the quarter ended December 31, 2010. The increased gross profit is the result of increased prices and decreased costs on certain spare parts items.

Selling, general and administrative expenses decreased $13,382 (1%) for the three-month period ended December 31, 2011 over the same period in the prior year. This decrease was the result of the cost of a strategic analysis not repeated in the current year ($75,000) partially offset by the addition of a new employee ($12,000), legal expenses relating to the S-1 filing for the Dutchess Investment Agreement ($27,000) and additional patent fees ($20,000) in fiscal 2012. As a percentage of total revenue, selling, general and administrative expenses were 55% for the three-month period ended December 31, 2011 compared to 76% of total revenue in the comparable period in fiscal 2011. Research and development costs increased $13,055 (85%) for the three-month period ended December 31, 2011 compared to the same period in fiscal 2011, due to increased project activity. Depreciation of $16,451 was recorded in the three months ended December 31, 2011 compared to $42,342 for the same period in the prior year.

Loss before taxes of $715,013 for the three-month period ended December 31, 2011 was significantly lower than the loss of $1,118,880 in the comparable period in the prior fiscal year. The reduced loss reflects higher revenue and gross profit in OEM systems for the second quarter of fiscal 2012 compared to those recorded in the second quarter of fiscal 2011.

Operating results for the second quarter of fiscal 2012 include a recovery of income taxes of $16,645 for international subsidiaries and a provision for income taxes of $753,000 for the US company compared to recovery of income taxes of $179,569 for the comparable period in fiscal 2011(combined international subsidiaries and the US company). This includes a $750,000 tax provision for US company operations in fiscal 2012 consisting of a recovery of income taxes of $205,683 offset by a deferred tax valuation allowance of $955,683 for the quarter. Our decision to record this deferred tax valuation allowance was based on two years of continued losses and a third year of projected losses to fully offset the US deferred tax asset.

The foreign currency translation adjustment reflects the exchange values for our Canadian dollar and Euro accounts converted to US dollars. The statement of comprehensive income reflects an increase in the carrying value of these accounts of $108,079 during the second quarter of fiscal 2012.

Six Months ended December 31, 2011 Compared with Six Months ended December 31, 2010

6 MONTH COMPARATIVE INCOME STATEMENTS AT DECEMBER 31, 2011 AND 2010

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The opening backlog of OEM orders for fiscal year 2012 was $11.7 million ($2.4 million for fiscal year 2011) and orders received in the first six months of fiscal 2012 were $5.9 million ($8.0 million in the same period in the prior year). Revenue recognition for these orders is determined on the percentage of completion method, with completion typically ranging over a production period of 6 to 12 months depending on the scope and terms of the individual contracts.

OEM systems revenue for the six month period ended December 31, 2011 increased 166% over the comparable period ended December 31, 2010 as the result of progress on two large turnkey projects. The balance of OEM backlog at December 31, 2011 was $11.0 million ($8.0 million at December 31, 2010) which will contribute to revenues over the next several quarters.

The cost of sales for OEM systems increased 151% for the six month period ended December 31, 2011 over the comparable period in the prior year, which reflects the increased revenue volume in the first six months of fiscal 2012.

As a result, gross profit on OEM systems in the first six months of fiscal 2012 was 13% and in the comparable period in fiscal 2011 was 8%. OEM systems contributed a gross profit of $878,494 (11% of total revenue) in the first six months of fiscal 2012 compared to a gross profit of $194,455 (5% of total revenue) for the same period in fiscal 2011.

The opening backlog of Aftermarket orders for the first six months of fiscal 2012 was $0.3 million ($0.6 million for fiscal 2011) and orders received in the first six months were $1.7 million ($1.6 million in the same period in the prior year). Revenue recognition for these orders is determined on a billing basis, which approximates actual performance and usually occurs in the first or second month following the order.

Aftermarket revenues decreased 13% for the six month period ended December 31, 2011 over the same period in the prior fiscal year primarily because two large component orders in fiscal 2011 were not repeated in fiscal 2012. The balance of Aftermarket backlog at December 31, 2011 is $0.4 million ($0.4 million at December 31, 2010) which will contribute to revenues in the next several months.

The cost of sales for Aftermarket products decreased 23% for the six month period ended December 31, 2011 over the same period in fiscal 2011. Gross profit on Aftermarket products increased 6% between the comparable periods in fiscal 2011 and 2012, which reflects a lower revenue volume and higher gross profit (41%) earned in the six month period ended December 31, 2011 over gross profits (33%) earned in the six months ended December 31, 2010. The increased gross profit is the result of increased prices and decreased costs on certain spare parts items.

Selling, general and administrative expenses increased $43,157 (2%) for the six month period ended December 31, 2011 over the same period in the prior year. This increase was the result of the addition of a new employee ($25,000) and additional patent fees ($20,000) in fiscal 2012. As a percentage of total revenue, selling, general and administrative expenses were 30% for the six month period ended December 31, 2011 compared to 57% of total revenue in the comparable period in fiscal 2011. Research and development costs increased $27,670 (105%) for the six month period ended December 31, 2011 compared to the same period in fiscal 2011, due to increased project activity. Depreciation of $33,636 was recorded for the six month period ended December 31, 2011 compared to $82,316 for the same period in the prior year. This decrease is the result of the full depreciation of certain office-related equipment in fiscal 2011; thereby reducing depreciation expense in the current fiscal year.

Loss before taxes of $1,095,250 for the six month period ended December 31, 2011 was significantly lower than the loss of $1,790,574 in the comparable period in the prior fiscal year. The reduced loss reflects higher revenue and gross profit in OEM systems for the first six months of fiscal 2012 compared to those recorded in the first six months of fiscal 2011.

Operating results for the first six months of fiscal 2012 include a provision for income taxes for $39,712 for international subsidiaries and $753,000 for the US company compared to recovery of income taxes of $412,423 for the comparable period in fiscal 2011(combined international subsidiaries and the US company). This includes a $750,000 tax provision for US company operations in fiscal 2012 consisting of a recovery of income taxes of $408,101 offset by a deferred tax valuation allowance of $1,158,101 for the current six month period. Our decision to record this deferred tax valuation allowance was based on two years of continued losses and a third year of projected losses to fully offset the US deferred tax asset.

The foreign currency translation adjustment reflects the exchange values for our Canadian dollar and Euro accounts converted to US dollars. The statement of comprehensive income reflects a decrease in the carrying value of these accounts of $131,800 during the first six months of fiscal 2012.

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Liquidity and Capital Resources

During the six month period ended December 31, 2011, cash of $376,385 was applied to operations while, during the same six months in fiscal 2011, cash of $910,608 was applied to operations. The net change in cash flows applied to operations was due primarily to the increased positions in accounts receivable and retentions, partially offset by increased deferred contract costs and unbilled revenue together with decreased unearned revenue and contract advances in the current fiscal period.

Our working capital position decreased to $2.0 million at December 31, 2011 from $2.9 million at December 31, 2010, with the current ratio decreasing from 2.37:1 as at December 31, 2010 to 1.50:1 at December 31, 2011.

Our contract payment terms provide for periodic progress payments by our customers based on our attainment of agreed milestones to the point of delivery. A final holdback amount is often dependent on commissioning, specified performance criteria or a fixed time of operations. At any point in time, the contracts in process with costs that exceed invoicing may be greater than the contracts that have been invoiced in advance of performance. At December 31, 2011, the net position of contracts in progress is a liability of $1,671,176. At December 31, 2010 the net position of contracts in progress is an investment of $294,377.

In May 2011, we entered into an agreement with HSBC Bank Canada, which agreement 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 (“EDC”) on a fee-for-service basis. Currently the guarantees provided by EDC are being approved on a case-by-case basis. This credit facility became operational in August 2011, at which time our prior credit facilities were terminated by mutual consent.

At December 31, 2011, we had standby letters of credit for approximately $0.9 million ($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 guarantees for these letters of credit to HSBC Bank Canada and another Canadian bank with whom we had a prior agreement for previously issued letters of credit.

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On October 28, 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, 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 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 from time to time in our need to pay vendors and suppliers in advance of our receipt of contractual progress payments from our customers. We refer you to 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 discretion, to sell common stock to Dutchess pursuant to the terms and conditions of the Investment Agreement.

As was the case with our previous bank operating line of credit that was never utilized, the Dutchess Investment Agreement for an equity line of credit has been established to provide back-up capabilities should the timing of our contractual progress payments prove temporarily insufficient to enable us to pay our vendors and suppliers on agreed terms.

Our backlog as at December 31, 2011 was approximately $11.4 million, compared to the December 31, 2010 backlog of $8.4 million, with approximately 58% expected to convert to revenue by June 30, 2012. We can offer no assurances that backlog will be replicated, increased or converted at current value into revenues in the future.

Based on our cash position and working capital at December 31, 2011, our credit agreements with HSBC Bank Canada and Export Development Canada, our access to an equity line of credit with Dutchess, our backlog of orders and anticipated sales orders through fiscal 2012 and 2013, we believe that we will have sufficient capital resources to support operations through December 31, 2012.

We have incurred significant operating losses over the past two fiscal years and during the first six months of fiscal 2012 which has resulted in an increase in the accumulated deficit. Our future success is dependent upon our ability to secure additional profitable contract orders, and if necessary, further financing. We are currently exploring alternative sources of financing that may be available to us.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign transactions are conducted in Canadian dollars, US 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 or with fabricators where the all-in costs, including currency, are most favorable. We do not engage in trading market risk sensitive instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk, other than as noted.

ITEM 4: 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) under the Securities Exchange Act of 1934) as of December 31, 2011. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2011.

There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

Not applicable.

ITEM 1A: RISK FACTORS

There have been no material changes in the risk factors from those disclosed in Item 1A of our annual report on Form 10-K for the year ended June 30, 2011.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5: OTHER INFORMATION

Not applicable

ITEM 6: EXHIBITS

SIGNATURE

Pursuant to the requirements 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.

Dated: February 14, 2012

TURBOSONIC TECHNOLOGIES, INC.

By: /s/ Carl A. Young                                  
Carl A. Young
Chief Financial Officer

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