SECURITIES AND EXCHANGE COMMISSION
                                              WASHINGTON, D.C. 20549
                                                     FORM 10-K

[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required)

For the fiscal year ended June 30, 1997 or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)

for the transition period from                   to

Commission File Number: 1-13234

                                           IONIC FUEL TECHNOLOGY, INC.
                  (Exact name of registrant as specified in its charter)

           Delaware                           06-1333140
(State or other jurisdiction of     (I.R.S. Employer Identification
incorporation)                        No.)


300 Delaware Avenue, #1704, Wilmington, Delaware        19801-1622
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code: (302) 427-5957

Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Title of each class                                Name of each exchange on which registered

Common Stock, par value $.01                                           Boston Stock Exchange

Series A Redeemable Common
Stock Purchase Warrant ("A Warrants")                                  Boston Stock Exchange

Series B Redeemable Common
Stock Purchase Warrant ("B Warrants")                                  Boston Stock Exchange

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

None
</TABLE>

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  twelve (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 ninety (90) days. Yes: x No:

                                                         1

<PAGE>



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 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]

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold,  or the average bid and asked  prices of such
stock,  as of a  specified  date  within  60 days  prior to the date of  filing.
Aggregate market value of securities held by  non-affiliates as of September 17,
1997 - $8,236,000.

Indicate the number of shares  outstanding of each of the registrant's  class of
common stock, as of the latest  practicable  date. At September 15, 1997,  there
were 6,173,433 common shares,  1,200,000  Series A Warrants,  1,200,000 Series B
Warrants and 189,000 Underwriters' Warrants, 771,883 Series C Warrants, 150,000
Consultant's Warrants outstanding.

List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K  (e.g.,  Part I, Part II,  etc.)  into  which the  document  is
incorporated:  (1) any  annual  report  to  security-holders;  (2) any  proxy or
information  statement;  and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the  Securities Act of 1933.  The listed  documents  should be clearly
described for identification  purposes (e.g.,  annual report to security-holders
for fiscal year ended December 24, 1980)

1.  Part  III  incorporates  by  reference  the  Company's  Proxy  Statement  to
stockholders for the Annual Meeting to be held November 6, 1997.

2. Part IV, Item 14, incorporated by reference the following Exhibits: 3.1, 3.2,
4.1, 4.2, 4.3 and 10.1.


                                                         2

<PAGE>



                                                      PART I

Item 1.  BUSINESS

INTRODUCTION

         The  Company  is an  environmental  technology  company  engaged in the
design, assembly,  marketing, sale and leasing of its patented,  proprietary IFT
System  designed to reduce  harmful  airborne  emissions  from and increase fuel
efficiency  of heating  and power  generation  systems.  The  Company  currently
markets the System to various industries in the U.K. and Europe.

      The IFT  System,  which  is  attached  to a  customer's  heating  or power
generation  equipment,  produces  negatively charged ions ("Ions") by passing an
air flow over a body of vibrating liquid and into the combustion  chamber or air
intake of the  customer's  machinery.  The  ionized air supply  accelerates  the
normal combustion process. As a result of the improved combustion, the amount of
air and fuel  supplied to the burner can be reduced  while still  maintaining  a
constant measure of power output.  This reduction of air and fuel decreases fuel
consumption  as well as the  production  of NOX CO and CO2 and when burning fuel
oil, fireside coking and particulate emissions are also reduced.

THE SYSTEM

      The IFT System is self  contained  in a  cube-shaped  metal  cabinet.  The
System's  interior  mechanism  vibrates the surface of a liquid contained inside
the cabinet. The vibrating liquid releases negatively charged Ions that are then
delivered  to the  customer's  equipment  through  a  connection  placed  either
adjacent  to the  boiler's  combustion  chamber  or to the  boiler's  air intake
mechanism.

      The System is available in eight sizes ranging from 15" x 12" x 16" to 43"
x  3  1-5"  x  35".  Such  sizes  are  suitable  for  boilers   generating  from
approximately 1,000 lbs. of steam per hour to approximately 96,000 lbs. of steam
per hour.  Multiple  Systems  are used when  either the boiler has more than one
burner or the boiler's  power  generating  capacity  exceeds the capacity of the
largest IFT System. The System generally requires only a routine servicing every
six months and may be leased or purchased.

      Typical  performance  results of the  System  reveal a  reduction  in NOx.
emissions ranging from 6% to 60%, a reduction in CO emissions ranging from 6% to
80%, a reduction  in CO2  emissions  ranging  from 2 1/2% to 7%, a reduction  in
particulate emissions ranging from 6%

                                                         3

<PAGE>



to 40% and a reduction in fuel consumption  ranging from 2 1/2% to 7%. The exact
performance  of the System depends upon the  customer's  existing  equipment and
desired  objectives;   customers  may  achieve  less  favorable  results  or  no
improvement if their  equipment  requires repair or if fuel and air flows cannot
be closely  controlled.  If NOx and CO emissions have been reduced by the use of
other  equipment,  the  System  may be used to  reduce  CO2  emissions  and fuel
consumption.  CO2 emission reduction  correlates  directly with the fuel savings
which the IFT System provides.


      MARKETING AND SALES

      Performance Trials

      The Company  initially  sought to performance test its System in locations
where a sales or lease contract could result. It also has performance tested the
System in certain locations solely to develop performance test data. The Company
has now phased out uncompensated  performance testing because the Company's data
from its numerous  sites supports the claims  regarding the benefits  offered by
the IFT System. The Company has now developed new application  software enabling
on site  performance  to be  evaluated  in  real  time  to  show  the  immediate
improvements  to the  customer  resulting  in  reducing  the lead  time  between
performance trials and customer acceptance of the System.

      The performance trial results obtained at a customer's location enable the
Company  to use such  results  to  confirm  the price of the IFT  System to such
customer. In setting the price, the Company considers the potential fuel savings
and emissions  reduction to be realized by that customer from use of the System,
thereby enabling a customer to offset the cost of the System.

         The Company has also participated in a laboratory test conducted by The
Building Services Research and Information Association ("BSRIA"), an independent
U.K.  organization.  The BSRIA test was instigated  and primarily  funded by the
British government to generate data on the emissions of various power generation
systems and ancillary  equipment.  BSRIA rendered a favorable  report on the IFT
System and such report was disseminated to BSRIA's members.

         Tests were  conducted  at the  Lownebrau  brewery  by the  German  test
authority  TUV and  showed  that with IFT  System the boiler was able to operate
with less combustion air thereby  improving the thermal  effidency.  A review on
ionisation processes conducted by Portsmouth  University sponsored by the Energy
Technical Support

                                                         4

<PAGE>



Unit,  ETSU,  reported  that fuel  savings  could be  achieved by use of the IFT
technology.


         Marketing

      The Company currently markets the IFT System to (a) large scale commercial
power  plant and  industrial  manufacturers  such as  breweries,  oil  refiners,
textile plants,  chemical  plants and paper mills and (b) commercial  industrial
heat processors including municipal authorities and universities.

         The Company had found that its technology was often not
readily  understood by power plant managers who therefore  hesitated to test the
IFT  System.  The  Company  devised a four step  approach  to educate  the power
generation community about its technology. First, it employed people experienced
in boiler and burner applications to market the System.  Second, the Company has
marketed the System to large multiple  plant users,  with emphasis on well known
international  companies,  so that such  companies may be used as references for
other  potential  customers and also that such customers will consider using the
IFT System in their other plants.  Third, the Company utilizes the services of a
recognized  authority in flame chemistry to specifically  explain the scientific
principles  behind the System.  Fourth the Company  has  introduced  a reporting
system using sophisticated  statistical  modeling to present the test results to
potential  customers  in a  succinct,  concise  manner.  This  reporting  system
computerizes  data  derived  from  testing  flue gases,  monitors  fuel to steam
performance  and then  presents in graphic form the benefits  offered by the IFT
System to the customer.

      Sales and Rentals

         The Company has adopted two approaches to its sales efforts.  First, it
sells directly to industrial  users with its own employees in the UK and Belgium
supplemented by the use of independent sales agents.  Secondly the Company sells
the System through dealers who are assigned a specific territory and compensated
on a commission basis. This marketing method is generally used in Europe.

         More  recently  the company  has been  working  with energy  management
companies  who  undertake to operate a  customer's  power or boiler  plant,  the
benefit to these  companies is to reduce their operating costs by reducing their
fuel bills.  Generally  these  organizations  prefer to rent the IFT System,  as
their payback is immediate.


                                                         5

<PAGE>



         The  Company  will rent or sell the System.  In the general  industrial
market  customers  prefer to rent,  in the oil and  petrochemical  industry  the
preference is to purchase.

      Warranty and Service

         The  Company  provides  a one  year  warranty  on  parts  and  labor to
purchasers  of the System and  thereafter  servicing  under a service  contract.
Lessees of the system receive service without additional charge within the terms
of the rental agreement.

      Assembly and Suppliers

      The IFT System is  assembled  in the U.K.  at the  Company's  facility  in
Laindon, Essex under strict quality control procedures. Although there have been
no sourcing  problems,  the Company has a policy of dual sourcing  where this is
deemed  advantageous  for cost and  continuity  of supply.  Single  sourcing  is
currently  confined to vibrators and air pumps that are widely  produced for use
in other industries and therefore readily available.

      Research and Development

         The Company's research and development efforts are a continuing process
and are focused  primarily on refining the vibration  technology  that forms the
basis of the IFT System.  To that end, the Company has studied such areas as the
interaction of the charged particles and the combustion process, the delivery of
the charged  particles  to the  combustion  chamber,  the optimum  volume of the
charge,  the optimum  ratio of air to liquid  surface and the impact of pressure
and temperature on delivery of the charge.  The Company's efforts resulted in an
enhancement to the patented  vibration  technology  for which a European  patent
application was filed in January 1994.

         The  Company's  research  and  development  costs  are  written  off as
incurred.  Employees engaged in engineering and manufacturing also perform R & D
functions,  therefore it is  unrealistic  to isolate these  specific costs since
they were not material in 1997.

      Patents

      The first U.S. Patent for the Ion generating technology utilized
by the IFT System was issued in 1975 to F.A. Wentworth, Jr.
("Wentworth").  This original technology employed a "bubble"
process whereby the air was "bubbled" through liquid to release
Ions at the surface of the liquid.  A subsequent patent was issued

                                                         6

<PAGE>



to  Wentworth  in  December   1990   employing  a   "vibration"   process  which
substantially  enhanced the commercial potential of the technology by increasing
the negative charge. The "vibration"  technology  involves vibrating the surface
of the water to release the Charged  Particles.  In January  1994, an additional
patent  application  was filed in Europe on behalf of the  Company  covering  an
enhancement to the vibration  technology.  This improved "Vibration"  technology
allows for a more powerful and more consistent  negative charge than the initial
Wentworth  vibration patent. This improvement has been incorporated into the IFT
System. The Company filed counterpart applications to its latest European patent
application in the United States and several other foreign countries in 1995.

      The Company entered into a Royalty Agreement  ("Royalty  Agreement") dated
June 2, 1994 (effective as of December 5, 1991) with Wentworth pursuant to which
Wentworth sold all of his interest in the patents relating to the ion generating
technology  to the  Company.  As  consideration  for the  assignment  and  sale,
Wentworth  received a $50,000 initial payment and a $6,000 per month royalty fee
during the life of the patents.  In addition,  Wentworth purchased 80,000 shares
of the Company's  Common Stock at S. 125 per share in December  1991.  Wentworth
has retained a security interest in the patent rights transferred to the Company
pursuant to the Royalty Agreement.

      The Company owns six U.S. Patents, twelve foreign patents and five foreign
patent  applications  covering,  in  the  aggregate,   up  to  twenty  different
countries.  Several of the earlier  "bubble"  technology  patents have  expired.
However, improvement patents covering the "bubble" technology still exist in the
United States and several foreign countries,  and the more important "vibration"
technology  patents,  which  form the basis of the IFT  System,  run to at least
2007. The Company was also granted a patent in Japan.

      While the Company intends to vigorously  enforce its patent rights against
infringement  by third parties,  no assurance can be given that such rights will
be  enforceable  or will provide the Company  with  meaningful  protection  from
competitors or that any pending patent  applications will be allowed.  Even if a
competitor's products were to infringe patents owned by the Company, it could be
damaging to the Company to enforce its rights  because  such action would divert
funds and resources which  otherwise could be used in the Company's  operations.
No assurance can be given that the Company would be successful in enforcing such
rights,  that the Company's  products or processes do not infringe the patent or
intellectual  property  rights of a third party,  or that, if the Company is not
successful in a suit involving patents or other intellectual  property rights of
a third  party,  a license  for such  technology  from such third party would be
available on

                                                         7

<PAGE>



commercially reasonable terms, if at all.

      Regulations

      Concern over  environmental  pollution has led to legislation  introducing
tougher and tighter controls on emissions.  NOx, for example,  is now understood
to be a key element in the formation of ground level ozone, widely recognized as
a hazard to health and a precursor to urban smog. The problem for industry is to
reduce NOx levels as is currently demanded while not increasing emissions of the
equally  undesirable  carbon  monoxide or reducing  power  generation  capacity.
According to available  statistics,  approximately 55% of the 20 million tons of
annual Nox production comes from utilities,  industrial boilers and furnaces the
balance is from motor vehicles.

      The  Federal  Clean Air Act,  initially  adopted  in 1970 and  extensively
amended in 1990 and European  Community  regulations  require  compliance  with
specified air quality standards and empower  government to establish and enforce
limits on the emission of various  pollutants  from specific types of industrial
facilities.  In the USA, the states have primary responsibility for implementing
these standards,  and, in some cases, have adopted standards more stringent than
those established by Federal regulation.

      In general, emitters of pollution are required to obtain permits issued by
the  appropriate  environmental  agency.  A typical  permit  would set forth the
amount of  pollutants  that the "source" may emit,  mandatory  emission  control
device   description  and  installation   deadlines  plus   monitoring/reporting
requirements.  Pollution  sources maybe charged a fee proportional to the amount
of pollution  the source  creates each year.  This provides an incentive for the
polluter  to  acquire  technology  which  will  reduce  its  emissions.  IFT  is
attempting to work with customers on an individual basis prior to and during its
process of  negotiating  permits in an attempt to have the System  "accepted" by
such regulatory agencies.

      Domestic and  international  environmental  laws and regulations  are, and
will  continue to be, a principal  factor  affecting  demand for the IFT System.
Although the Company believes there is a trend toward increasing  regulation and
enforcement  by all levels of government,  a decline in enforcement  and related
expenditures  by businesses  subject to such laws and  regulations  could have a
significant adverse effect on the demand for the IFT System. In addition,  there
can be no assurance that the IFT System  currently,  or as adjusted or enhanced,
will  enable  others to  comply  with  specified  or yet  unspecified  emissions
standards implemented by any

                                                         8

<PAGE>



amendments to present laws and regulations or any future
legislation.

      Competition

      While most other  pollution  control  technologies  are aimed at  reducing
airborne  emissions,  the Company is not aware of any technology  which enhances
combustion efficiency and reduces noxious emissions.  The technology used by the
Company's  competitors  can be divided  into three  categories:  pre-combustion,
combustion and post-combustion.

      Pre-combustion techniques include chemical additives, low NOx burners, and
water/steam  injection added to the fuel. Such techniques can achieve  reduction
in particulate and NOx emissions but do not result in material fuel savings.

      Combustion techniques include air/fuel control systems, chemical additives
(i.e.  urea  injection)  and flue gas  recirculation.  These methods  reduce NOx
emissions but may result in higher  particulate  emissions and/or reduced boiler
efficiency.  Furthermore,  they are generally more expensive to install than the
IFT System.

      Post-combustion systems include precipitators,  bag filters and scrubbers.
These systems require large capital  expenses often involve high maintenance and
operating  costs  and do not  address  fuel  efficiency.  Some  have  the  added
disadvantage of producing by-products which may present disposal problems.

      The  IFT  technology  is not,  by  itself,  a  solution  to all  emissions
problems.  More  frequently  the  technology  is  complementary  to  solutions a
customer  may  wish to  utilize.  For  example,  to  achieve  extremely  low NOx
emission,  ammonia  injection  might be selected.  IFT could enhance  combustion
efficiency so that less NOx is produced and  subsequently  less ammonia required
to achieve the final lower NOx level.

      While the Company believes that its System enjoys  significant  advantages
as compared to its competitors' products, many of the Company's competitors have
greater resources,  both financial and otherwise, than the Company and therefore
may be capable of testing, enhancing,  marketing and distributing their products
on  a  wider  basis  than  the  Company.  In  addition,   future   technological
developments  and  novel  approaches  in the flame  combustion  field as well as
enhancements of current technology will, in all likelihood,  create new products
and  services  that  directly  compete  with  the IFT  System.  There  can be no
assurance that the Company would not be

                                                         9

<PAGE>



adversely affected by such technological change.


      Item 2.  PROPERTY

      The  Company  leases  approximately  10,000  square  feet of space for its
principal   executive  offices,   manufacturing  and  research  and  development
facilities in Laindon,  Essex,  U.K. This lease  expires in December  1997,  the
terms  for  renewal  are  currently  being  negotiated.  The base  rent for this
facility is approximately  $6,000 per month for 1995,  approximately  $6,655 per
month for 1996 and approximately $7,375 per month for 1997.

      The Company maintains one office in New Canaan,  Connecticut on a month to
month basis at $105 per month and a sales office in Gent,  Belgium pursuant to a
three year lease at $360 per month plus utilities.

         The Company  maintains its  corporate  office in  Wilmington,  Delaware
pursuant to an annual lease with an annual rental of $3,000 plus utilities.  The
lease expires in December 1997 and will be renewed.

         The Company  believes that its  facilities are adequate for its present
and anticipated needs.


      Item 3. LEGAL PROCEEDINGS

      Not applicable.


      Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable.



                                                        10

<PAGE>



                                                      PART II

      Item 5.   MARKET FOR REGISTRANT'S SECURITIES AND RELATED
                  STOCKHOLDER MATTERS

         The Company's common stock,  Class A and Class B Warrants are quoted on
the Nasdaq  SmallCap  Market and Boston Stock Exchange under the symbols "IFTI",
"IFTIW", and "IFTIZ" respectively.

         The table set forth below shows, for the period indicated, the high and
low bid quotations on the Nasdaq SmallCap  Market for the Company's  Securities.
These amounts  represent  quotation  between  dealers in securities,  and do not
include retail mark-ups,  mark-downs or commissions and may not represent actual
transactions.


                                                              Bid
      Period Ended          Type of Security              High   Low

      September 1995                Common Stock         1 3/16   11/32
                                    Class A Warrant      5/32     3/32
                                    Class B Warrant      3/32     3/32

      December 1995                 Common Stock         7/16     1/4
                                    Class A Warrant      3/32     1/64
                                    Class B Warrant      3/32     1/64

      March 1996                    Common Stock         1 1/8      1/4
                                    Class A Warrant       3/16     3/32
                                    Class B Warrant       5/32     3/32

      June 1996                     Common Stock          2 25/32    5/8
                                    Class A Warrant        9/32    5/32
                                    Class B Warrant        7/32    1/8


      September 1996                Common Stock          2 3/4      1
                                    Class A Warrant       1/4        3/32
                                    Class B Warrant       1/4        3/16

      December 1996                 Common Stock         21/2          1
                                    Class A Warrant      1/8         3/32
                                    Class B Warrant      3/16        3/32

      March 1997                    Common Stock         2 3/4      1 5/32
                                    Class A Warrant       3/16      1/16
                                    Class B Warrant      3/16        3/32

      June 1997                     Common Stock       3 13/16     2 1/8
                                    Class A Warrant    1/8           1/16
                                    Class B Warrant    7/32           1/8





                                                        11

<PAGE>



         At  September  19,  1997 the  number of  shareholders  of record and in
street  name of the  Company's  common  stock and Class A  Warrants  and Class B
Warrants were 99, 28 and 29, respectively.

         The Company has not paid any cash dividends.

      Item 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


      Statement of                                                                                         Six Months
       Operations                            Year Ended                                  Ended
       Data:                                 December 31, 1992      June 30,1993(1)

      Revenues....                                    $ 22,751                            $17,025
      Cost of
       Revenues...                                     131,793                            121,828
      Operating
       Expenses...                                   1,485,644                            999,771
      Net (loss)..                                   (1,573,706)                        (1,101,056)
      Net (loss) per
       share......                           $   (.44)                           $   (.27)
      Weighted average
       number of common
       shares.....                                   3,546,668                          3,957,540
      Cash dividend
       per common share..

      Balance Sheet
          Data:                                      December 31, 1992                  June 30, 1993 (1)
                                                     -----------------                  -------------    

      Total assets..                                 $2,063,110                         $3,965,244
      Working capital.                        765,500                           2,670,427
      Long-term
       liabilities.                                    437,464                            437,108
      Total
       liabilities.                                    806,732                            758,335
      Accumulated
       deficit.....                                  (1,579,788)                        (2,680,844)
      Cumulative
       translation
       adjustment...                                  (148,467)                          (166,806)

      Stockholders'
       equity......                                  1,256,378                          3,206,909




                                                        12

<PAGE>





                                    Year Ended                Year Ended                Year Ended                 Year Ended
                                    June 30, 1994             June 30, 1995             June 30, 1996              June 30, 1997

      Statement of
      Operations Data:

      Revenues                      $1,190,291                $ 476,161                    $ 593,959                 $628,694

      Cost of Revenues                 445,355                  344,868                      537,110                  723,327

      Operating Expenses             2,631,912                2,974,998                    1,669,145                  882,524
      Net Loss                      (1,928,987)              (2,725,744)                  (1,563,667)               1,004,425
      Net Loss per
       share                        $    (.46)              $      (.51)                   $    (.29)                $   (.19)
      Weighted average
       number of                    4,210,668                 5,318,445                    5,410,500                5,412,100
       common shares

      Cash Dividend
       per common share                ---                     ----                          ---                      ---
      Balance Sheet:

      Total Assets                 $2,601,471               $4,463,543                   $2,659,185                 $1,627,291

      Working Capital                 636,096                2,687,338                    1,306,293                    434,686
      Long-term
       liabilities                    422,521                  394,625                      364,773                    346,249
      Total
       liabilities                  1,318,560                1,106,581                     886,274                     782,734
      Accumulated
       deficit                     (4,609,831)              (7,335,575)                (8,899,242)                  (9,903,667)
      Cumulative
       translation
       adjustment                    (161,817)                (130,436)                 (150,820)                    (143,199)

      Stockholders'
       Equity                       1,282,911                 3,356,962                1,772,911                      844,557



                                                              13
</TABLE>

<PAGE>



      Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS

      Overview

         The Company  commenced  operations in late December 1991.  During 1992,
the  Company's  primary focus was  completing  the design and testing of the IFT
System.  In 1993,  the  first  production  equipment  was made  available  and a
customer testing program was commenced.  Simultaneously,  the Company stepped-up
its marketing and promotional activities.

         In 1993,  the Company  changed its year end to June 30.  During  Fiscal
1994 the  Company  increased  its  staffing  levels and  acquired  the  Vapormid
business from EcoLab,  BVBA, a  distributor  of the  Company's  earlier  "bubble
technology".

         On July 18, 1994 the Company's  Initial  Public  Offering was completed
generating net proceeds of $4,768,414.  In conjunction with the public offering,
the Company  increased its operational and marketing  activities in an effort to
achieve  cash  flow  break  even by  fiscal  year end.  This  objective  was not
accomplished  in part  because of long lead times  experienced  between  initial
sales presentations and invoicing, together with a lack of positive test data on
three very large  pulverized  coal  facilities.  Therefore a sharp  reduction in
expenses,  including  staff cuts,  was  implemented  in May which reduced annual
costs by approximately  $1,200,000  during fiscal 1996. A leading  international
oil company  completed  testing the IFT System in its central research  facility
with positive results and  recommendations to its operating units to utilize the
technology.  As a consequence the Company has installed an IFT System on a large
Texaco  boiler with follow on orders  expected in Fiscal '98.  Likewise  initial
installations  have been completed at sites with British Petroleum and Amoco. An
average size refinery or  petrochemical  plant could utilize IFT  technology and
equipment   valued  at   approximately   $1,000,000.   With  this  large  market
opportunity,  fiscal '98  revenues  are  estimated to be higher than in the past
year  providing  positive  cash flow and net income.  The  additional  volume of
business  can be  accommodated  within  the  existing  capacity  of the  Company
allowing for increases in material  purchases.  The  attainment of positive cash
flow remains the Company's primary  financial  objective and the immediate focus
of  operations  will be the  European  Community  where the IFT  technology  has
achieved market recognition.



      Year ended June 30, 1997 and June 30, 1996

         Total revenues increased to approximately $629,000 during

                                                        14

<PAGE>



the year ended June 30,  1997 from  $594,000  in the fiscal  year ended June 30,
1996. The net increase  relates to a decrease in rental income to  approximately
$307,000  ($347,000  in 1996),  an  increase  in system  sales to  approximately
$171,000  ($123,000 in 1996) and an increase in service income to  approximately
$151,000  ($124,000 in 1996).  The  decrease in rental  income is due to rentals
being  converted  to sales  during the year.  The  increase  in system  sales is
primarily  attributable to UK activity in 1997 where larger companies may prefer
to purchase the IFT System rather than rent,  however,  system sales occur on an
irregular basis. The increase in service income reflects increased  installation
fees in 1997.

         There was a gross loss of  approximately  $95,000 during the year ended
June 30,  1997  compared  to a profit of $57,000  during the year ended June 30,
1996. The gross loss related primarily to field engineering and service costs of
approximately  $269,000 in 1997 which in the previous year were classified,  for
nine months, in general and administrative expenses. Total field engineering and
service  costs were  $716,000 in 1996 and  $443,000 in 1997.  The  reduction  of
$273,000  was from staff  reductions  in the United  States and  Belgium and the
transfer of support activities to England.  Other items in cost of goods sold in
aggregate,  were reduced $83,000 for the year ended June 30, 1997. The different
classification  relates  to the  maturing  of the  Company's  technology  from a
development state requiring extensive  engineering support to complete the sales
process to a mature product.  The Company has  discontinued  free or conditional
testing and all trial installations are paid for by the customer.

         General and adminstrative  expenses decreased to approximately $657,000
during the year ended June 30, 1997 from  approximately  $1,230,000  in the year
ending June 30, 1996, a reduction of  $573,000.  Field  engineering  and service
costs of $541,000 which represents nine months of charges in the year ended June
30, 1996 are no longer  classified as general and adminstrative as stated above.
Other items in aggregate were reduced $32,000.

         Sales and  marketing  expenses  decreased  to $161,000  during the year
ended June 30, 1997 from  approximately  $362,000 during the year ended June 30,
1996. The decrease of $201,000 is primarily due to the  termination of sales and
marketing  arrangements  in Eastern Europe and Germany and the  substitution  of
geographic coverage by existing sales staff and top management.


         Other income was a loss of approximately $27,000 during the

                                                        15

<PAGE>



year ended June 30, 1997 from a profit of $49,000 during the year ended June 30,
1995, a decrease of $75,000  primarily  due to the use of funds in operations of
the Company and reduced interest income.


      Year ended June 30, 1996 and June 30, 1995

         Total  revenues  increased to  approximately  $594,000  during the year
ended June 30,  1996.  The increase  relates to an increase in rental  income to
approximately  $347,000  ($277,000  in 1995),  an  increase  in system  sales to
approximately  $123,000  ($81,000 in 1995) and an increase in service  income to
approximately  $124,000 ($118,000 in 1995). The increase in rental income is due
to trials being  converted to normal  rentals  during the year.  The increase in
system  sales is  primarily  attributable  to UK activity  in 1996 where  larger
companies may prefer to purchase the IFT system  rather than rent.  System sales
occur on an  irregular  basis.  The  increase  in service  income  reflects  the
increased sales and rentals in 1996.

         Gross profit decreased to  approximately  $57,000 during the year ended
June 30, 1996 from  $131,000  during the year ended June 30, 1995.  The decrease
related  to  field   engineering,   installation   and  other   field  costs  of
approximately  $176,000 incurred during the final quarter of the year ended June
30, 1996 which had been  classified  as cost of revenues;  in previous  periods,
these costs have been classified as sales and marketing expenses.  The different
classification   relates  to  the  maturing  of  the  Company's  system  from  a
development state requiring extensive  engineering support to complete the sales
process to a mature  product.  In  January,  the  Company  discontinued  free or
conditional testing and by the fourth quarter all previously free tests had been
completed.

         General  and   administrative   expenses   decreased  to  approximately
$1,230,000  during the year ended June 30,  1996 from  approximately  $1,855,000
during the year ended June 30,  1995,  a decrease  of  $625,000  due to internal
staff and other cost  reductions  implemented in May 1995. A total one-time cost
of $198,000 was incurred in May 1995, related to the personnel reductions.

         Sales and marketing expenses decreased to approximately $362,000 during
the year ended June 30, 1996 from  approximately  $853,000 during the year ended
June 30, 1995. The decrease of $491,000 is due to cost reductions implemented in
May 1995, and continuing through 1996, as well as approximately $176,000 of

                                                        16

<PAGE>



engineering and other technical costs incurred in the fourth quarter of the year
ended June 30, 1996,  which were included in cost of revenues.  These  technical
costs were included in sales and marketing  expenses  during the year ended June
30, 1995 and the first  three  quarters  of the year ended June 30,  1996.  This
change  is a result of the  change in  responsibilities  of  certain  employee's
caused by the maturing of the Company's  system from a developmental  state to a
mature product.

         Other income decreased to  approximately  $49,000 during the year ended
June 30, 1996 from approximately $118,000 during the year ended June 30, 1995, a
decrease  of  $69,000  primarily  due to the use of funds in  operations  of the
Company.


      Liquidity and Capital Resources

         Since  inception,  the  Company's  funding  requirements  have been met
through the initial public offering of equity securities totaling  approximately
$4.8 million, the private placement of equity securities totaling  approximately
$6 million, and revenue generated from operations.  On July 14, 1997 the Company
sold an additional 771,833 common shares with gross proceeds of $1,736,624.

         Net cash used in operations was approximately  $900,000,  $1.3 million,
and $2.6 million for the years ended June 30, 1997, 1996 and 1995. The principal
use of cash was to fund operating  losses  incurred by the Company in developing
the IFT System and sales, marketing and promotional activities.  Working capital
was  approximately  $435,000,  $1.3 million,  and $2.7 million at June 30, 1997,
1996 and 1995, respectively. Fluctuations in working capital have been primarily
due to increases in accounts  receivable  and  inventory  offset by increases in
accounts payable and other accruals.

         The Company  liquidated its U.S. Treasury  investments  during the year
ended June 30, 1996. The Company's primary investing  activity in the year ended
June 30, 1995 involved the  acquisition and sale of U.S.  Treasury  obligations.
Capital expenditures amounted to approximately $29,000 and $100,000 during
fiscal years "97 and "95, respectively. There were no capital expenditures 
during the year ended June 30, 1996. Capital expenditures were associated with 
the purchase of equipment used in manufacturing as well as expenditures 
incurred to produce rental equipment.  The Company has no plans for a
significant investment in ucapital equipment in fiscal 1998.


                                                        17

<PAGE>



      Under  an  Assignment  and  Royalty  Agreement  with the  inventor  of the
Technology utilized by the Company's System ("Royalty  Agreement"),  the Company
is  required  to make  payments  of $6,000  per month to the  inventor  over the
remaining  life of patents  relating  to the  technology.  In  conjunction  with
Royalty Agreement, the Company pays an executive officer/director of the Company
a royalty override of $5,000 per month.

         On  July  14,  1997,  the  Company  issued  771,833  units,  each  unit
consisting of one share of common stock, par value $.01 per share and one Series
C, Common Stock purchase warrant. As a result, the Company raised $1,571,960 net
of discounts, commissions and offering costs of $164,664.

         The Company believes that the proceeds from the above offering together
with  anticipated  funds from  operations,  will satisfy the  Company's  working
capital  requirements and capital  expenditures through fiscal 1998. The Company
intends  to focus its  operations  primarily  on  continued  expansion  with the
European Community.

         Currency Fluctuation

         The Company's  revenues are invoiced  primarily in Pounds  Sterling and
also  currencies of other  European  countries  (Belgium,  Austria and Germany).
Changes in exchange rates of these currencies  relative to the U.S. dollar could
affect the  Company's  operations  and cash flow.  During the fiscal years ended
June 30, '97 and '96, currency fluctuations were not significant and were not an
influence on Company  revenues  and  expenses.  Currently,  the Company does not
enter into derivative contracts to hedge currency risks.

         During the year ended June 30, 1997,  the average rate of exchange used
to translate revenues and expenses  denominated in Pounds Sterling has increased
from  approximately  $1.55 U.S. dollars to 1 Pound to  approximately  $1.65 U.S.
dollars to 1 Pound.

      Inflation

         The  Company  does not believe  that  inflation  has had a  significant
impact on the results of its operations since inception.





                                                        18

<PAGE>



      Forward-Looking Statements

         Forward-looking statements made in this Annual Report are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that all forward-looking  statements involve risks
and uncertainties  including without limitation risks in technology development,
risks in  product  development  and  market  acceptance  of and  demand  for the
Company's  products,  risks associated with competition and competitive  pricing
pressures,  risks  associated with foreign sales and other risks detailed in the
Company's filings with the Securities and Exchange Commission.


      Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See the  consolidated  financial  statements  and the financial  statement
schedule set forth in Item 14 of this annual report.

      Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE

      Not applicable



                                                        19

<PAGE>



      PART IV

      Item 14. Exhibits, Financial Statement

      Schedules and Reports on Form 8-K

                                                                 Page
      A.  (1)              Financial Statements

      Report of Independent Auditors                             F-1


      Consolidated Balance Sheet - June 30, 1997 and 1996        F-2

      Consolidated Statement of Operations - Years Ended         F-3
      June 30, 1997, 1996 and 1995

      Consolidated Statement of Stockholders' Equity -           F-4
      Years Ended June 30, 1997, 1996 and 1995

      Consolidated Statement of Cash Flows - Years Ended         F-6
      June 30, 1997, 1996 and 1995

      Notes to Consolidated Financial Statements                 F-7

      The following consolidated financial statement schedule of
      Ionic Fuel Technology, Inc. is included in Item 14(d):

         Schedule II - Valuation and Qualifying Accounts

         All other  schedules  for  which  provision  is made in the  applicable
accounting  regulations  of the  Securities  and  Exchange  Commission  are  not
required under the related  instructions or are  inapplicable and therefore have
been omitted.

      (3)         Exhibits

         3.1      Certificate of Incorporation
                  Incorporated  by  reference to the filing of such Exhibit with
                  Registrants  Annual  Report  on Form 10K for the  fiscal  year
                  ended June 30, 1996.

         3.2      By-Laws
                  Incorporated  by  reference to the filing of such Exhibit with
                  Registrants  Annual  Report  on Form 10K for the  fiscal  year
                  ended June 30, 1996.

         4.1      Specimen Certificate of Common Stock Incorporated by reference
                  to the filing of such Exhibit with  Registrants  Annual Report
                  on Form 10K for the fiscal year ended June 30, 1996.

                                                        20

<PAGE>







         4.2      Specimen Certificate of A Warrant
                  Incorporated  by  reference to the filing of such Exhibit with
                  Registrants  Annual  Report  on Form 10K for the  fiscal  year
                  ended June 30, 1996.

         4.3      Specimen Certificate of B Warrant
                  Incorporated  by  reference to the filing of such Exhibit with
                  Registrants  Annual  Report  on Form 10K for the  fiscal  year
                  ended June 30, 1996.


         10.1     Stock Option Plan
                  Incorporated  by  reference to the filing of such Exhibit with
                  Registrants  Annual  Report  on Form 10K for the  fiscal  year
                  ended June 30, 1996.

         27       Financial Data Schedule 
             
      B.   Reports on Form 8-K

              Form 8K dated July 10, 1997 electronically filed and
accepted on July 15, 1997; Accession No. 0001012118-97-000095.
Reference Item 5. Other Events: On July 10, 1997, the Registrant
concluded a private placement of Units pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended.

              Form 8K dated July 24, 1997 electronically filed and
accepted on July 24, 1997; Accession No. 0001012118-97-000105.
Item 5, Other Events: Extending the expiration date of the Class
A Warrants.



                                                        21

<PAGE>











                                              Report of Independent Auditors



To the Board of Directors and Stockholders
Ionic Fuel Technology, Inc.


We have  audited  the  accompanying  consolidated  balance  sheet of Ionic  Fuel
Technology,  Inc.  as of June 30, 1997 and 1996,  and the  related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
three years in the period  ended June 30,  1997.  Our audits also  included  the
financial  statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of Ionic
Fuel Technology, Inc. at June,30, 1997 and 1996, and the consolidated results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  June  30,  1997,  in  conformity  with  generally   accepted   accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
present fairly in all material respects, the information set forth therein.


                                                /s/ Ernst & Young LLP


September 5, 1997


                                                          F-1


<PAGE>




                                                         

                                               Ionic Fuel Technology, Inc.

                                                Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


                                                                                                       June 30

                                                                                               1997                 1996
                                                                                      -------------------------------------------
Assets
Current assets:
   Cash and cash equivalents (Note 1)                                                     $191,629           $1,173,088
   Trade accounts receivable (net of allowances of $0 and $43,791,                          59,420               80,332
     respectively)
   VAT and other receivables                                                                  -                  25,642
   Inventory (Note 2)                                                                     482,446               464,093
   Prepaid expenses                                                                       137,676                84,639
                                                                                      -------------------------------------------
   Total current assets                                                                   871,171              1,827,794

Equipment and vehicles, net (Notes 1 and 3)                                               153,117                192,608

Patents, net (Notes 1 and 4)                                                              603,003                638,783
                                                                                      -------------------------------------------
   Total  assets                                                                      $ 1,627,291             $2,659,185
                                                                                      ===========================================

   Liabilities and stockholders' equity
   Current liabilities:
   Accounts payable                                                                    $   87,155        $       87,739
   Accrued expenses                                                                       239,827               316,493
   Provisions for warranties and returns                                                   16,380                63,833
   Accrued royalty - due to officer (Note 4)                                               40,000                20,800
   Current portion of royalty agreement (Note 4)                                           18,720                16,127
   Accrued salary, benefits and payroll taxes                                              19,419                16,509
   Current portion of capital lease obligations (Note 5)                                   14,984                  -
                                                                                      -------------------------------------------
   Total current liabilities                                                              436,485               521,501


   Other long-term liabilities (Note 4)                                                   346,249               364,773

   Stockholders' equity (Notes 7 and 10):
   Common stock, $.01 par value:
     20,000,000 shares authorized; issued and outstanding 5,401,600
     and 5,400,000 shares, respectively (Note 7)                                           54,016               54,000
   Capital in excess of par value                                                      10,837,407           10,768,973
   Accumulated deficit                                                                 (9,903,667)          (8,899,242)
   Cumulative translation adjustment (Note 1)                                            (143,199)            (150,820)
                                                                                      -------------------------------------------
   Total stockholders' equity                                                             844,557             1,772,911
                                                                                      -------------------------------------------
   Total liabilities and stockholders' equity                                         $ 1,627,291           $ 2,659,185
                                                                                      ===========================================

</TABLE>

See accompanying notes.
                                                                  F-2

                                                          

<PAGE>



                                                          
                                                Ionic Fuel Technology, Inc.

                                           Consolidated Statement of Operations

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>





                                                                                       Year ended June 30

                                                                           1997                 1996                  1995
                                                                  -----------------------------------------------------------------

Revenues (Note 1):
   Equipment sales                                                 $    171,079          $    122,671         $     80,788
   Service income                                                       150,755               124,084              118,035
   Rental income                                                        306,860               347,204              277,338
                                                                  -----------------------------------------------------------------
     Total revenue                                                      628,694               593,959              476,161


     Cost of revenues                                                   723,327               537,110              344,868
                                                                  -----------------------------------------------------------------
                                                                      (94,633)                 56,849              131,293

   Operating expenses:
   General and administrative                                         657,133              1,229,969            1,854,880
   Sales and marketing                                                161,418                361,644              853,093
   Restructuring charges (Note 9)                                       -                      -                  198,006
   Royalty charges                                                     60,000                 60,000               60,000
   Research and development                                             3,973                 17,532                9,019
                                                                  -----------------------------------------------------------------
                                                                      882,524              1,669,145            2,974,998
                                                                  -----------------------------------------------------------------
   Loss from operations                                             (977,157)             (1,612,296)          (2,843,705)

   Other income (expense):
   Interest income                                                    28,801                106,905              161,787
   Miscellaneous income                                                 -                      -                  16,145
   Interest expense                                                  (56,069)              (58,276)              (59,971)
                                                                  -----------------------------------------------------------------
                                                                     (27,268)              48,629               117,961
                                                                  -----------------------------------------------------------------


   Net (loss)                                                    $(1,004,425)          $(1,563,667)          $(2,725,744)

                                                                  =================================================================


   Net (loss) per share (Note 1)                                 $     (0.19)     $        (0.29)      $         (0.51)
                                                                  =================================================================

Weighted average number of common shares
   (Note 1)                                                        5,412,100            5,410,500            5,318,445
                                                                  =================================================================


</TABLE>

See accompanying notes.


                                                          F-3

<PAGE>

                                                         

                                                Ionic Fuel Technology, Inc.

                               Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>





                                                          Common Stock                
                                              ----------------------------------     Capital in 
                                                                      Par            Excess of
                                                    Shares           Value           Par Value
                                              -----------------------------------------------------
 
Balance at June 30, 1994                          4,200,000         $42,000         $  6,012,559
     Issuance of common stock                     1,200,000          12,000            4,756,414
     Net loss
     Translation adjustment
                                              -----------------------------------------------------
Balance at June 30, 1995                          5,400,000         54,000          10,768,973
     Net loss
     Translation adjustment
                                              -----------------------------------------------------
Balance at June 30, 1996                          5,400,000         54,000          10,768,973
     Net loss
     Issuance of compensatory stock
       options and warrants                                                            68,000
     Exercise of stock options                        1,600             16                434
     Translation adjustment
                                              -----------------------------------------------------
Balance at June 30, 1997                          5,401,600         $54,016         $10,837,407
                                              =====================================================


</TABLE>

See accompanying notes.

                                                          F-4


<PAGE>

                                                         




                                                Ionic Fuel Technology, Inc.

                            Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>





                                                                         Cumulative
                                                     Accumulated       Translation
                                                     Deficit            Adjustment           Total
                                              ------------------------------------------------------------
 
Balance at June 30, 1994                          $(4,609,831)          $(161,817)        $    1,282,911
     Issuance of common stock                                                                  4,768,414
     Net loss                                     (2,725,744)                                 (2,725,744)
     Translation adjustment                                                31,381                 31,381
                                              ------------------------------------------------------------
Balance at June 30, 1995                          (7,335,575)            (130,436)             3,356,962
     Net loss                                     (1,563,667)                                (1,563,667)
     Translation adjustment                                               (20,384)              (20,384)
                                              ------------------------------------------------------------
Balance at June 30, 1996                          (8,899,242)            (150,820)            1,772,911
     Net loss                                     (1,004,425)                                (1,004,425)
     Issuance of compensatory stock
       options and warrants                                                                      68,000
     Exercise of stock options                                                                      450
     Translation adjustment                                                 7,621                 7,621
                                              ------------------------------------------------------------
Balance at June 30, 1997                          $(9,903,667)          $(143,199)         $    844,557
                                              ============================================================


</TABLE>

See accompanying notes.

                                                         F-5


<PAGE>

                                                        


                                                Ionic Fuel Technology, Inc.

                                           Consolidated Statement of Cash Flows

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>



                                                                                      Year ended June 30

                                                                          1997                 1996                  1995
                                                                 -----------------------------------------------------------------

Operating activities
Net (loss)                                                           $(1,004,425)          $(1,563,667)         $(2,725,744)
Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
     Depreciation                                                        66,241                111,316               67,763
     Amortization                                                        62,661                 85,653               79,414
     Non cash compensation                                               16,000                    -                   -            
     Changes in operating assets and liabilities:
       Accounts receivable                                              26,128                112,352              (77,870)
       Other receivables                                                 8,674                 2,311                5,039
       Inventory                                                        43,464                (9,058)              (89,498)
       Prepaid expenses                                                 19,211                61,750               (62,966)
       Deferred charges                                                   -                     -                  327,614
       Other assets                                                      2,195                33,374                (6,267)
       Accounts payable and accrued expenses                          (131,121)             (174,440)             (165,866)
                                                                 -----------------------------------------------------------------
Net cash used in operating activities                                (890,972)            (1,340,409)           (2,648,381)
 
Investing activities
Acquisition of investments                                              -                       -              (6,063,303)
Acquisition of patents and license                                   (25,885)                (18,703)             (38,219)
Acquisition of equipment                                             (29,239)                    -               (100,283)
   Accretion of interest                                             -                       (13,949)            (122,161)
Proceeds from maturity of investments                                -                     1,300,000            4,899,413
                                                                 -----------------------------------------------------------------
Net cash (used in) provided by investing activities                  (55,124)              1,267,348           (1,424,553)
 
Financing activities
Principal payments on capital leases                                 -                      (14,707)             (30,911)
Principal payments under licensing agreement                         (15,931)               (13,725)             (11,824)
Net proceeds from issuance of stock                                      450                   -               4,768,414
                                                                 -----------------------------------------------------------------
Net cash (used in) provided by financing activities                  (15,481)               (28,432)           4,725,679
                                                                 -----------------------------------------------------------------
 
Effects of exchange rate differences on cash                         (19,882)                (6,677)              9,810
                                                                 -----------------------------------------------------------------
 
(Decrease) increase in cash                                         (981,459)              (108,170)            662,555
Cash, beginning of year                                            1,173,088              1,281,258             618,703
                                                                 -----------------------------------------------------------------
Cash, end of year                                                $    191,629          $  1,173,088         $ 1,281,258
                                                                 =================================================================
 
Interest paid                                                    $     56,069         $      58,276         $    59,971
                                                                 =================================================================


</TABLE>

See accompanying notes.

                                                          F-6


<PAGE>

                                                         


                                                Ionic Fuel Technology, Inc.

                                  Notes to Consolidated Financial Statements



1. Summary of Significant Accounting Policies

Basis of Presentation

Ionic  Fuel  Technology,  Inc.  ("Company"),  a Delaware  corporation  formed on
December 10, 1991,  manufactures  ion generating  equipment for sale or lease to
entities in various  industries,  in the United  Kingdom  and Europe,  to reduce
airborne emissions and fuel consumption.

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned  subsidiaries,  Ionic Fuel Technology USA, Inc. ("IFT, USA"), a
company  incorporated in the U.S. and Ionic Fuel Technology Ltd. ("IFT Ltd."), a
company  incorporated  in  the  United  Kingdom.  All  significant  intercompany
accounts and transactions have been eliminated in consolidation.

Concentration of Credit Risk

At June 30, 1997 and 1996, the Company maintained cash balances of approximately
$69,000 and $980,000,  respectively, at a bank in excess of the insurance limits
($100,000) of the Federal Deposit Insurance Corporation.

The Company performs periodic  evaluations of its customers  financial condition
and generally does not require collateral.

Cash Equivalents

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

Inventory

Inventory is valued at the lower of cost, determined by the first-in,  first-out
method, or net realizable value.

Equipment and Vehicles

Equipment  and vehicles  are stated at cost less  accumulated  depreciation  and
amortization provided on the straight-line basis over the estimated useful lives
of the  assets,  which range from three to ten years.  Equipment  under lease to
third parties is depreciated over the life of the lease, generally five years.


                                                          F-7


<PAGE>

                                                        

                                                Ionic Fuel Technology, Inc.

                       Notes to Consolidated Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Intangible Assets

Patents  are  carried at cost,  less  accumulated  amortization  provided on the
straight-line  basis over the  estimated  useful lives of the assets which range
from five to fifteen  years.  Amortization  expense of these  intangible  assets
amounted to $62,661, $61,732 and $59,410 for the years ended June 30, 1997, 1996
and 1995,  respectively.  Accumulated  amortization  amounted  to  $322,272  and
$259,611 at June 30, 1997 and 1996, respectively.

The value of rental and  maintenance  contracts  acquired was amortized over the
lives of the contracts,  which ranged from one to four years. The original lives
of all contracts  purchased expired in 1996. This amortization  expense amounted
to $23,921 and $20,004 for the years ended June 30, 1996 and 1995, respectively.

Income Taxes

The Company  accounts for income taxes under the liability  method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this method,  deferred  income taxes are recognized for the
tax consequences of "temporary  differences" by applying  enacted  statutory tax
rates applicable to future years to differences  between the financial statement
carrying  amounts and the tax bases of existing  assets and  liabilities.  Under
SFAS 109, the effect upon deferred  taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.

Fair Value

Cash and  cash  equivalents,  accounts  receivable  and  accounts  payable:  The
carrying  amounts  reported in the balance sheet for cash and cash  equivalents,
accounts receivable and accounts payable approximate their fair value.

Stock Compensation

The Company  accounts  for stock option  grants in  accordance  with  Accounting
Principles  Board  (APB)  Opinion  No.  25,  "Accounting  for  Stock  Issued  to
Employees". Under the Company's current plan, options may be granted at not less
than the fair market value on the date of grant and therefore,  no  compensation
expense is recognized for the stock options granted.  In the year ended June 30,
1997, the Company adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation".  The effect of applying SFAS No. 123's fair value
method to the  Company's  stock- based awards  results in net loss and per share
data amounts for the years ended June 30, 1997 and 1996, respectively,  that are
not materially different from amounts reported.

Per Share Data

Net loss per share of common stock is computed  using the treasury  stock method
based on the  weighted  average  number of shares of common  stock and  dilutive
common equivalent shares outstanding during the period.


                                                          F-8


<PAGE>

                                                          
                                               Ionic Fuel Technology, Inc.

                         Notes to Consolidated Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Foreign Currencies

Adjustments  resulting from the  translation of the financial  statements of the
Company's  foreign  subsidiary  are excluded  from the  determination  of income
(loss) and are accumulated in a separate component of stockholders' equity.

Revenue Recognition

Rental income under operating leases is recognized on a straight-line basis over
the lease term. The equipment  leased is owned by the Company and,  accordingly,
the Company bears all repairs and maintenance costs incurred.  The lease term is
generally five years with an option for renewal.  Equipment sales are recognized
upon shipment of the equipment and are recorded net of an allowance for returns.

Warranty Costs

Estimated warranty costs are provided for when the product is sold.

Field Engineering Costs

Cost  of  revenues  reflects   approximately   $176,000  of  field  engineering,
installation,  and other field costs  incurred in the fourth quarter of the year
ended June 30, 1996. Similar costs incurred prior to these periods were included
in sales and  marketing  expenses  because  extensive  engineering  support  was
required to complete the sales  process.  This change was a result of the change
in  responsibilities  of  certain  employee's  caused  by  the  maturing  of the
Company's system from a developmental state to a mature product.

Reclassification

Certain amounts at year ended June 30, 1996 have been reclassified to conform to
the presentation at the year ended June 30, 1997.

Use of Estimates

The  consolidated  financial  statements  have been prepared in accordance  with
generally accepted  accounting  principles and as such, include amounts based on
judgments  and  estimates  made by  management,  which may  differ  from  actual
results.

                                                          F-9


<PAGE>

                                                          
                                               Ionic Fuel Technology, Inc.

                Notes to Consolidated Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Accounting Pronouncements

In February 1997, the Financial  Accounting  Standards  Board (FASB) issued SFAS
No. 128 "Earnings per  Share"which  the Company will adopt for it second quarter
ending December 31, 1997. SFAS No. 128 requires the Company to change the method
it currently uses to compute earnings per share and requires  restatement of all
prior periods. Under the new requirements,  the dilutive effect of stock options
are excluded from computing "basic" earnings per share and remain in the diluted
computation. The impact of SFAS No. 128 is not expected to be material.

2. Inventory

Inventory is comprised of the following:
                                                    June 30

                                             1997                1996
                                     ----------------------------------------


Material and supplies                    $161,817             $152,721
Finished goods                            320,629              311,372
                                     ----------------------------------------
                                         $482,446             $464,093
                                     ========================================

Included in finished goods inventory are units, at customer sites, on a 
short-term trial basis.

3. Equipment and Vehicles

Equipment and vehicles are comprised of the following:

                                                    June 30

                                             1997                1996
                                     ----------------------------------------

Equipment                             $ 440,540            $ 404,994
Vehicles                                 35,015               22,754
                                     ----------------------------------------
                                        475,555              427,748
Accumulated depreciation               (394,708)            (321,242)
                                     ----------------------------------------
                                         80,847              106,506
                                     ----------------------------------------

Equipment under lease                  119,667               126,072
Accumulated depreciation               (47,397)              (39,970)
                                     ----------------------------------------
                                        72,270                86,102
                                     ----------------------------------------
                                     $ 153,117            $  192,608
                                     ========================================

Amortization  expense included in depreciation  expense,  relating to the leased
equipment, amounted to $15,247, $20,898 and $18,208 for the years ended June 30,
1997, 1996 and 1995, respectively.
                                                          F-10


<PAGE>

                                                          

                                               Ionic Fuel Technology, Inc.

                  Notes to Consolidated Financial Statements (continued)



4. Royalty Agreement

Under an agreement  effective as of December 1991, the Company purchased certain
patents and  inventions  for  $50,000 and agreed to make  payments of $6,000 per
month over the remaining life of the patents  (initially 15 years).  The Company
has valued these patent  rights  ($428,698)  based upon the present value of the
future minimum royalty payments. The remaining balance of this obligation,  less
amounts  currently due, is included in other long-term  obligations.  If certain
annual profitability  levels are achieved,  an additional royalty of $24,000 per
annum will be payable.  In conjunction with this agreement,  the Company granted
the  inventor a security  interest  in the  patents  and  inventions  during the
royalty period.

A  founder/officer  of the Company  receives  an override  royalty of $5,000 per
month.  This expense  amounted to $60,000,  for each of the years ended June 30,
1997, 1996 and 1995.  During 1995, $1,600 per month of this override royalty was
deferred  resulting in an accrued royalty expense of $40,000 and $20,800 at June
30, 1997 and 1996, respectively.

5. Leases

The Company leases its facility under a  noncancelable  operating lease expiring
in 1997. The future minimum lease payments under operating and capital leases as
of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                   Operating        Capital
                                                                     leases          leases
                                                                --------------------------------
Year ending June 30:
   1998                                                          $102,723        $  2,491
   1999                                                             9,130           2,913
   2000                                                             3,043           3,146
   2001                                                             -               3,399
   2002                                                             -               3,039
                                                                --------------------------------
   Total minimum lease payments                                  $114,896         $14,988
                                                                ================================

</TABLE>

The cost of assets under capital leases amounted to $15,247 at June 30, 1997. 
There was no cost of assets under capital leases at June 30, 1996.

Rent expense amounted to $166,118, $135,720 and $102,439 for the years ended
June 30, 1997, 1996 and 1995, respectively.

The future minimum lease payments receivable under noncancelable operating 
leases as of June 30, 1997 are as follows:

                                                                   Operating
                                                                     leases
                                                                ----------------
Year ending June 30:
   1998                                                             $134,223
   1999                                                               66,871
   2000                                                                4,926
                                                                ----------------
   Total minimum lease payments receivable                          $206,020
                                                                ================


                                                          F-11


<PAGE>

                                                         


                                                Ionic Fuel Technology, Inc.

              Notes to Consolidated Financial Statements (continued)



6. Income Taxes

At June 30, 1997,  the Company has available  operating loss  carryforwards  for
United States federal  income tax purposes of $2,045,157  which are available to
offset future taxable income,  if any,  through the indicated  years:  $6,082 in
2006,  $54,766 in 2007,  $95,812 in 2008,  $600,574  in 2009,  $615,511 in 2010,
$380,431  in 2011 and  $291,981  in 2012.  The amount and timing  upon which the
Company may realize  future tax benefits from its net operating loss is affected
by prior  changes in ownership  of the Company.  The  Company's  subsidiary  has
unused operating loss carryforwards, with no expiration date, for United Kingdom
income tax purposes,  of  $7,728,104  at June 30, 1997.  The statutory tax rates
during the year ended June 30, 1997 are 34% and 24% in the U.S. and U.K.  During
the years ended June 30, 1996 and 1995 the  statutory tax rates were 34% and 25%
in the U.S. and U.K., respectively.

Significant components of the Company's deferred tax assets and liabilities are
 as follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                                       June 30

                                                                               1997                 1996
                                                                      -------------------------------------------

Deferred tax liabilities:
Total deferred tax liabilities                                         $   16,904         $        -
Deferred tax assets:
   Benefit of net operating loss carryforwards - U.S.                     695,353                 598,180
   Benefit of net operating loss carryforwards - U.K.                   1,854,745               1,636,330
   Other                                                                   41,477                  58,899
                                                                      -------------------------------------------
   Total deferred tax assets                                            2,591,575               2,293,409
   Valuation allowance                                                 (2,574,671)             (2,293,409)
                                                                      -------------------------------------------
   Net deferred tax assets                                                 16,904                 -
                                                                      ===========================================
   Total net deferred tax assets (liabilities)                        $     -              $      -
                                                                      ===========================================
</TABLE>

7. Stockholders' Equity

Effective March 28, 1994, an amendment and restatement of the Company's Restated
Certificate  of  Incorporation  was  approved by the Board of  Directors  of the
Company  providing for an increase in the authorized common stock of the Company
to 20,000,000 shares.

On July 28, 1994, the Company issued  1,200,000  units,  each unit consisting of
one share of common  stock,  par value $.01 per share,  one Series A  redeemable
common stock purchase warrant and one Series B redeemable  common stock purchase
warrant.  Two Series A Warrants  entitle  the holder,  to purchase  one share of
Common  Stock for $6.50,  which  rights been  extended for a year until July 28,
1998. Two Series B Warrants entitle the holder,  to purchase one share of Common
Stock for $7.50  until July 28,  1999.  Each  Series of  Redeemable  Warrants is
redeemable at a price of $.01 per two Redeemable Warrants, upon not less than 30
days prior written  notice,  if the last sale price of the Common Stock has been
at least $9.50 with  respect to the Series A Warrants and $10.50 with respect to
the Series B Warrants  for the 20  consecutive  trading days ending on the third
day prior to the notice of redemption.  As a result of the offering, the Company
raised  $4,768,414,  net  of  discounts,   commissions  and  offering  costs  of
$1,231,586.

                                                          F-12


<PAGE>

                                                       


                                                Ionic Fuel Technology, Inc.

      Notes to Consolidated Financial Statements (continued)



7. Stockholders Equity (continued)

Stock Options

The Company's 1992 Stock Option Plan, as amended, (the "Plan"), provides for the
granting of qualified or  nonqualified  options to acquire up to 450,000  common
shares by certain key  employees of the Company or its  subsidiary.  Options are
exercisable  one year after the date of grant at a rate of 20% per  annum,  on a
cumulative basis. Options may be granted through November 30, 2002, although the
Plan may be terminated at any time.

The  following  presents a summary of the  Company's  stock option  activity and
related information: 
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>                                                                
                                                                                                              Weighted
                                                                                                               average
                                                                                              Option           exercise
                                                                            Number          price per           price
                                                                          of shares           share           per share
                                                                      ------------------------------------------------------
 
Options outstanding at June 30, 1994                                       198,000           $2.81-$5.00        $4.51
   Granted                                                                  28,000            $2.13             $2.13
   Exercised                                                                 -
   Canceled                                                               (136,000)         $2.81-$4.69         $4.47
                                                                      ------------------
Options outstanding at June 30, 1995                                        90,000          $2.13-$5.00         $3.18
   Granted                                                                  36,000             $.28             $ .28
   Exercised                                                                -
   Canceled                                                                 -
                                                                      ------------------
Options outstanding at June 30, 1996                                        126,000           $ .28-$5.00        $2.35
   Granted                                                                  206,000           $1.06-$4.00        $3.31
   Exercised                                                                 (1,600)          $  .28             $ .28
   Canceled                                                                   -
                                                                      ------------------
Options outstanding at June 30, 1997                                        330,400           $  .28-$5.00      $2.96
                                                                      ==================
</TABLE>

At June 30, 1997,  options for 119,600  shares were  available for future grants
and 212,000 options were exercisable.

In April  1997,  the  Company  issued  150,000  options  to a  financial  public
relations  firm in lieu of a $20,000 fee required  under a written  contract for
annual services commencing January 1, 1997. The options were divided into thirds
and are exercisable at $2, $3 and $4 a share, respectively. They are exercisable
immediately  and expire on December 31, 2002.  For the year ended June 30, 1997,
the  Company  has  recognized  compensation  expense for the fair value of these
options of $10,000.

                                                          F-13


<PAGE>

                                                        

                                                Ionic Fuel Technology, Inc.

    Notes to Consolidated Financial Statements (continued)



7. Stockholders' Equity (continued)

Warrants

In April 1997, the Company issued 150,000 warrants to a financial  consultant in
lieu of present and future compensation for services.  Each warrant entitles the
holder to purchase one share of Common  Stock.  The exercise  price of 75,000 of
the warrants is $2.25 per warrant and the exercise price of the remaining 75,000
warrants is $3.50 per warrant.  The warrants were  exercisable  immediately  and
expire in March 15, 2001.  The fair value of the warrants,  $48,000 was based on
contract  value of the services to be provided.  Compensation  expense of $6,000
was recognized for the year ended June 30, 1997.
8. Results of Foreign Operations

Total assets and liabilities and results of operations for IFT Ltd. were as
follows:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                 June 30

                                                        1997                        1996
                                            ---------------------------------------------------------


Total assets                                        $ 904,452                   $ 1,001,869
                                            =========================================================
Total liabilities                                   $ 357,834                   $   543,080
                                            =========================================================
Revenues                                            $ 601,408                   $   593,959
                                            =========================================================
Loss from operations                                $(709,309)                  $(1,197,933)
                                            =========================================================
</TABLE>

9. Restructuring Charges

During 1995,  IFT Ltd.  undertook a  fundamental  restructuring,  leading to the
termination  of  over  half  of its  workforce.  Other  costs  relating  to this
restructuring  included inventory  writedowns and early termination  payments on
certain motor vehicle leases.

10. Subsequent Event

On July 14, 1997, the Company  completed a private offering of 771,833 shares of
its common  stock and Series C Warrants at a price of $2.25 per unit.  Each unit
is  comprised  of one share of common  stock,  par value $0.01 per share and one
warrant to purchase one share of common stock at a price of $2.95, expiring July
10,  2000.  The Company  granted  71,183  Series C Warrants  to their  broker in
exchange for the  services  provided.  The Company  received  total  proceeds of
$1,736,624 which, net of offering expenses of $165,965, will be used for general
working capital.

                                                          F-14


<PAGE>
                                                Ionic Fuel Technology, Inc.

                       Schedule II-Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>




                                                                                    Additions/Deductions
                                                                        ------------------------------------------
                                                        Balance at            Charged to            Write-Offs
                                                       Beginning of           Costs and               Net of             Balance at
                   Description                            Period               Expenses             Recoveries        End of Period
                                                   -------------------------------------------------------------------------------
 
For the year ended June 30, 1995
   Allowance for doubtful accounts                       $43,565                 $1,439              $  -                 $45,004
   Inventory reserve                                     $12,230                 $18,525             $  -                 $30,755
 
For the year ended June 30, 1996
   Allowance for doubtful accounts                       $45,004                 $  -                $1,213               $43,791
   Inventory reserve                                     $30,755                 $26,560             $  -                 $57,315 
 
For the year ended June 30, 1997
   Allowance for doubtful accounts                       $43,791                  $510               $44,301               $    -   
   Inventory reserve                                     $57,315                 $37,647             $  -                  $94,962  

</TABLE>

<PAGE>


                                                    SIGNATURES




      Pursuant  to the  requirements  of Section  13 or 15(b) 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:  September    , 1997

                                            IONIC FUEL TECHNOLOGY, INC.


                                            By:
                                                   Douglas F. Johnston

      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 in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

      Name                                         Titles                          Date




      Douglas F. Johnston                Chairman & Chief Financial       September   , 1997
                                         Officer



      Anthony J.S. Garner                President, Chief Executive       September   , 1997
                                         Officer and Director


      Paul C. O'Neill                    Treasurer and Director           September   , 1997



      Frank J. Hollendoner               Director                         September   , 1997



      Henry W. Sullivan                  Director                         September   , 1997

</TABLE>