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, 1996 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:

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

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

                                                         1

<PAGE>



requirements for the past ninety (90) days. Yes: x    No:

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of 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 16,
1996 - $9,604,480

Indicate the number of shares  outstanding of each of the registrant's  class of
common stock, as of the latest practicable date. At September 25, 1996, there
were 5,400,000  common  shares,  1,200,000  Series  A  Warrants,  1,200,000 
Series B Warrants and 120,000 Underwriters' 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 7, 1996.

                                                         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 ("IFT System" or "System")  designed to reduce harmful airborne emissions
from and increase fuel efficiency of heating and power generation  systems.  The
Company 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 particles 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  charged 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, CO2 and CO. A further  significant
benefit,  is the  ability  of the IFT  System to  initially  remove  and then to
prevent the further formation of "coke" on the combustion and flue side surfaces
of boiler tubes or walls,  frequently found when burning heavy fuel oil or coal.
This coking also occurs in refinery and  petrochemical  crackers  and  reformers
when  burning  commercial  gas on natural  draft fired  systems.  The  resulting
cleaner surfaces,  ensure the further advantage of consistent heat transfer from
the flame through to the product, with better thermal efficiency. Plant shutdown
to clean tubes,  often  necessary  when burning oil and coal,  is  substantially
reduced  or  completely  eliminated.  If fuel and air  flow  cannot  be  closely
controlled in an existing  combustion system or if customer equipment is in need
of repair, the IFT technology may not be effective. Boilers utilizing oil or gas
fuels have provided the best improvements  with the IFT system.  The Company has
completed  testing it's  technology  at a leading  international  oil  company's
research  facility  in the UK and their  report  stating the  benefits  has been
circulated to all operating  facilities.  On two large  pulverized coal electric
power  generating  facilities in the United States  testing has been  terminated
because  continuing  costs  would not be funded  by the power  plants.  Positive
results have been established on traditional coal fired boilers in the U.K.

The System

         The IFT System is self contained in a cube-shaped free

                                                         3

<PAGE>



standing metal enclosure.  The System's interior  mechanism vibrates the surface
of a  liquid  contained  inside  the  cabinet.  The  vibrating  liquid  releases
negatively charged particles that are then delivered to the customer's equipment
through a  connection  to the  boiler's  combustion  chamber or to the  boiler's
combustion air system.

         The System is available in eight sizes  ranging from 15" x 12" x 16" to
43" x  31.5"  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.  Multiple  Systems are currently  installed on boilers up to
250,000lbs/hr.  The System  generally,  can be retrofitted  while the customer's
boiler is operating and requires only a routine  servicing  every six months and
may be leased or purchased.

         Performance  results of the System  reveal a reduction in NOx emissions
ranging from 6% to 60%, a reduction in CO2  emissions  ranging from 8% to 12%, a
reduction  in CO emissions  ranging  from 6% to 80%, a reduction in  particulate
emissions  ranging  from 6% to 40% and a reduction in fuel  consumption  ranging
from  21/2%  to 11%.  The  exact  performance  of the  System  depends  upon the
customer's existing equipment and desired objectives; customers may achieve less
favorable  results or no results if their  equipment  requires repair or if fuel
and air flows cannot be closely controlled.


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 commitment.

         The performance trial results obtained at a customer's location, enable
the Company to use such results to confirm the

                                                         4

<PAGE>



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 partially,
if not fully, 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.

         The  Company  has  completed  testing  it's  technology  at  a  leading
international oil company's research facility in the UK and their report stating
the benefits  has been  circulated  to all  operating  facilities.  On two large
pulverized  coal  electric  power  generating  facilities  in the United  States
testing has been terminated  because continuing costs would not be funded by the
power plants.  Postitive results have been established on traditional coal fired
boilers in the U.K.

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 more  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

                                                         5

<PAGE>



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.

         The Company will rent or sell the System. In the U.K. and Belgium, most
orders consist of rental  agreements while in Austria,  Hungary,  Czech Republic
and Slovakia, most orders consist of outright sales plus an installation fee and
a maintenance agreement.

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 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.

                                                         6

<PAGE>



         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 1996.

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 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 $.125 per share in December 1991.
Additionally,   in  December  1991,  Messrs.  Johnston  and  O'Neill,  executive
officers,  directors  and  principal  stockholders  of the  Company,  granted to
Wentworth from their stock holdings  options to purchase in the aggregate 22,400
shares of the Company's  Common Stock at an exercise  price of $3.125 per share.
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

                                                         7

<PAGE>



at least 2007.  The Company was granted a patent in Japan during
the year.

         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 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

                                                         8

<PAGE>



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 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 to reduce both noxious emissions and fuel consumption. 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.

                                                         9

<PAGE>



         The IFT  technology  is not,  by itself,  a solution  to all  emissions
problems.  More  frequently  the  technology  is  complimentary  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 adversely  affected by
such technological change.

Employees

         As of September 1, 1996, the Company employed 13 persons on a full-time
basis, four in administrative and finance, three in sales and marketing,  six in
manufacturing  and field  engineering.  Most  employees  fill in on  assignments
outside their primary  responsibilities as needed. The Company believes that its
relations with its employees are satisfactory.

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 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's  corporate office is in Wilmington,  Delaware pursuant to
an annual lease of $2,766 or $225 per month plus utilities. The lease expires in
December 1996.

         The Company believes that its facilities are adequate for its

                                                        10

<PAGE>



present and anticipated needs.


Item 3. LEGAL PROCEEDINGS

Not applicable.


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

Not applicable.



                                                        11

<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  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

December 1994                       Common Stock           3 3/8    2 1/4
                                    Class A Warrant          1/2      3/8
                                    Class B Warrant          7/16     3/8

March 1995                          Common Stock           2 7/8    1 1/16
                                    Class A Warrant          1/2      1/4
                                    Class B Warrant          3/8      3/16

June 1995                           Common Stock           1 5/16     7/16
                                    Class A Warrant          1/4      1/8
                                    Class B Warrant          3/16     3/32

 
                                                               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

         At  September  25,  1996 the  number of  shareholders  of record of the
Company's common stock and Class A Warrants and Class B Warrants were 69, 25 and
25, respectively.
         The Company has not paid any cash dividends.


                                                        12

<PAGE>



         Listing of Common Stock on Nasdaq SmallCap Market under symbol IFTI and
on Boston Stock Exchange.

         Listing of Class A and Class B  warrants  will be  discontinued  on the
Boston Stock Exchange.


Item 6.  SELECTED FINANCIAL DATA



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

(1) During 1993, the Company changed its fiscal year end to June 30, 1993.

                                                        13

<PAGE>







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

Statement of
Operations Data:

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

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

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

Cash Dividend
 per common share              ---              ---                 ---

Balance Sheet:

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

Working Capital                 636,096       2,687,338           1,322,420
Long-term
 liabilities                    422,521         394,625             380,900
Total
 liabilities                  1,318,560       1,106,581             886,274
Accumulated
 deficit                     (4,609,831)     (7,335,575)         (8,899,242)
Cumulative
 translation
 adjustment                    (161,817)       (130,436)           (150,820)

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


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.

                                                        14

<PAGE>



        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. During the year 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 is in active
negotiations  with three  leading oil  companies  covering  six  locations  with
receipt  of  the  first   contract   imminent.   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  '97
revenues  are  estimated  to be sharply  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, 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,

                                                        15

<PAGE>



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
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.


Year ended June 30, 1995 and June 30, 1994

          Total revenues  decreased to  approximately  $476,000  during the year
ended June 30, 1995 from approximately $1,190,000 during the year ended June 30,
1994.  The  decrease  related to a  decrease  in System  sales to  approximately
$81,000 ($852,000 in 1994), net of an increase in rental income to approximately
$277,000  ($220,000  in  1994).  The  decrease  in  System  sales  is  primarily
attributable  to activity in 1994 in former "eastern bloc" countries where sales
are preferable over rentals. System sales, particularly in these former "eastern
bloc"  countries,  occur on an irregular  basis.  The increase in rental  income
relates to the increase in the number of Systems  leased at June 30, 1995 versus
June 30, 1994.

        Gross profit decreased to approximately $131,000 during the

                                                        16

<PAGE>



year ended June 30, 1995 from $745,000 during the year ended June 30, 1994. This
decrease  related  primarily  to the  decrease in System  sales;  the  irregular
occurrence of System sales will cause  significant  fluctuations in gross profit
until the rental revenue base is significantly higher.

        General  and   administrative   expenses   increased  to   approximately
$1,855,000  during the year ended June 30, 1995, from  approximately  $1,610,000
during  the year  ended  June 30,  1994,  an  increase  of  $245,000  due to the
Company's  expanded  European  and  United  States  operations.  A total cost of
$198,000  was  incurred in the fourth  quarter as a result of an internal  staff
reduction  in  May  1995,  which  reduced  total  personnel  from  28 to 18  and
eliminated  other costs such as  advertising  and  promotion.  These savings are
projected to reduce expenses by approximately $1,000,000 in 1996.

        Sales and marketing expenses decreased to approximately  $853,000 during
the year ended June 30, 1995, from approximately  $936,000 during the year ended
June 30, 1994. The decrease of $83,000 is principally due to reduced  commission
expense related to lower system sales,  partially offset by increased  marketing
costs in the United States.

        Other income increased to  approximately  $118,000 during the year ended
June 30, 1995 due to additional  interest earned on the proceeds of the July 28,
1994 public offering.

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, revenue generated from equipment sales of approximately  $1,056,000,
service and rental  income of  approximately  $1,244,000  and interest  earnings
totaling approximately $386,000. Cash on hand at June 30, 1996 was approximately
$1,173,000.  All short term U.S.  Treasury  investments  have been liquidated by
June 30, 1996.

        Net cash used by operations was approximately $1.3 million, $2.7 million
and $1.7 million for the years ended June 30, 1996, 1995 and 1994. 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  $1.3  million,  $2.7  million and $636,000 at June 30, 1996,
1995,  and  1994,  respectively.  Fluctuations  in  working  capital  have  been
primarily  due to  increases  in accounts  receivable  and  inventory  offset by
increases in accounts payable and other

                                                        17

<PAGE>



accruals as well as $4,768,000 of new equity capital raised in July
1994.

        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.
During the year ended June 30, 1994, the Company's primary investing  activities
included an acquisition of an operating  business and capital  expenditures  for
equipment for the Company.  The Vapormid business was acquired in August of 1993
for approximately $150,000. As part of the acquisition,  the Company acquired an
established customer base, the continued use of the Vapormid product and various
ongoing  customer  contracts  relating  to  equipment  rentals  and  maintenance
agreements.  There were no capital  expenditures  during the year ended June 30,
1996;  capital  expenditures  amounted to  approximately  $100,000  and $151,000
during  fiscal  years  '95 and  '94,  respectively.  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 capital equipment in the next year.

        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 the
Royalty Agreement, the Company pays an executive officer/director of the Company
a royalty override of $5,000 per month.

        On July 28, 1994 the Company registered with the Securities and Exchange
Commission  and issued  1,200,000  units,  each unit  consisting of one share of
common  stock,  par  value  $.01 per  share,  one  Series  A,  and one  Series B
Redeemable  Common  Stock  purchase  warrant.  As a result,  the Company  raised
$4,768,414 net of discounts, commissions and offering costs of $1,231,586.

        The Company  believes that the  remaining  proceeds from the Offering of
$1,173,000, together with anticipated  funds from  operations,  will satisfy the
Company's working capital  requirements and capital  expenditures through fiscal
1997. The Company intends to focus its operations on continued  expansion within
the European Community.

        Currency Fluctuation

        The  Company's  revenues are invoiced  primarily in Pounds  Sterling and
also currencies of other European countries (Belgium,

                                                        18

<PAGE>



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,  '96 and  '95,  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, 1996,  the average rate of exchange  used
to translate revenues and expenses  denominated in Pounds Sterling has decreased
from  approximately  $1.58 U.S. dollars to 1 Pound to  approximately  $1.55 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.

        Forward-looking statements made in this release 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 schedules
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, 1996 and 1995          F-2

Consolidated Statement of Operations - Years Ended           F-3
June 30, 1996, 1995 and 1994

Consolidated Statement of Stockholders' Equity -             F-4
Years Ended June 30, 1996, 1995 and 1994

Consolidated Statement of Cash Flows - Years Ended           F-6
June 30, 1996, 1995 and 1994

Notes to Consolidated Financial Statements                   F-7


        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

        3.2                                       By-Laws

        4.1                               Specimen Certificate of Common Stock

        4.2                               Specimen Certificate of A Warrant

        4.3                               Specimen Certificate of B Warrant

        10.1                              Stock Option Plan

B.   Reports on Form 8-K

                                                  Not Applicable

                                                            20

<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. at June
30, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1996. These
 financial statements are the
responsibility of the Company's management. Our responsibility is to express
 an opinion on these
financial statements 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, 1996 and 1995,
and the consolidated results of its operations and its cash flows for each of
the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting principles.



                                     
                                 /s/ ERNST & YOUNG LLP

September 6, 1996



                                                            F-1





<PAGE>

                                                Ionic Fuel Technology, Inc.
                                                Consolidated Balance Sheet

                                                      June 30

                                                   1996                1995
Assets
Current assets:
   Cash and cash equivalents (Note 1)        $1,173,088           $ 1,281,258
   Short-term investments (Note 1)             -                    1,286,051
Trade accounts receivable (net of 
allowances of $43,791
     and $45,004)                                80,332               197,902
   VAT and other receivables                     25,642               17,554
   Inventory (Note 2)                           464,093              466,941
   Prepaid expenses                              84,639               149,588
Total current assets                          1,827,794             3,399,294

Equipment and vehicles, net (Notes 1 and 3)     192,608              312,683

Patents, net (Notes 1 and 4)                    638,783              679,811
Rental maintenance contracts, net of 
accumulated amortization of
   $113,233 (Note 1)                             -                    24,584
Total  assets                               $2,659,185           $ 4,463,543

Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                      $      87,739        $    120,127
   Accrued expenses                            316,493              373,203
   Provisions for warranties and returns        63,833               145,650
   Accrued royalty - due to officer (Note 4)    20,800               1,600
   Accrued salary, benefits and payroll taxes   16,509               56,262
   Current portion of capital lease 
obligations (Note 5)                             -                    15,114
Total current liabilities                       505,374              711,956


Other long-term liabilities (Note 4)            380,900              394,625

Stockholders' equity:
   Common stock, $.01 par value:
     20,000,000 shares authorized; issued 
and outstanding 5,400,000
     shares (Note 7)                            54,000               54,000
   Capital in excess of par value           10,768,973           10,768,973
   Accumulated deficit                      (8,899,242)          (7,335,575)
   Cumulative translation 
adjustment (Note 1)                           (150,820)            (130,436)
Total stockholders' equity                   1,772,911            3,356,962
Total liabilities and stockholders' equity    $ 2,659,185          $ 4,463,543

  See accompanying notes.
                                                            F-2


<PAGE>

                                                Ionic Fuel Technology, Inc.
                                           Consolidated Statement of Operations

                                                  Year ended June 30

                                1996                 1995                1994

Revenues (Note 1):
   Equipment sales      $    122,671         $      80,788       $     851,785
   Service income            124,084              118,035             118,404
   Rental income             347,204              277,338             220,102
Total revenue                593,959              476,161             1,190,291


Cost of revenues             537,110              344,868             445,355
                              56,849               131,293             744,936

Operating expenses:
   General and
administrative             1,229,969            1,854,880           1,609,930
   Sales and marketing       361,644              853,093             935,778
   Restructuring charges
 (Note 9)                    -                    198,006             -
   Royalty charges            60,000               60,000              60,000
   Research and development   17,532               9,019               26,204
                           1,669,145            2,974,998           2,631,912
                        -------------------- ----------------   --------------
Loss from operations      (1,612,296)          (2,843,705)         (1,886,976)

Other income (expense):
   Interest income           106,905              161,787             18,591
   Miscellaneous income        -                   16,145              11,155
   Interest expense         (58,276)             (59,971)            (71,757)
                             48,629               117,961             (42,011)
                         -------------------- ----------------    -------------


Net (loss)             $(1,563,667)         $(2,725,744)         $ (1,928,987)



Net (loss) per
 share (Note 1)    $        (0.29)      $         (0.51)     $          (0.46)
                 ==================== ==================== ===================


Weighted average 
number of common shares
   (Note 1)             5,410,500            5,318,445           4,210,668
 
See accompanying notes.



<PAGE>

                                                            F-3



<PAGE>



                                                Ionic Fuel Technology, Inc.
                               Consolidated Statement of Stockholders' Equity






                                   Common Stock              Capital in
                                    -------------------------------
                                             Par           Excess of
                             Shares          Value          Par Value
 
Balance at June 30, 1993     4,200,000        $42,000        $ 6,012,559
 Net loss
Translation adjustment
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
                           ================ ============== =================



See accompanying notes.







                                                            F-4



<PAGE>



                                                Ionic Fuel Technology, Inc.
             Consolidated Statement of Stockholders' Equity (continued)





                                               Cumulative
                                Accumulated        Translation
                                Deficit           Adjustment          Total
 
Balance at June 30, 1993     $(2,680,844)         $(166,806)       $ 3,206,909
     Net loss                 (1,928,987)                           (1,928,987)
     Translation adjustment                           4,989            4,989
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
                          ================ ================ ==================



See accompanying notes.








                                                            F-5



<PAGE>

                                           Consolidated Statement of Cash Flows

                                                       Year ended June 30
                                 1996                 1995                1994
                              -------- -------------------- -------------------

Operating activities
Net (loss)                  $(1,563,667)         $(2,725,744)     $(1,928,987)
Adjustments to reconcile 
net loss to net cash
provided by (used in)
operating activities:
     Depreciation               111,316              67,763           116,834
     Amortization                85,653               79,414          144,314
     Provision for bad debts       -                    -              43,565
     Changes in operating
 assets and liabilities:
       Accounts receivable     112,352              (77,870)          (143,863)
       Other receivables         2,311                5,039             44,347
       Inventory                (9,058)             (89,498)          (172,103)
       Prepaid expenses         61,750              (62,966)           (24,112)
       Deferred charges          -                  327,614           (327,614)
       Other assets            33,374               (6,267)             (2,384)
       Accounts payable
       and accrued expenses  (174,440)            (165,866)            543,783
Net cash used in operating 
 activities                (1,340,409)          (2,648,381)          (1,706,220)

Investing activities
Acquisition of investments    -                   (6,063,303)          (27,005)
Acquisition of patents and 
license                     (18,703)             (38,219)             (151,424)
Acquisition of equipment       -                   (100,283)          (143,373)
Accretion of interest        (13,949)             (122,161)            -
Proceeds from maturity of 
investments                 1,300,000            4,899,413             -
Net cash provided
 by (used in) investing
 activities                 1,267,348            (1,424,553)          (321,802)
 
Financing activities
Principal payments on 
capital leases               (14,707)             (30,911)             (15,766)
Principal payments
 under licensing agreement   (13,725)             (11,824)             (9,220)
Net proceeds from issuance 
of stock                       -                4,768,414                -
Net cash (used in) provided 
by financing activities      (28,432)             4,725,679            (24,986)
                 -------------------- -------------------- -------------------
 
Effects of exchange rate
 differences on cash         (6,677)              9,810                (5,927)
                 -------------------- -------------------- -------------------
 
 (Decrease) increase
 in cash                    (108,170)            662,555            (2,058,935)
Cash, beginning of year    1,281,258            618,703              2,677,638
Cash, end of year       $  1,173,088         $ 1,281,258          $    618,703
                
 
Interest paid        $       58,276       $      59,971        $      66,505
                

See accompanying notes.




                                                            F-6


<PAGE>

                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, 1996 and 1995, the Company maintained cash balances of
approximately $980,000 and
$1,167,000, 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.

Short-term Investments

Effective July 1, 1994 the Company adopted Statement of Financial Accounting
Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This 
statement addresses the
accounting and reporting for investments in debt and equity securities that
 have readily determinable fair
values.

Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability
to hold the securities to maturity. Held-to-maturity securities are stated at
 amortized cost. The amortized
cost of debt securities classified as held-to-maturity is adjusted for
amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income from investments.
Interest and dividends are included in interest income from investments.
 Realized gains and losses on
dispositions are based on the net proceeds and the adjusted book value of the
securities sold, using the
specific identification method. The realized gains and losses flow through the
 Company's statement of income.



At June 30, 1996, the Investment Securities portfolio had been liquidated.



                                                            F-7
<PAGE>




                                  Notes to Consolidated Financial Statements
(continued)

1. Summary of Significant Accounting Policies (continued)

Inventory
Inventory is valued at the lower of cost, determined by the first-in, first-ou
 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.

Impairment of Long-Lived Assets
In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards
(SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for
 Long-Lived Assets to
be Disposed of". The Company will adopt SFAS No. 121 in the year ended
June 30, 1997, and is not
expected to have a material impact.

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 $61,732, $59,410 and $56,892 for the years ended
June 30, 1996, 1995
and 1994, respectively. Accumulated amortization amounted to $259,611 and
 $197,879 at June 30, 1996
and 1995, respectively.

The value of rental and maintenance contracts acquired has been amortized over
the lives of the
contracts, which range from one to four years. The original lives of all
 contracts purchased expired in
1996. This amortization expense amounted to $23,921, $20,004 and $87,422
 for the years ended June
30, 1996, 1995 and 1994, respectively.

Income Taxes
The Company accounts for income taxes under the liability method in accordance
 with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
 (SFAS 109). 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



<PAGE>

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.

                                                            F-8



<PAGE>

                                  Notes to Consolidated Financial Statements 
(continued)



1. Summary of Significant Accounting Policies (continued)

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 no 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 intends to adopt the disclosure provisions of SFAS No. 123, 
"Accounting for Stock-Based Compensation".

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.

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 in prior periods
are included in sales and marketing expenses because extensive engineering
support was required to
complete the sales process. 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.

Reclassification
Certain amounts from the year ended June 30, 1995 have been reclassified to
 conform to the presentation
at and for the year ended June 30, 1996.



<PAGE>

                                                            F-9



<PAGE>

                     Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

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.

2. Inventory
Inventory is comprised of the following:

                                                    June 30

                                             1996              1995


Material and supplies                 $152,721           $123,977
Finished goods                        311,372            342,964
                                      $464,093           $466,941
                                      ================== =================

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

                                            1996               1995

Equipment                            $ 404,994           $ 403,068
Vehicles                             22,754              23,717
                                     427,748             426,785
Accumulated depreciation             (321,242)           (237,269)
                                     106,506             189,516
                                     ------------------- -----------------

Equipment under lease                126,072             148,510
Accumulated depreciation             (39,970)            (25,343)
                                     86,102              123,167
                                     ------------------- -----------------
                                     $ 192,608           $ 312,683
                                     =================== =================

Amortization expense included in depreciation expense, relating to the leased
equipment, amounted to
$20,898, $18,208 and $28,622 for the years ended June 30, 1996, 1995 and 1994,
 respectively.


                                                           F-10




<PAGE>





<PAGE>

                                  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 the years ended June 30, 1996, 1995 and 1994. During 
1995, $1,600 per month
of this override royalty was deferred resulting in an accrued royalty expense 
of $20,800 and $1,600 at
June 30, 1996 and 1995, respectively.

5. Leases
The Company was the lessee of vehicles under capital leases which expired in
1996. The Company leases
its facility under a noncancelable operating lease expiring in 1997. The future
minimum lease payments
under the operating lease as of June 30, 1996 are as follows:

                                                                  Operating
                                                                    lease
Year ending June 30:
   1997                                                         $150,064
   1998                                                         91,302
   1999                                                         8,547
   2000                                                         2,848
                                                                --------------
Total minimum lease payments                                    $252,761
                                                                ==============
The cost of assets under capital leases amounted to $42,964 at June 30, 1995.
 Accumulated amortization
relating to the leased equipment, amounted to $33,011 at June 30, 1995. 
There was no cost of assets
under capital leases at June 30, 1996.
Rent expense amounted to $135,720, $102,439 and $117,366 for the years ended
 June 30, 1996, 1995
and 1994, respectively.
The future minimum lease payments receivable under noncancelable operating 
leases as of June 30, 1996
are as follows:

                                                                  Operating
                                                                    leases
Year ending June 30:
   1997                                                         $141,241
   1998                                                         113,911
   1999                                                         57,832
   2000                                                         6,435
                                                                --------------
Total minimum lease payments receivable                         $319,419
                                                                ==============




<PAGE>


                                                           F-11
                                  Notes to Consolidated Financial Statements 
(continued)

6. Income Taxes

At June 30, 1996, the Company has available operating loss carryforwards for
 United States Federal
income tax purposes of $1,759,354 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 and $386,609 in 2011. 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 an unused operating loss carryforward,
 with no expiration date, for United
Kingdom income tax purposes of $6,545,318 at June 30, 1996. The statutory tax
rates during the years
ended June 30, 1996, 1995 and 1994 are 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:


                                                         June 30

                                                  1996                1995


Deferred tax liabilities:
Total deferred tax liabilities                 $                    $
                                                -                    -
Deferred tax assets:
   Benefit of net operating loss 
carryforwards - U.S.                           598,180              483,477
   Benefit of net operating loss 
carryforwards - U.K.                         1,636,330            1,334,346
   Other                                        58,899               98,114
Total deferred tax assets                    2,293,409            1,915,937
Valuation allowance for 
deferred tax assets                         (2,293,409)          (1,915,937)
Net deferred tax assets                         -                       -
Total net  deferred tax
 assets (liabilities)                          $ -                 $    -
                                             
                                      ==================== ===================

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. The Board also
approved a 1.6 for 1
stock split of the Company's then outstanding common stock. All share and per 
share data were
retroactively adjusted in 1994 to reflect these actions.

In December 1991, the Company raised approximately $2,985,000, net of offering
 costs of $145,000,
through the issuance of 2,640,000 shares of common stock at a price of $.125
per share (including
2,128,000 shares of common stock to its founders in exchange for certain 
patent rights) and 896,000
shares at a price of $3.125 per share.



<PAGE>

In March 1993, the Company raised approximately $3,070,000, net of 
offering costs of $250,000,
through the issuance of 664,000 shares of common stock at $5.00 per share.

                                                           F-12

                                  Notes to Consolidated Financial Statements
(continued)

7. Stockholders' Equity (continued)
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 until July 28, 1997. 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 at any
time after July 1995,
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.


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. Under the Plan, the options granted may not be at
a price of less than 100%
of the fair market value of the common stock at the date of grant as determined
 by the Company's Board
of Directors. 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, althoug
 the Plan may be
terminated at any time.

                                                             Option
                                              Number           price
                                              of shares        per share
 
Options outstanding at June 30, 1993           87,200           $2.81
   Granted                                    194,000          $2.81-$5.00
   Exercised                                    -
   Canceled                                   (83,200)         $2.81-$5.00
Options outstanding at June 30, 1994          198,000
   Granted                                     28,000           $2.13
   Exercised                                      -
   Canceled                                  (136,000)        $2.81-$4.69
                                           ----------------
Options outstanding at June 30, 1995           90,000           $2.13-$5.00
   Granted                                     36,000                 $.28
   Exercised                                    -
   Canceled                                     -

Options outstanding at June 30, 1996          128,000          $  .28-$5.00
                                          
At June 30, 1996, options for 332,000 shares were available for future
grants and 47,200 options were
exercisable.


                                                           F-13
                                  
<PAGE>

Notes to Consolidated Financial Statements (continued)



8. Results of Foreign Operations

Total assets and liabilities and results of operations for IFT, Ltd. were as
follows:


                                                         June 30

                                        
                                           1996                      1995


Total assets                         $ 1,001,869               $ 1,315,409
                               ========================  =====================
Total liabilities                   $    543,080              $    692,803
                               ========================  =====================
Revenues                            $    593,959              $    477,783
                               ========================  =====================
Loss from operations                 $(1,197,933)              $(2,060,986)
                               ========================  =====================

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.










                                                           F-14







<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:  November 5, 1996

        IONIC FUEL TECHNOLOGY, INC.



        By: /s/ Douglas F. Johnston
            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.


NAME                                         TITLES                  DATE


/S/ DOUGLAS F. JOHNSTON
DOUGLAS F. JOHNSTON       CHAIRMAN & CHIEF FINANCIAL         November 5, 1996
                           ACCOUNTING OFFICER


/S/ ANTHONGY J.S. GARNER
ANTHONY J.S. GARNER       EXECUTIVE VICE PRESIDENT-          November 5, 1996
                          OPERATIONS AND DIRECTOR

/S/ PAUL C. O'NEILL
PAUL C. O'NEILL          TREASURER AND DIRECTOR              November 5, 1996























<PAGE>