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, 1998 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  
    No.)                                         incorporation)


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

                                                         1

<PAGE>



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:

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,
1998 - $3,385,405.
        .
Indicate the number of shares  outstanding of each of the registrant's  class of
common stock, as of the latest  practicable  date. At September 16, 1998,  there
were 6,417,655 common shares,  1,200,000  Series A Warrants,  1,172,700 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 12, 1998.

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.

         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 fuel  consumption
ranging from 2.5% to 7%, a reduction in CO2 emissions ranging from 2.5% to 7%, a
reduction in CO emissions  ranging from 6% to 80%, a reduction in NOx  emissions
ranging from 6% to 40%.  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 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.


                                                         3

<PAGE>




MARKETING AND SALES

         Performance Trials

         The  Company  initially  sought  to  performance  test  its  System  in
locations  where a sale 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  Lowenbrau  brewery  by the  German  test
authority TUV and showed that with the IFT System the boiler was able to operate
with less combustion air thereby improving the thermal  efficiency.  A review on
ionisation processes conducted by Portsmouth  University sponsored by the Energy
Technical  Support Unit,  ETSU,  reported that fuel savings could be achieved by
use of the IFT Technology.

             During  1998 the  company  received  further  endorsements  from BP
Energy; BP Chemicals; Degussa AG and Texaco following extensive operation of IFT
Systems at their respective sites.

         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, vehicle manufactures, 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

                                                         4

<PAGE>



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 though dealers who are assigned a specific  territory and compensated
on a commission basis. This marketing method is generally used in Europe.

         During the year the Company signed agreements with Cockerill Mechanical
Industries,  a division of Cockerill Sambre,  Belgium and BP Energy,  the energy
management  division of BP PLC. CMI is the market leader in boiler  servicing in
Belgium BP Energy has 70 customers in the United Kingdom.

         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.



                                                         5

<PAGE>



         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 plans to launch an enhanced
IFT System in 1999  developed to meet the  anticipated  requirements  of the oil
industry, with further developments later in the year following discussions with
UK utility companies.

The Company's  research and  development  costs  increased to $46,248 during the
year ended June 30, 1998 from $3,973 in the year ended June 30, 1997 and $17,532
during the year ended June 30, 1996.  This  increase is due to new models under
development, research and development costs are written off as incurred.

         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.
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

                                                         6

<PAGE>



"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 licence 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.  More  recently  emphasis  has been  placed on
reductions of Carbon  Dioxide (CO2),  often referred to as "Greenhouse  gas" and
International  programs  are being  established  to achieve  reductions  of this
particular gas.

         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 may be 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 working
with  customers  on an  individual  basis  prior to and  during  its  process of
negotiating permits where the System "accepted" by such regulatory agencies.

                                                         7

<PAGE>



         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 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  is
required to achieve the final lower NOx level.

         While  the  Company  believes  that  it's  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

                                                         8

<PAGE>



System.  There can be no assurance that the Company would not be 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 2007, the base
rent for this  facility is  approximately  $7,743 per month for 1998 to December
2000,  with the rent to be  reviewed  for the  January  2001  and  January  2005
periods.

         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 was renewed in December 1997 on the same terms.

         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







                                                         9

<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 Company is not currently in compliance
with all NASDAQ listing requirements.

         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.

         The Class A Warrants expire September 30, 1998.
                                                                    Bid
Period Ended                Type of Security             High              Low

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

September 1997             Common Stock                  3                1 5/8
                           Class A Warrant               3/32             1/16
                           Class B Warrant               5/32             1/8

December 1997              Common Stock                  5 9/16          2 3/8
                           Class A Warrant               9/16             3/32
                           Class B Warrant               9/16             1/8

March 1998                 Common Stock                   4 1/16           3
                           Class A Warrant                7/16             9/32
                           Class B Warrant                3/4              9/32

June 1998                  Common Stock                   3                1 1/4
                           Class A Warrant                1/8              1/16
                           Class B Warrant                5/16             3/32


                                                        10

<PAGE>



         At  September  16,  1998 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>


                                    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
 sh  are                            $    (.46)               $      (.51)             $       (.29)            $       (.19)
Weighted average
 number of                          4,210,668                  5,318,445                  5,400,000                5,401,600
 common shares

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

Total Assets                      $2,601,471                  $4,463,543                  $2,659,185               $1,549,619

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                   705,062
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




                                                              11
</TABLE>

<PAGE>



Statement of Operations                              Year Ended
Data:                                                June 30, 1998

Revenues.........................                    $   437,650
Cost of  Revenues............                             692,952
Operating Expenses..........                           1,106,406
Net (loss).........................                   (1,348,156)
Net (loss) per share..........                       $     (0.22)
Weighted average number
   of common shares.........                          6,251,376
Cash dividend per common
   share...............................                     --

Balance Sheet
 Data:

Total assets..............................           $ 2,427,717
Working capital.......................                 1,323,540
Long-term liabilities.................                   393,376
Total liabilities.........................               701,111
Accumulated deficit.................                 (11,251,823)
Cumulative translation
  adjustment.............................               (133,579)
Stockholders' equity................                   1,726,606




                                                        12

<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 on 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.

In early 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.  Likewise  initial  installations  have been
completed at sites with British Petroleum and Degussa.  An average size refinery
or  petrochemical  plant could utilize IFT  technology  and equipment  valued at
approximately  $1,000,000.  During 1998 marketing and alliance  agreements  were
reached with CMI Servicing, a unit of the Cockerill Sambre Group, one of
Belgium's  largest  companies  and with BP Energy a unit of BP PLC.  In addition
Land Rover, a unit of BMW and Degussa were added as new customers.

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, 1998 and June 30, 1997

         Total  revenues  decreased to  approximately  $438,000  during the year
ended June 30, 1998 from  $629,000 in the fiscal year ended June 30,  1997.  The
net  decrease  relates to a decrease in system  sales to  approximately  $89,000
($261,000  in 1997),  a  decrease  in  rental  income  to  approximately
$349,000  ($368,000 in 1997).  The  decrease  in system  sales  relates to one
purchase in the prior year not  repeated in the current  year.  The  decrease in
rental income  relates to the  phasing out of those  leases  which fell
below an acceptable monthly income.


                                                        13

<PAGE>



         There was a gross loss of approximately  $255,000 during the year ended
June 30, 1998 compared to a loss of approximately  $95,000 during the year ended
June 30, 1997.  The  increased  gross loss  related  primarily to the decline in
revenues  being  greater than the decline in cost of sales,  which are primarily
fixed. Cost of sales decreased  approximately  $30,000 to $693,000 ($723,000 for
fiscal 1997) whereas revenues decreased by approximately $191,000.

         General and administrative expenses increased to approximately $793,000
during the year  ended June 30,  1998 from  approximately  $657,000  in the year
ended June 30, 1997, an increase of $136,000. This increase is primarily due to:
an  increase  of  approximately   $42,000  in  stock  market  related  expenses,
specifically  public relation fees and stock  registration  fees; an increase of
approximately  $18,000 in legal and professional fees and an increase of general
and administrative expenses that had been allocated to cost of sales in 1997 but
not in 1998, due to the reduction in manufacturing activities.

         Sales and  marketing  expenses  increased  to $217,000  during the year
ended June 30, 1998 from  approximately $161,000 during the year ended June 30,
1997.  The increase of $56,000 is primarily  due to  additional marketing
consulting  and staff costs.

         Other income was  approximately $14,000 during the year ended June 30,
1998  compared  to expense of $27,000  during the year ended June 30, 1997,  an
increase of $41,000, primarily due to an increase in interest income as a result
of capital issued during fiscal 1998.

Year ended June 30, 1997 and June 30, 1996

         Total  revenues  increased to  approximately  $629,000  during 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/service  income to  approximately
$368, 000 ($404,000 in 1996), an increase in system sales to approximately $261,
000  ($190,000 in 1996).  The decrease in rental  income is due to rentals being
convened 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.

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
the  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.


                                                        14

<PAGE>

         General and administrative expenses decreased to approximately $657,000
during the year ended June 30, 1997 from  approximately  $1,230,000  in the year
ended 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  administrative as stated
above. Other items in the 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,
199 6. 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 expense of  approximately  $27,000  during the year
ended June 30, 1997  decreased from income of $49,000  during the year ended
June 30, 1996, a decrease of $76,000  primarily  due to the use of funds in 
operations of the Company and reduced interest income.

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 net proceeds of $1,552,116 and on
March 31, 1998 the Company  sold an  additional  147,800  shares of common stock
with gross proceeds of $300,750.

         Net cash used in operations was  approximately  $1.2 million,  $900,000
and $1.3 million for the years ended June 30, 1998, 1997 and 1996, respectively.
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,  $435,000 and $1.3 million at
June 30, 1998, 1997 and 1996, respectively. Fluctuations in working capital have
been primarily due to  fluctuations in cash,  decreases in accounts  payable and
other accruals.

         The Company  liquidated its U.S. Treasury  investments  during the year
ended June 30, 1996. Capital expenditures  amounted to approximately $88,000 and
$29,000 during fiscal years 1998 and 1997,  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.

         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.


                                                        15

<PAGE>


         The  Company  believes  that  the  proceeds  from the  above  offerings
together  with  anticipated  funds from  operations,  will satisfy the company's
working capital  requirements and capital  expenditures through fiscal 1999. The
Company intends to focus its operations  primarily 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, Austria and Germany). With
the recent  introduction of the European common currency,  the euro, the Company
also  expects to invoice  revenues  in this  currency  for those sales to States
within Europe who have joined the European Monetary System. Revenues invoiced to
customers  within the United  Kingdom  will  continue to be in Pounds  Sterling.
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, 1998 and 1997, currency  fluctuations were not significant and were not
an influence on the Company's revenues and expenses. Currently, the Company does
not enter into derivative contracts to hedge currency risks.

         During the year ended June 30, 1998 the average  rate of exchange  used
to translate  revenues and expenses  denominated in Pounds Sterling has remained
at approximately 1.65 U.S. dollars to 1 Pound Sterling, consistent with 
the year ended June 30, 1997.

Inflation

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

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


                                                        16

<PAGE>



Company's  products,  risks  associated  with the  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.

Impact of Year 2000

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits rather than four to define the  applicable  year.  Any computer
programs that have time or date sensitive  software may recognize a date defined
as "0(Y' as being the Year 1900  rather  than the Year 2000.  This  could  cause
system failure,  miscalculations or other disruptions of operations,  including,
among other things an inability to process transactions,  obtain supplies or raw
materials from vendors or otherwise engage in normal business activities.

         The  Company  has  reviewed  the  impact  of the Year  2000 on both the
hardware and software applications affecting the Company's operations.  Based on
such  review.  management  does not  expect  the cost of any  required  software
changes to have a material  impact on the Company's  operations and such changes
can be  implemented  prior to the Year 2000 in the  normal  course of  business.
Management cannot predict the impact of the Year 2000 on its vendors business or
whether such impact will have a material effect on the Company's operations.


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




                                                        17

<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, 1998 and 1997                      F-2

Consolidated Statement of Operations - Years Ended                       F-3
June 30, 1998, 1997 and 1996

Consolidated Statement of Stockholders' Equity -                         F-4
Years Ended June 30, 1998, 1997 and 1996

Consolidated Statement of Cash Flows - Years Ended                       F-5
June 30, 1998, 1997 and 1996

Notes to Consolidated Financial Statements                               F-6

 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.




                                                    18

<PAGE>



(3)   Exhibits

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

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

       23.1     Consent of Independent Auditors

  27   Financial Data Schedule

B.   Reports on Form 8-K

Form 8-K 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 8-K 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.




                                                    19

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



                                              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, 1998 and 1997,  and the  related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
three years in the period  ended June 30,  1998.  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, 1998 and 1997, and the consolidated results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  June  30,  1998,  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
presents fairly in all material respects, the information set forth therein.



                                                 /s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 28, 1998


                                             F-1

<PAGE>

                                                Ionic Fuel Technology, Inc.

                                                Consolidated Balance Sheet

                                                                                                    June 30
                                                                                            1998                1997
                                                                                     ---------------------------------------
                                                                                     ---------------------------------------
Assets
Current assets:
   Cash and cash equivalents (Note 1)                                                    $  1,082,872        $    191,629
   Trade accounts receivable                                                                   66,839              59,420
   Inventory (Note 2)                                                                         348,496             404,774
   Prepaid expenses                                                                           133,068             137,676
                                                                                     ---------------------------------------
Total current assets                                                                        1,631,275             793,499

Equipment and vehicles, net (Notes 1 and 3)                                                   245,551             153,117

Patents, net (Notes 1 and 4)                                                                  550,891             603,003
                                                                                     =======================================
Total  assets                                                                            $  2,427,717         $ 1,549,619
                                                                                     =======================================
                                                                                     =======================================

Liabilities and stockholders' equity
 Current liabilities:
   Accounts payable                                                                      $     87,324       $      87,155
   Accrued expenses                                                                           115,920             162,155
   Provisions for warranties and returns                                                       20,272              16,380
   Accrued royalty - due to officer (Note 4)                                                    4,800              40,000
   Current portion of royalty agreement (Note 4)                                               21,464              18,720
   Accrued salary, benefits and payroll taxes                                                  19,834              19,419
   Current portion of capital lease obligations (Note 5)                                       38,121              14,984
                                                                                     ---------------------------------------
                                                                                     ---------------------------------------
Total current liabilities                                                                     307,735             358,813


Long-term liabilities (Notes 4 and 5):
   Long-term obligations less current portion                                                  68,362                  -
   Other long-term liabilities                                                                325,014             346,249
                                                                                     ---------------------------------------
Total long-term liabilities                                                                   393,376             346,249

Commitments and contingencies (Note 5)

Stockholders' equity (Note 7): Common stock, $.01 par value:
     20,000,000 shares authorized; issued and outstanding 6,444,955 shares and
     5,401,600 shares, respectively (Note 7)                                                   64,450              54,016
   Capital in excess of par value                                                          13,047,558          10,837,407
   Accumulated deficit                                                                    (11,251,823)         (9,903,667)
   Cumulative translation adjustment (Note 1)                                                (133,579)           (143,199)
                                                                                     ---------------------------------------
Total stockholders' equity                                                                  1,726,606             844,557
                                                                                     ---------------------------------------
                                                                                     =======================================
Total liabilities and stockholders' equity                                               $  2,427,717         $ 1,549,619
                                                                                     =======================================


See accompanying notes.


                                         F-2
<PAGE>

                                                Ionic Fuel Technology, Inc.

                                           Consolidated Statement of Operations





                                                                                     Year ended June 30
                                                                        1998                1997                1996
                                                                 -----------------------------------------------------------

Revenues (Note 1):
   Sales                                                            $      88,870        $    260,679       $    190,443
   Rentals                                                                348,780             368,015            403,516
                                                                 -----------------------------------------------------------
Total revenues                                                            437,650             628,694            593,959

   Sales                                                                  205,484             184,063            116,818
   Rentals                                                                487,468             539,264            420,292
                                                                 -----------------------------------------------------------
Cost of revenues                                                          692,952             723,327            537,110
                                                                 -----------------------------------------------------------
                                                                         (255,302)            (94,633)            56,849

Operating expenses:
   General and administrative                                             792,690             657,133          1,229,969
   Sales and marketing                                                    217,468             161,418            361,644
   Royalty charges                                                         60,000              60,000             60,000
   Research and development                                                36,248               3,973             17,532
                                                                 -----------------------------------------------------------
                                                                        1,106,406             882,524          1,669,145
                                                                 -----------------------------------------------------------
Loss from operations                                                   (1,361,708)           (977,157)        (1,612,296)

Other income (expense):
   Interest income                                                         67,060              28,801            106,905
   Interest expense                                                       (53,508)            (56,069)           (58,276)
                                                                 -----------------------------------------------------------
                                                                           13,552             (27,268)            48,629
                                                                 -----------------------------------------------------------

Net (loss)                                                            $(1,348,156)        $(1,004,425)     $(1,563,667)
                                                                 ===========================================================

Net (loss) per share - basic and diluted (Note 1)                 $         (0.22)   $          (0.19)   $        (0.29)
                                                                 ============================================================

Weighted average number of common shares
   (Note 1)                                                             6,251,376           5,401,600          5,400,000
                                                                 ===========================================================

See accompanying notes.

                                                  F-3
<PAGE>


                           Ionic Fuel Technology, Inc.

                 Consolidated Statement of Stockholders' Equity





                                                          Common Stock         Capital in                    Cumulative
                                                  -----------------------------
                                                                      Par      Excess of     Accumulated     Translation
                                                      Shares         Value     Par Value     Deficit         Adjustment       Total
                                                  ---------------------------------------------------------------------------------

Balance at June 30, 1995                             5,400,000      $54,000    $10,768,973  $(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                             5,400,000       54,000     10,768,973   (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                                    68,000
     Exercise of stock options                           1,600           16           434                                       450
     Translation adjustment                                                                                     7,621         7,621
                                                  ---------------------------------------------------------------------------------
Balance at June 30, 1997                             5,401,600       54,016    10,837,407    (9,903,667)     (143,199)      844,557
     Net loss                                                                                (1,348,156)                 (1,348,156)
     Exercise of stock options and warrants
                                                       148,722        1,487       367,981                                   369,468
     Sale of stock                                     894,633        8,947     1,842,170                                 1,851,117
     Translation adjustment                                                                                    9,620          9,620
                                                  ---------------------------------------------------------------------------------
Balance at June 30, 1998                             6,444,955      $64,450   $13,047,558   $(11,251,823)  $(133,579)   $ 1,726,606
                                                  ================================================================================



See accompanying notes.

                                              F-4

<PAGE>

                           Ionic Fuel Technology, Inc.

                      Consolidated Statement of Cash Flows




                                                                                    Year ended June 30
                                                                       1998                1997                1996
                                                                -----------------------------------------------------------

Operating activities
Net (loss)                                                           $(1,348,156)        $(1,004,425)        $(1,563,667)
Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities:
     Depreciation                                                         80,899              66,241             111,316
     Amortization                                                         64,155              62,661              85,653
     Non cash compensation                                                    -               16,000                  -
   Changes in operating assets and liabilities:
       Accounts receivable                                                (7,178)             26,128             112,352
       Other receivables                                                 (13,203)              8,674               2,311
       Inventory                                                         152,547             121,136              (9,058)
       Prepaid expenses                                                   25,247              19,211              61,750
       Other assets                                                       (6,882)              2,195              33,374
       Accounts payable and accrued expenses                            (100,674)           (208,793)           (174,440)
                                                                -----------------------------------------------------------
Net cash (used) in operating activities                               (1,153,245)           (890,972)         (1,340,409)

Investing activities
Acquisition of patents and license                                       (12,043)            (25,885)            (18,703)
Acquisition of equipment                                                 (88,084)            (29,239)                  -
Accretion of interest                                                          -                  -              (13,949)
Proceeds from maturity of investments                                          -                  -            1,300,000
                                                                -----------------------------------------------------------
Net cash (used in) provided by investing activities                     (100,127)            (55,124)          1,267,348

Financing activities
Principal payments on capital leases                                     (11,232)                 -             (14,707)
Principal payments under licensing agreement                             (18,393)            (15,931)            (13,725)
Net proceeds from issuance of stock                                    2,166,085                 450                 -
                                                                -----------------------------------------------------------
Net cash provided by (used in) financing activities                    2,136,460             (15,481)            (28,432)
                                                                -----------------------------------------------------------

Effects of exchange rate differences on cash                               8,155             (19,882)             (6,677)
                                                                -----------------------------------------------------------

Increase (decrease) in cash                                              891,243            (981,459)           (108,170)
Cash, beginning of year                                                  191,629           1,173,088           1,281,258
                                                                ===========================================================
Cash, end of year                                                    $ 1,082,872        $    191,629        $  1,173,088
                                                                ===========================================================

Interest paid                                                      $      53,508       $      56,069      $       58,276
                                                                ===========================================================



See accompanying notes.

                                                 F-5
<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, 1998 and 1997, the Company maintained cash balances of approximately
$1,080,000  and  $69,000,  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-6
<PAGE>

                           Ionic Fuel Technology, Inc.

             Notes to Consolidated Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Intangible Assets

Patents are carried at acquisition 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  $64,155,  $62,661 and $61,732 for the years ended June 30,
1998, 1997 and 1996, respectively. Accumulated amortization amounted to $376,423
and $322,272 at June 30, 1998 and 1997, respectively.  The carrying value of the
patents  are  reviewed  by  management  on a  periodic  basis and when facts and
circumstances  suggest the value may be impaired.  If this review indicates that
the  carrying  amounts  will  not be  recoverable,  as  determined  based on the
undiscounted  cash flows of revenues  generated as a result of such patents over
the remaining amortization period, management will reduce the carrying amount by
the estimated shortfall in cash flows.

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 for the year ended June 30, 1996.

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,  accounts payable and capital
lease obligations and other long-term liabilities: The carrying amounts reported
in the  balance  sheet  for  cash  and cash  equivalents,  accounts  receivable,
accounts payable and capital lease  obligations and other long-term  liabilities
approximate their fair value.

Stock Compensation

The Company applies the  recognition  and  measurement  provisions of Accounting
Principles  Board  (APB)  Opinion  No.  25,  "Accounting  for  Stock  Issued  to
Employees"  and the  disclosure  provisions  of SFAS No.  123,  "Accounting  for
Stock-Based Compensation" in accounting for stock options.


                                             F-7
<PAGE>
                           Ionic Fuel Technology, Inc.

             Notes to Consolidated Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Per Share Data

In February 1997, the Financial  Accounting  Standards  Board (FASB) issued SFAS
No. 128  "Earnings  per Share"  ("Statement  128").  Statement  128 replaced the
previously  reported primary and fully diluted earnings per share with basic and
diluted earnings per share.  Unlike primary  earnings per share,  basic earnings
per share excludes any dilutive  effects of options,  warrants,  and convertible
securities. The Company's net loss per share calculated under the basic earnings
per share  method is the same as under the primary  earnings  per share  method.
Diluted  earnings per share is very  similar to the  previously  reported  fully
diluted earnings per share. As a result of having incurred losses,  all dilutive
securities  have been omitted from the calculation of diluted net loss per share
since their inclusion would be anti-dilutive.  Therefore,  basic and diluted net
loss per share are the same for all  periods.  Given this set of facts,  the net
loss per share amounts as previously reported did not require restatement.

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

Sales are  recognized  upon shipment of the equipment and are recorded net of an
allowance for returns.  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.

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 employees caused by the maturing of the Company's
system from a developmental state to a mature product.

New Accounting Pronouncements

During 1997, the FASB issued SFAS No. 130, "Reporting  Comprehensive  Income"
and SFAS No. 131,  "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 is effective  for the first  quarter of fiscal 1999,
while SFAS No. 131 is effective  for year end financial  reporting in fiscal
1999 and on an interim basis thereafter. Both of these pronouncements require
additional disclosures and the Company expects no material impact upon adoption.

                                            F-8

<PAGE>

                           Ionic Fuel Technology, Inc.

             Notes to Consolidated Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Reclassification

Certain amounts at years ended June 30, 1997 and 1996 have been  reclassified to
conform to the presentation at the year ended June 30, 1998.

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
                                           1998              1997
                                     -----------------------------------
                                     -----------------------------------


Material and supplies                      $149,367          $161,817
Finished goods                              199,129           242,957
                                     ===================================
                                           $348,496          $404,774
                                     ===================================

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
                                           1998              1997
                                     -----------------------------------
                                     -----------------------------------

Equipment                                   $501,465         $ 440,540
Vehicles                                     114,992            35,015
                                     -----------------------------------
                                             616,457           475,555
Accumulated depreciation                    (403,648)         (394,708)
                                     -----------------------------------
                                             212,809            80,847
                                     -----------------------------------

Equipment under lease                        109,268           119,667
Accumulated depreciation                     (76,526)          (47,397)
                                     -----------------------------------
                                              32,742            72,270
                                     -----------------------------------
                                            $245,551         $ 153,117
                                     ===================================


Depreciation  expense,  relating to the leased  equipment,  amounted to $29,129,
$15,247  and  $20,898  for the  years  ended  June  30,  1998,  1997  and  1996,
respectively.


                                                   F-9
<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  using an interest rate of 15% per annum.  The
remaining balance of this obligation,  less amounts currently due ($21,464),  is
included in other long-term obligations and has the following maturities:

Year ending June 30:
   2000                                                           $  25,246
   2001                                                              29,281
   2002                                                              33,989
   2003                                                              39,472
   Thereafter                                                       197,026
                                                               -------------
                                                                   $325,014
                                                               =============

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.

The Company's  Chairman,  Douglas F. Johnston,  receives an override  royalty of
$5,000 per month until the last of the  patents  expires in 2007.  This  expense
amounted to $60,000,  for each of the years ended June 30, 1998,  1997 and 1996.
Commencing  in 1995,  $1,600 per month of this  override  royalty  was  deferred
resulting in an accrued  royalty  expense of $4,800 and $40,000 at June 30, 1998
and 1997, respectively (see Note 7).

5. Commitments and Contingencies

Leases

The Company is the lessee of vehicles under capital leases which expire in 2001.
The Company leases its facility under a  noncancelable  operating lease expiring
in 2007. The future minimum lease payments under operating and capital leases as
of June 30, 1998 are as follows:

                                                               Operating leases  Capital leases
                                                               ----------------------------------
                                                               ----------------------------------
Year ending June 30:
   1999                                                           $   173,848        $  36,747
   2000                                                               167,730           36,747
   2001                                                               110,526           27,942
   2002                                                                98,442            3,566
   2003                                                                98,442            1,482
   Thereafter                                                         418,376                -
                                                               ----------------------------------
Total minimum lease payments                                       $1,067,364         $106,484
                                                               ==================================

The cost of assets under capital leases amounted to $106,484 and $15,247 at June
30, 1998 and 1997.

Rent  expense  amounted to  $143,873,  $166,118 and $135,720 for the years ended
June 30, 1998, 1997 and 1996, respectively.


                                                F-10
<PAGE>

                           Ionic Fuel Technology, Inc.

             Notes to Consolidated Financial Statements (continued)



5. Commitments and Contingencies (continued)

The future  minimum lease  payments  receivable  under  noncancelable  operating
leases as of June 30, 1998 are as follows:

                                                                 Operating
                                                                  leases
                                                               --------------
                                                               --------------
Year ending June 30:
   1999                                                            $43,794
   2000                                                              1,147
                                                               --------------
Total minimum lease payments receivable                            $44,941
                                                               ==============

Long-Term Obligations

Long-term obligations as of June 30, 1998, consist of a 10% chattel note payable
over 36 months that began in December 1997, plus various capital leases.

6. Income Taxes

At June 30, 1998,  the Company has available  operating loss  carryforwards  for
United States federal  income tax purposes of $2,434,353  which are available to
offset future U.S.  taxable  income.  The losses expire in varying  amounts from
2007 through 2013 and are subject to limitations  on utilization  resulting from
prior changes in the  ownership of the Company.  The  Company's  subsidiary  has
unused operating loss carryforwards, with no expiration date, for United Kingdom
income tax purposes, of $8,758,145 at June 30, 1998.

Significant components of the Company's deferred tax assets are as follows:

                                                                                     June 30
                                                                             1998               1997
                                                                      --------------------------------------

Deferred tax assets:
   Benefit of net operating loss carryforwards - U.S.                     $    827,680       $    695,353
   Benefit of net operating loss carryforwards - U.K.                        1,839,210          1,854,745
   Depreciation in excess of capital allowances                                 31,658             16,904
   Other                                                                        15,608             41,477
                                                                      --------------------------------------
Total deferred tax assets                                                    2,714,156          2,608,479
Valuation allowance                                                         (2,714,156)        (2,608,479)
                                                                      ======================================
Total net deferred tax assets (liabilities)                           $           -            $  -
                                                                      ======================================



                                                   F-11

<PAGE>
                           Ionic Fuel Technology, Inc.

             Notes to Consolidated Financial Statements (continued)



7. Stockholders' Equity

On July 28, 1994, the Company issued  1,200,000  units,  each unit consisting of
one share of common  stock,  par value $0.01 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  September 30, 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 $0.01 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 expenses of $1,231,586.

On July 14, 1997, the Company  completed a private  offering of its common stock
and Series C warrants at a price of $2.25 per unit.  The Company  issued 771,833
units.  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  77,183 Series C Warrants to their
broker in  exchange  for the  services  provided.  The  Company  received  total
proceeds of $1,552,116,  net of offering expenses of $184,508. In December 1997,
97,722 of the Series C warrants were exercised.

On March 31, 1998 the Company  completed an offering of 147,800 shares of common
stock, par value $0.01 per share, at a price of $2.50 per share. Concurrent with
the offering,  25,000  warrants  issued in April 1997 to a financial  consultant
(see   discussion   below)  were  exercised  at  a  price  of  $2.25.   Also,  a
founder/officer  of the Company who  receives an override  royalty (see Note 4),
received 21,800 shares in consideration of $54,500 of accrued  royalties owed to
him by the Company.  The Company  raised  $300,750  net of offering  expenses of
$8,000 and the accrued royalty liability of $54,500.

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
granted to directors are exercisable  immediately.  As of June 30, 1998,  30,000
director  options were granted and  exercisable.  All  non-director  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.

Pro forma information regarding net income and net loss per share is required by
SFAS No. 123,  which also requires that the  information be determined as if the
Company had accounted for its employee stock options granted  subsequent to June
30, 1995 under the fair value method of that Statement.  The fair value of these
options was estimated at the date of grant using a Black-Scholes  option pricing
model with the following  weighted-average  assumptions for the years ended June
30, 1998, 1997 and 1996,  respectively;  risk-free  interest rates of 5.8%, 6.7%
and 6.0%;  volatility  factors of the  expected  market  price of the  Company's
common stock of 93%, 129% and 164% and a weighted-average  expected life for the
options of 5, 10 and 10 years and no anticipated dividends.


                                          F-12


<PAGE>

                                                                 Ionic Fuel Technology, Inc.

             Notes to Consolidated Financial Statements (continued)



7. Stockholders' Equity (continued)

The  Black-Scholes  option pricing model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option  pricing  models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different  from those of traded  options and because  changes in the  subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
and warrants are  amortized to expense over the vesting  periods.  The Company's
pro  forma  net loss  would  have  been  approximately  $1,396,993,  $1,010,203,
$1,563,937 and pro forma net loss per share would have been $(0.22), $(0.19) and
$(0.29) for the years ended June 30, 1998, 1997 and 1996, respectively.

In accordance  with the  provisions  of SFAS No. 123, the pro forma  disclosures
include  only the effect of stock  options  granted in the years  ended June 30,
1998, 1997 and 1996.  These pro forma effects may not be  representative  of the
effects of SFAS No. 123 on future  years  because of the fact that  options vest
over several years and new grants generally are made each year.

The  following  presents a summary of the  Company's  stock option  activity and
related information:

                                                                                                         Weighted
                                                                                                         average
                                                                                      Option price    exercise price
                                                                          Number        per share       per share
                                                                        of shares
                                                                      ------------------------------------------------
                                                                      ------------------------------------------------

Options outstanding at June 30, 1995                                       62,000     $2.83-$5.00         $4.62
   Granted                                                                 64,000     $  .28-$.63         $ .43
   Exercised                                                                   -
   Canceled                                                                    -
                                                                      ---------------
Options outstanding at June 30, 1996                                      126,000    $  .28-$5.00         $2.49
   Granted                                                                206,000     $1.06-$4.00         $2.49
   Exercised                                                               (1,600)        $.28           $  .28
   Canceled                                                                    -
                                                                      ---------------
Options outstanding at June 30, 1997                                      330,400    $  .28-$5.00         $2.50
   Granted                                                                 96,000      $1.75-$4.00        $3.44
   Exercised                                                              (26,000)    $ .28- $1.34       $  .96
   Canceled                                                               (18,000)    $ .28- $1.06       $  .79
                                                                      ===============
Options outstanding at June 30, 1998                                      382,400     $ .28- $5.00        $2.92
                                                                      ===============

At June 30, 1998, options for 67,600 shares were available for future grants and
237,600 options were exercisable.

                                         F-13
<PAGE>
                           Ionic Fuel Technology, Inc.

             Notes to Consolidated Financial Statements (continued)



7. Stockholders' Equity (continued)

The  following  table   summarizes   information   concerning   outstanding  and
exercisable options,  excluding the 150,000 options issued to a financial public
relations firm, as of June 30, 1998:

                                Options Outstanding                                            Options Exercisable
--------------------- ----------------------------------------- -------------------- -----------------------------------------
--------------------- -------------------- -------------------- -------------------- -------------------- --------------------
                                            Weighted-Average
                                                Remaining
                                            Contractual Life     Weighted-Average                          Weighted-Average
 Range of Exercise    Number Outstanding       (in years)         Exercise Price     Number Exercisable     Exercise Price
       Prices
--------------------- -------------------- -------------------- -------------------- -------------------- --------------------

    $0.01 - $1.00             26,400               7.39                 $0.41               13,600                $0.44
    $1.01 - $2.00             56,000               8.86                 $1.36               20,400                $1.53
    $2.01 - $3.00             20,000               5.00                 $2.81                4,000                $2.81
    $3.01 - $4.00             72,000               9.50                 $4.00                    -                    -
    $4.01 - $5.00             58,000               5.37                 $4.74               49,600                $4.74
===================== ==================== ==================== ==================== ==================== ====================
                             232,400               7.85                 $2.87               87,600                $3.24
===================== ==================== ==================== ==================== ==================== ====================

The  weighted-average  fair value of options granted during the years ended June
30, 1998, 1997 and 1996 was $2.56, $1.10 and $0.09, respectively.

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 each of the years ended June
30, 1998 and 1997, the Company has recognized  compensation expense for the fair
value of these options of $10,000.

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 on 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 $24,000
and  $6,000  was  recognized  for the  years  ended  June  30,  1998  and  1997,
respectively. As noted above, 25,000 warrants were exercised at a price of $2.25
per warrant as part of the March 1998 offering.

                                                F-14
<PAGE>
                           Ionic Fuel Technology, Inc.

             Notes to Consolidated Financial Statements (continued)



8. Results of Foreign Operations

Geographic operations of the Company are as follows:

                                 Adjustments and
                                  Eliminations
                                                  United States          Europe                              Consolidated
                                                -----------------------------------------------------------------------------
Year ended June 30, 1998
Total revenue                                   $               -        $   427,097     $        10,553       $    437,650

Loss from operations                                     (368,189)          (993,519)                 -          (1,361,708)
Other income (expense), net                                                                                          13,552
                                                                                                          -------------------
Net (loss)                                                                                                       (1,348,156)

Identifiable assets                                    11,852,985          1,524,899         (10,950,167)         2,427,717

Year ended June 30, 1997
Total revenue                                                  -             601,408              27,286            628,694

Loss from operations                                     (263,664)          (709,309)             (4,184)          (977,157)
Other income (expense), net                                                                                         (27,268)
                                                                                                          -------------------
Net (loss)                                                                                                       (1,004,425)

Identifiable assets                                    10,039,427            826,780          (9,316,588)         1,549,619

Year ended June 30, 1996
Total revenue                                                  -             593,959                   -            593,959

Loss from operations                                     (449,066)        (1,197,933)             34,703         (1,612,296)
Other income (expense), net                                                                                          48,629
                                                                                                          -------------------
Net (loss)                                                                                                       (1,563,667)

Identifiable assets                                    10,266,606          1,001,869          (8,609,290)         2,659,185


                                              F-15


<PAGE>
                     SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                                               Additions/Deductions

                                             Balance at         Charged to   Write-Offs
Description                                  Beginning of       Costs and    Net of 
                                             Period             Expenses     Recoveries          Balance at
                                                                                                 End of
                                                                                                 Period


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

For the year ended June 30, 1998
   Allowance for doubtful accounts         $    -                $  1,714      $  1,714       $   -
   Inventory reserve                        $94,962              $     710     $12,332        $83,340


                                                         
<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 28, 1998

                                            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.

Name                                        Titles                                   Date



Douglas F. Johnston                Chairman & Chief Financial                        September 28, 1998
                                      Officer



Anthony J.S. Garner                President, Chief Executive                        September 28, 1998
                                      Officer and Director


Frank J. Hollendoner               Director                                          September 28, 1998



Henry W. Sullivan                  Director                                          September 28, 1998


</TABLE>