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

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                  -------------
                                   FORM 10-KSB

                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 1996           Commission File No. 0-21169


                     IMPERIAL PETROLEUM RECOVERY CORPORATION
                  --------------------------------------------
                  (Name of Issuer as Specified in its Charter)


             Nevada                                          76-0529110
---------------------------------                      ---------------------
 (State or Other Jurisdiction of                          (I.R.S. Employer
 Incorporation or Organization)                          Identification No.)


     15311 Vantage Parkway West
              Suite 160
           Houston, Texas                                        77032
----------------------------------------                    --------------
(Address of Principal Executive offices)                      (Zip Code)


                                 (281) 987-2828
                ------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)


         Securities Registered under Section 12(b) of the Exchange Act:
                                      None

         Securities Registered under Section 12(g) of the Exchange Act:

                     Common Stock, par value $.001 per share
                     ---------------------------------------
                                (Title of Class)

Check if the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
as the issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |_| No |X|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this report and no such disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|

The issuer's revenues for its most recent fiscal year were $0.

The aggregate market value of shares of Common Stock held by non-affiliates
(based on the October 31, 1997 average of bid and asked prices) was
approximately $6.8 million.

As of October 31, 1997, 13,101,421 shares of the issuer's Common Stock were
outstanding.

Transitional small business disclosure format:  |_| Yes |X| No

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


<PAGE>


                                     PART I

ITEM 1.        DESCRIPTION OF BUSINESS

General

        Imperial Petroleum Recovery Corporation (the "Company" or "Imperial") is
a development stage company committed to developing and marketing a proprietary
oil sludge remediation process and equipment that use high energy microwaves to
separate water, oil and solids. The Company calls the process "MST," which
stands for "Microwave Sludge Treatment," and believes the process can provide an
effective, ecologically sound and economical method of processing crude oil
sludge and emulsions. The process recovers usable hydrocarbon compounds from
material that otherwise would be of little value or require disposal. Based on
prototype testing and demonstrations, the Company believes that approximately
50% to 90% of the crude oil recovered through the remediation process can be
reclaimed for sale.

        In December 1996, new management assumed control of day-to-day
operations of the Company. The new management consists of Henry Kartchner,
Chairman and Chief Executive Officer, and C. Brent Kartchner, Secretary/Vice
President of Operations. The Company's new management has implemented a number
of cost-cutting initiatives aimed at continuing to fund the Company's operations
from existing resources and reducing the level of revenue required to operate
the Company. See "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

        The Company has not yet recognized sales revenues. It is concentrating
its marketing efforts on North America. Approximately eight potential customers
are awaiting the results of field test trials before determining whether to
enter into contracts to acquire the Company's products.

        Internationally, the Company is negotiating with entities in Kuwait, the
Netherlands and Venezuela to use the MST process to clean up stored sludge or
emulsions.

Current Product Offerings

        The Company currently has one product offering, the MST-1000, and
intends to offer another product, the MST-500. The model number of each unit
represents the average number of barrels of sludge the unit can process in a
24-hour period. The MST-1000 has been designed primarily for use by oil
refineries and other waste oil processors that have operable crude oil
distillation capacities of between 5,000 and 100,000 barrels per day. Up to
eight MST-1000 units can be joined to work together. The MST-500 has been
designed primarily for use at small refineries and clean-up sites, many of which
are located in developing nations. The Company intends also to offer an MST-2000
and an MST-4000 for larger field applications. These products would consist of,
respectively, two and four MST-1000 units joined together.


                                      -2-

<PAGE>


        The core of an MST process consists of a microwave generator, a series
of waveguides, tuners, a computer and computer control instrumentation plus the
actual applicator, where the sludge/emulsion is subjected to microwave energy.

        The Company intends to assemble MST units in its Houston, Texas
facility, using components procured primarily from outside subcontractors and
vendors. The Company intends to manufacture a few key items itself and to build
to order to fit each customer's needs. Each unit will vary in size and
sophistication in the software modules.

        The Company offers its products and systems for lease directly to end
users. In certain overseas markets, the Company offers its products to existing
oil sludge processors through geographically-specific marketing partnerships.
After leasing, the MST products are to be operated by the customer's or
partner's personnel, after receiving technical training from the Company.
Imperial intends to have technicians available worldwide to service the
Company's products and to monitor and periodically check products in the field.
Each MST System is to be protected by a security system to assure that the
Company and its partners maintain control of the system and that any royalty
payments are calculated accurately.

Research and Development

        Principals of the Company began developing the MST process in 1995.
Testing of a prototype unit began in September 1996. The Company has modified
the MST process based on its testing and on reactions to presentations and
demonstrations made to potential customers and technical experts. Modifications
have greatly reduced maintenance costs of MST units.

Marketing

        The Company markets its products primarily for remediation of crude oil
sludge and emulsions produced in connection with oil production and refining.
There are approximately 700 oil refineries worldwide, all of which are potential
customers of the Company. The United States has 111 operable petroleum
refineries. The Company is focusing its marketing efforts on refineries located
in the United States and Canada. The Company intends to form strategic alliances
with foreign partners in order to penetrate international markets. The Company
already has formed alliances with the following:

        o   DuraTherm, Inc., an environmental services and technology firm that
            provides thermal desorption, resource recovery, recycling, and waste
            minimization for hydrocarbon contaminated materials, primarily for
            the petroleum and petrochemical industries; and

        o   Golden Shahin for General Trading and Contracting Co., a Kuwaiti
            company that provides logistical support for the successful
            completion of the Kuwait Oil Lakes Remediation Project.


                                      -3-

<PAGE>

        The Company believes that the MST process also can be deployed in
shipping lanes and ports to treat sludge from crude oil tankers as they off-load
ballast and clean their tanks before loading. The Company intends to increase
efforts to market the system for this application in the future.

Competition

        The Company's competitors are firms that use either incineration or
centrifuge recovery systems to process oil sludge and emulsions. Incineration,
which is still prevalent in developing nations, is easy, low in cost and does
not require sophisticated technology if the process is not subject to
environmental rules and procedures. If done under environmental rules and
regulations, however, incineration is costly. In addition, most incineration
systems destroy the sludge in a way that does not produce usable hydrocarbon
byproducts.

        Use of a centrifuge recovery system requires high heat and creates vapor
problems. Fires and explosions are possible, posing a danger to personnel as
well as to the environment. Complete recovery of oil seldom is achieved and
requires the use of chemicals, at additional cost. Moreover, the chemicals are
difficult to eliminate from the sludge, and eventually travel back to the
refinery or into the wastewater system.

        The Company believes that the MST process offers significant competitive
advantages over competing oil sludge remediation processes. The Company believes
the MST process is more effective, ecologically more sound, and more economical
than competing systems. In addition, fewer environmental problems appear to be
associated with the MST process. The cost of using the MST process is comparable
to centrifuging, which is between $3 and $15 a barrel plus $.25 to $1.50 a
barrel if chemicals are used. The Company expects the MST process to recover 50%
to 90% of the oil, while centrifuging usually would recover less. The Company
believes that the sale value of the hydrocarbons recovered by the MST process
can offset a portion of the cost of operation.

        The Company's competitors include both very large companies engaged in
oil sludge remediation and small operators with portable burners who incinerate
oil sludge and move from site to site.

        The Company's largest competitors are:

        o   Waste Management, Inc., which handles bio-remediation, liquid
            solidification, and waste transportation, is a nationwide company
            with 25 operating units in the Texas, Oklahoma, and Louisiana
            regions.


                                      -4-

<PAGE>


        o   DuraTherm, Inc., which is the nation's leader in hazardous solid
            waste handling, processing and recovery, has a $20 million facility
            in Houston, Texas that receives products from all over North
            America./1

        o   Alfa Laval, a manufacturer of remediation equipment, has a worldwide
            coverage of centrifuges and other separation equipment, plus a
            service company in most oil producing regions.

        Many of the companies with which the Company competes are substantially
larger and have substantially greater resources and market recognition and
broader capabilities than the Company. It is also likely that other competitors
will emerge in the future. As a consequence, there is no assurance that the
Company will be able successfully to compete in the marketplace.

Protection of Intellectual Property

        The technology used in the MST process is proprietary. The Company does
not now own patents to protect its design. Proprietary rights relating to the
Company's products and processes generally will be protected from unauthorized
use by third parties only to the extent that they are covered by valid and
enforceable patents or are maintained in confidence as trade secrets. The
Company has filed a patent application relating to its design and may seek
additional patents in the future covering patentable results of research. There
can be no assurance that any patent applications filed by the Company will
result in patents being issued or that any patents that may be owned or licensed
by the Company in the future will afford protection against competitors with
similar technology, will not be infringed upon or designed around by others or
will not be challenged and held to be invalid or unenforceable. In the absence
of patent protection, the business of the Company may be adversely affected by
competitors who independently develop substantially equivalent technology.

        Third-party patents relating to technology utilized by the Company may
now exist or be issued in the future. The Company may need to acquire licenses
to, or to contest the validity of, any such patents. Significant funds may be
required to defend any claim that the Company infringes a third-party patent,
and any such claim could adversely affect the Company until the claim is
resolved. Furthermore, any such dispute could result in a rejection of any
patent applications of the Company or the invalidation of any patents the
Company may own in the future. There can be no assurance that any license
required under any such patent would be made available or, if available, would
be available on acceptable terms or that the Company would prevail in any
litigation involving such patent. Any of the foregoing adverse results could
have a material adverse effect on the Company and its results of operations.

        The Company seeks to protect the technology used in the MST process in
part by confidentiality agreements with its advisors, employees, consultants,
suppliers and vendors. The


-------------
(1)Currently, Duratherm is processing solid waste. In the future, however, it
is expected that Duratherm will attempt to expand into the liquid product
remediation area and become one of the Company's competitors.


                                      -5-

<PAGE>


Company also protects its technology by building interlocking security measures
into its products. There can be no assurance, however, that these agreements and
security measures will not be breached, that the Company will have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
be disclosed to, or discovered by, competitors. In addition, there can be no
assurance that persons or institutions providing research to the Company will
not assert rights to intellectual property arising out of such research.

Suppliers

        The Company primarily uses standard parts and components from a variety
of suppliers to produce the hardware for each MST process. Certain components
are currently available only from a few limited sources. To date, the Company
has not had difficulty obtaining parts and components in sufficient quantity in
a timely manner. The Company does not expect to have such difficulty if and when
sales of MST processes accelerate.

Government Regulation

        The Company's products are subject to government regulation by the
United States Environmental Protection Agency, local and state environmental
agencies, and local health departments. The Company believes that its products
meet or exceed all applicable safety and environmental regulations.

Employees

        As of October 31, 1997, the Company had 10 full-time employees, five
engaged in testing and manufacturing and five involved in sales and
administration.


ITEM 2. PROPERTIES

        The Company leases 4,519 square feet of office space and 7,500 square
feet of manufacturing space in Houston, Texas, on a month to month basis. The
total lease payment for the leased space is $6,265.83 per month.

ITEM 3. LEGAL PROCEEDINGS

        A lawsuit involving the Company was filed on February 9, 1995. The
defendant, Thermal Wave International Inc. (TWI), filed third-party claims
against third-party defendants, including the Company, on August 20, 1996. TWI
alleged that the company:

               (1) is misrepresenting itself as the exclusive source of a
        technology designed to perform oil sludge remediation through treatment
        by microwave radiation, but that such technology was actually acquired
        and developed by TWI;

               (2) has disclosed and/or made commercial use of TWI's trade
        secrets;


                                      -6-


<PAGE>



               (3) has violated ss. 43 (a) of the Lanham Act;

               (4) has violated ss. 16.29 of the Texas Business and Commerce
        Code;

               (5) has engaged in unfair competition, false advertising and
        misappropriation of proprietary information under the common law of
        Texas; and

               (6) has engaged in a conspiracy to misappropriate, misrepresent
        and wrongfully exploit technology of TWI.

        TWI sought the following remedies, inter alia, against the Company: (1)
actual damages of an unspecified amount; (2) disgorgement of profits; (3)
punitive damages of an unspecified amount; (4) an order to enjoining the Company
from (a) using trade secrets or other proprietary information belonging to TWI;
(b) acts of unfair competition, and (c) false advertising, and (5) requirements
that the Company (a) make appropriate disclosures to correct alleged false or
misleading statements, and (b) disclose to TWI all details of alleged false or
misleading statements.

        Management believes that TWI's claims are without merit and is
vigorously defending the Company. The Company denies that it has utilized or
misappropriated any trade secrets of TWI. Due to the uncertainties of the
litigation, no outcome can be predicted at this stage.

        Continental Electronics Corporation claims Imperial owes it $178,845 for
work performed by Continental under two contracts. The claim under one contract
is approximately $100,000. Imperial believes that the claimed sum was not
properly calculated under the contract. The second contract was for programing
services and related hardware. The program did not functioned properly, however,
and the hardware did not meet safety standards. Imperial intends to defend the
claim and to pay only that portion of the claim ultimately deemed appropriate.

        The Company is subject to other litigation from time to time arising
from its operations and receives occasional letters alleging infringement of
patents owned by third parties. Management does not believe that any such
litigation and claims that have arisen have merit or that they will have a
material effect on the Company's financial position or results of operations.

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

        No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.


                                      -7-

<PAGE>



                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's common stock is traded on the OTC Bulletin Board Market
under the symbol "IREC."

        The following table sets forth the range of high and low bid quotations
for the Company's common stock for each of the calendar quarters of 1996 and
1997 from the commencement of public trading in the stock on April 16, 1996.

                       High and Low Bid Prices
                       -----------------------

        1996                  High Bid       Low Bid
        ----                  --------       -------

        Second Quarter*       $ 3.62         $ 0.87
        Third Quarter         $ 8.375        $ 5.1875
        Fourth Quarter        $ 6.00         $ 4.375

        1997                  High Bid       Low Bid
        ----                  --------       -------

        First  Quarter        $ 4.56         $ 2.62
        Second Quarter        $ 2.62         $ 0.62
        Third  Quarter        $ 0.75         $ 0.43
        Fourth Quarter        $ 0.96         $ 0.31

        ------------

        * From April 16, 1996.

        The quotations in the table above reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.

Holders

        As of October 31, 1997, there were 540 registered holders of the
Company's Common Stock.

Dividends

        The Company has not paid cash dividends to date, and it is not expected
that any cash dividends will be paid in the foreseeable future. The Company
intends to retain any earnings to finance its future growth.


                                      -8-

<PAGE>



Recent Sales of Unregistered Securities

        During the fiscal year ended October 31, 1996, the Company sold shares
of its Common Stock for cash without registration under the Securities Act of
1933 on 16 different dates, as detailed in the following table:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------
                        No. of          Aggregate                                     No. of
      Date            Purchasers      Purchase Price          Price per Share*     Shares Sold*
------------------------------------------------------------------------------------------------
    <S>                    <C>              <C>                  <C>                  <C>  
    11/01/95                1               $8,000               $2.00                4,000
------------------------------------------------------------------------------------------------
    11/15/95                1                2,000                2.00                1,000
------------------------------------------------------------------------------------------------
    12/13/95               14               51,200                2.00               25,600
------------------------------------------------------------------------------------------------
    12/23/95                1               12,000                2.00                6,000
------------------------------------------------------------------------------------------------
    01/07/96                9               22,400                2.00               11,200
------------------------------------------------------------------------------------------------
    01/07/96                1                  500                4.00                  125
------------------------------------------------------------------------------------------------
    01/07/96                1                1,500                3.00                  500
------------------------------------------------------------------------------------------------
    01/11/96                2               65,000                4.00               16,250
------------------------------------------------------------------------------------------------
    01/23/96                9              204,305                2.00            102,150.5
------------------------------------------------------------------------------------------------
    01/24/96                4               92,000                2.00               46,000
------------------------------------------------------------------------------------------------
    01/26/96                1               50,000                2.00               25,000
------------------------------------------------------------------------------------------------
    01/31/96                1                8,000                2.00                4,000
------------------------------------------------------------------------------------------------
    01/31/96                6               21,200                2.50                8,480
------------------------------------------------------------------------------------------------
    02/05/96                2                3,000                3.00                1,000
------------------------------------------------------------------------------------------------
    02/14/96                2                9,000                3.00                3,000
------------------------------------------------------------------------------------------------
    02/16/96                1                3,000                3.00                1,000
------------------------------------------------------------------------------------------------
    04/18/96                1               12,000                3.00                4,000
------------------------------------------------------------------------------------------------
    05/10/96                1               40,000                2.00               20,000
------------------------------------------------------------------------------------------------
    05/10/96                3               40,000                2.50               16,000
------------------------------------------------------------------------------------------------
    05/10/96                4              102,000                3.00               34,000
------------------------------------------------------------------------------------------------
    08/15/96                1             5,000.00                6.00                  833
------------------------------------------------------------------------------------------------
     TOTAL                 66**           $752,105                                330,138.5
------------------------------------------------------------------------------------------------
</TABLE>

* Numbers have not been adjusted toect .03 for 1 stock dividend of November
22, 1996.

** Total is not sum of column because some purchasers purchased more
than once.

        In addition to the sales reflected in the table above, the Company
issued 10,345 shares of Common Stock to 15 individuals on September 4, 1996 and
4,938 shares of Common Stock to four individuals on October 30, 1996. All of
these individuals were employees of either the Company, NSA, Inc., which was
providing administrative support services to the Company at the time, or Food
Development Corporation, which was also providing services to the Company at the
time. See "Item 12. Certain Relationships and Related Transactions." Shares of
Common Stock were issued to these individuals in lieu of other compensation. The
Company also issued 25,000 shares of Common Stock to a lawyer providing services
to the Company in lieu of other compensation on January 24, 1996.


                                      -9-

<PAGE>



        Current management believes that prior management relied upon the
exemption provided in Section 4(2) of the Securities Act, which covers
"transactions by an issuer not involving any public offering," to issue the
shares discussed and identified in the table above without registration under
the federal Securities Act of 1933. Except in the case of the issuance to the
lawyer and to employees, purchasers of the shares were business associates,
family members and friends of officers and directors of the Company. The
certificates representing the shares sold were marked with a legend indicating
that transfer of the shares was restricted because they had not been sold in a
registered offering.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Overview

        Since its inception in 1995, the Company has been actively developing
its petroleum sludge treatment technology. From inception Imperial has sustained
cumulative losses of approximately $4,804,746. The losses include expenses for
the following:

               (a) The purchase of Phonon Technologies, a microwave and chemical
        research and development company, in the amount of $349,500;

               (b) Costs of approximately $1,795,324 to fund the research and
        development of Imperial's MST process for treating oil sludge and
        further improving its present technologies; and

               (c) General and administrative (G&A) expenses, which include the
        international and domestic marketing of Imperial's microwave technology
        and oil sludge remediation product line.

        The above losses have been funded in part by private sales of common
stock which have resulted in net cash proceeds of approximately $3,620,000.

        In December 1996, the Company effected a significant number of
cost-cutting initiatives aimed at continuing to fund its operations from
existing resources and reducing the level of revenue required to achieve a
break-even/cash flow position. The Board of Directors relocated corporate
headquarters to Houston, Texas. This relocation has saved the Company money by
consolidating management and operations into the same area for better
coordination and communication. The relocation also provided a strategic benefit
by placing the Company in the oil capital of the world, thus exposing it to
hundreds of Houston-based companies involved in the petro-chemical industry. The
relocation should better enable the Company to meet directly with interested
parties and interface with oil industry executives in a position to make
decisions to further the goals of the Company.


                                      -10-

<PAGE>



        In December 1996, a management re-organization also was instituted.
Since that time, Imperial has substantially completed its capital expenditure
program, field tested its MST-1000, and built an inventory of key components.
Current management has instituted a complete set of internal policies on cost
control. These have resulted in major cost reductions to date.

        The Company recognizes the key to success at this time requires
extensive promotion. Management intends to implement a strategic marketing plan
with the following objectives:

o    Position the Company as a leader in microwave technology both domestically
     and internationally.

o    Increase awareness and name recognition of Imperial among petroleum
     industry clients.

o    Generate qualified sales leads and potential joint venture partners.

o    Increase, through market research, significant information to create
     immediate and long-term marketing plans.

o    Expand sales materials, emphasizing use of a product video and the
     Company's website.

o    Continue to contact media groups to further establish an image as a highly
     professional organization interested in helping solve environmental
     problems while improving customer's bottom line.

o    Communicate on a regular basis with editors of major trade, business and
     local petroleum-related publications to increase coverage of the Company's
     technology.

o    Create an internal/external newsletter to serve as an informational piece
     for internal personnel, shareholders, key clients and media sources.

o    Increase communication with the financial community, including brokers and
     potential investors.

o    Join industry and environmental organizations to further corporate goals.

        Even though the Company has been restricted by cash flow, marketing
efforts have been ongoing. Management believes that the interest generated in
the MST technology thus far indicates solid demand for products utilizing the
technology. In an effort to produce MST sales, the Company is continuing with
product testing efforts and has targeted several large volume users. Management
currently is hopeful that an order for an MST-1000 will be placed in the first
fiscal quarter of 1998, and that orders for two MST-1000 units will be placed in
the second quarter of fiscal year 1998. The Company's plan of operations
envisions the placement of two to three orders per quarter in the remainder of
fiscal year 1998.

        The foregoing discussion contains certain forward looking statements
which involve risks and uncertainties. Imperial's actual results could differ
materially from the results anticipated in such statements.


                                      -11-


<PAGE>


Fiscal Year Ended October 31, 1996 Compared to Fiscal Year Ended October 31,
1995

        The Company has sustained substantial losses from operations since
inception, and such losses have continued since October 31, 1996. In addition,
the Company has used, rather than provided, cash in its operations.

        The Company has taken the following steps to revise its operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue operations.

        A change in management occurred in December 1996, wherein the number of
administrative and marketing personnel was reduced, operations were relocated to
less costly facilities, and marketing and promotion costs were lowered.

        In mid-1997, the Company completed development and demonstration of a
redesigned MST-1000 and began field testing.

        Management has aggressively sought to restructure its liabilities to
reduce near-term cash requirements. Such restructuring activities include the
following:

o    In July 1997, an agreement was reached to settle the remaining obligations
     resulting from the Company's acquisition of assets from Phonon
     Technologies, Inc., by issuing 100,000 shares of common stock and
     reassigning the rights to certain technologies previously acquired.

o    In June 1997, the Company settled its commitment under a long-term lease in
     Las Vegas, Nevada, which carried a monthly commitment in excess of $25,000,
     by issuing 100,000 shares of common stock and by agreeing to pay the
     landlord $100,000 in June 1998.

o    In August 1997, the Company reached an agreement with Food Development
     Corporation (FDC), a company which is owned by the Chairman of the
     Company's Board of Directors and which has funded operations of the Company
     since inception. The agreement required the Company to repay $703,000 on
     May 1, 1998. Of this sum, $661,000 was outstanding at October 31, 1996.

        The Company has been in the development stage since operations commenced
in 1995 with substantially all of management's attention focused on developing
products based upon its sludge remediation process, promoting the Company within
its targeted industries, and raising capital to finance operations. As such, the
Company has not realized any sales since operations began in 1995.

        Operating expenses in fiscal 1996 were $4,105,683 as compared to
$700,749 in fiscal 1995, an increase of 486%. The increase is partially
attributable to fiscal 1995 containing only four months of operations in which
the Company had reduced staff levels and had outsourced the


                                      -12-


<PAGE>


initial development phase of the first prototype. Research and development
expenses in fiscal 1996 were $1,355,324 as compared to $440,000 in fiscal 1995,
an increase of 208%. This increase was due to continued development of an
MST-4000 prototype unit which was outsourced in 1995 and then bought in-house in
1996. By the end of fiscal 1996, the first unit was completed and demonstrable.
Therefore, management does not expect development expenditures in fiscal 1997 to
be as significant as they were in fiscal 1996.

        In August 1996, the Company acquired certain assets consisting primarily
of patents and technology from Phonon Technologies, Inc. A charge of $349,500
was recorded in the fiscal 1996 financial statements associated with this
acquisition to expense the portion of the purchase price related to technology
and patents which the Company has reassigned.

        General and administrative expenses in fiscal 1996 totaled $2,283,941 as
compared to $260,749 in fiscal 1995, which as discussed above constituted only a
partial year of operations. Of these expenses, $846,283 in fiscal 1996 were
funded or incurred by National Security Analysts, Inc. or Food Development
Corporation, both entities controlled by stockholders of the Company. Such
expenses consisted of administrative support, marketing, technology development,
and management salaries necessary due to lack of existing infrastructure within
the Company. Management has curtailed significantly such expenses in fiscal 1997
as internal management has increased its involvement in the administrative,
product development and selling and marketing functions of the Company. Other
general and administrative expenses in fiscal 1996 include non-cash charges of
approximately $340,000 associated with the issuance of common stock to employees
and a vendor for services rendered to the Company.

        In fiscal 1997, management entered into a lease in Las Vegas, Nevada for
space intended to be used for production and manufacturing. However, due to
delays in bringing its products to market and the relocation by new management
to Texas in late 1996, the facility was abandoned by the Company. As a result of
abandonment, the Company recorded a charge of $161,918 for the cost attributable
to a settlement reached with the landlord in July 1997.

Liquidity and Capital Resources

        Imperial's business is capital intensive. The Company has funded its
operations principally from the private placement of common stock and debt
financing that has subsequently been converted into common stock. On October 31,
1996, Imperial's aggregate liabilities were approximately $2,005,804 and the
Company had negative working capital of approximately $400,555. By mid-November
1996, Imperial had no available cash or marketable securities.

        In December 1996, Barry Meuse, President/CEO, Richard Wiewiorka, Vice
President, and Joseph Meuse, Secretary resigned their positions as officers and
members of the Board of Directors.


                                      -13-

<PAGE>


        The following officers/directors remained: Henry Kartchner,
Chairman/CEO; Larry Taylor, President; Brent Kartchner, Secretary/Vice President
of Operations. Mr. Taylor resigned from the presidency and Board of Directors of
the Company late in fiscal year 1997.

        Beginning in December l996, Imperial, under new management, began a
major effort to restructure its operations and reorganize its business focus
that enabled the Company to continue to fund its operations. The efforts to
reduce costs and expenses included closing Imperial's large corporate offices in
Alexandria, Virginia and its leased facility in Las Vegas, Nevada. This move
allowed the consolidation of both facilities in Houston, Texas. Additionally, by
reducing staff, eliminating costly consultants, focusing R&D and streamlining
office activities, management estimates that monthly expenses have been reduced
by approximately 40%.

        These factors enabled Imperial to continue to fund operations from its
existing sources and reduce the revenue required to achieve break-even. Imperial
has not yet completed a laboratory in Houston and estimates that it will require
$75,000 near-term capital to complete this facility.

        Since the re-organization started in December 1996, Imperial has
struggled to stabilize its financial condition by raising capital through
private placements of equity and debt.


ITEM 7. FINANCIAL STATEMENTS

        Please see attached.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        Not required because previously reported.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers.

        The current directors and executive officers of the Company are Henry H.
Kartchner, 73, and C. Brent Kartchner, 51.

        Henry Kartchner has served as a director and Chairman of the Board of
the Company since December 1995 and as Chief Executive Officer since December
1996. Mr. Kartchner also is Chief Executive Officer of Food Development
Corporation, an international agribusiness, which he founded in 1975. Under his
leadership, FDC grew to annual revenues of $75 million.


                                      -14-


<PAGE>


In 1970, he founded Desert Magic, Inc., an agribusiness that included 10,000
acres of irrigated land, processing plants and a nationwide marketing system.
During the 1960's, Mr. Kartchner was an executive with the H.J. Heinz company
and responsible for the fastest growing food sector of the Company.

        Brent Kartchner has been Vice President of Operations and Secretary of
the Company since December 1996 and a director of the Company since September
1995. He also was a Vice President of the Company from September 1995 to
December 1996. From 1992 to 1994, Mr. Kartchner was General Manager and co-owner
of Pacific Northwest Farming--Oregon Potato Processing Center, a 12,000 acre
agribusiness that included production and marketing and a transportation
division, plus the nation's largest potato dehydrating factories. From 1987 to
1992, Mr. Kartchner was Vice President of Marketing of Sunkyong Limited, one of
the largest grain/foodstuff importers into South Korea. Mr. Kartchner received a
Bachelor of Science degree in agronomy and business management from Brigham
Young University in 1971. Brent Kartchner is the son of Henry Kartchner.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

        Section 16(a) of the Securities Exchange Act of 1934 (the "Act")
requires the Company's executive officers and directors and any persons who own
beneficially more than 10% of the Company's Common Stock to file initial reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC") as well as to furnish the Company with a copy of each such
report. Additionally, SEC regulations require the Company to identify in its
proxy statement and Annual Report on Form 10-KSB those individuals for whom one
or more of these reports required under Section 16 was not filed on a timely
basis during the most recent fiscal year or prior fiscal years.

        All executive officers, directors and 10% beneficial owners of the
Company's Common Stock who were such on October 7, 1996, the date on which the
Company's Common Stock became registered under the Act, were required under
Section 16(a) to file an initial statement of beneficial ownership on Form 3
within 10 days of that date. Mr. Henry Kartchner and Mr. Brent Kartchner did not
file their initial statements of beneficial ownership until August 11, 1997. To
the Company's knowledge, Mr. Barry Meuse, Mr. Larry Taylor and Mr. Richard
Wieworka, who were executive officers, directors and 10% beneficial owners at
the time, and Mr. Owen K. Stephenson, who was a 10% beneficial owner, have not
yet filed their initial statements of beneficial ownership.

ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation Table

        The following table sets forth certain information concerning the
compensation paid or accrued by Imperial, to or on behalf of the Imperial's
Chief Executive Officer and other executive officers determined for services
provided in the fiscal years indicated.


                                      -15-



<PAGE>

                                              Annual Compensation

          Name                                                   Other
          and                                                    Annual
          Principal                       Salary      Bonus      Compensation
          Position             Year       ($)         ($)        ($)
          --------------------------------------------------------------------

          Henry Kartchner      1996       12,000       0           0
          Chairman             1995          -         0           0

          Barry Meuse          1996       35,000       0           0
          CEO/President        1995       10,000       0           0

          Brent Kartchner      1996       17,500       0           0
          Vice President       1995           -        0           0

          Larry Taylor         1996       58,600       0           0
          Vice President       1995       23,000       0           0

          Richard Wiewiorka    1996       46,500       0           0
          Vice President       1995       23,000       0           0

Compensation of Directors

        Directors receive no compensation or fees for their services rendered in
such capacity.

Employment Contracts

        There were no written employment contracts for any Imperial employees in
the fiscal year ended October 31, 1996 and have been none since then.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

Security Ownership of Certain Beneficial Owners

        As of October 31, 1997 the persons (including any "group") named in the
table below were believed by the management of the Company to be beneficial
owners of more than five percent of the Common Stock of the Company under SEC
Rule 13d-3. Under that Rule, beneficial ownership of a security consists of sole
or shared voting power (including the power to vote or direct the voting) and/or
sole or shared investment power (including the power to dispose or direct the
disposition) with respect to a security whether through a contract, arrangement,
understanding, relationship or otherwise. Unless otherwise indicated, management
believes that each person indicated above has sole power to vote, or dispose or
direct the disposition, of all shares beneficially owned, subject to applicable
community property laws.


                                      -16-

<PAGE>



                  Five-Percent Owners and Management Holdings(1)
        ----------------------------------------------------------------------
         Name and                        Amount and
         Address of                      Nature of
         Beneficial                      Beneficial
         Owner                           Ownership(2)          Percent of Class
         ---------------------------------------------------------------------

         C. Brent Kartchner              1,098,041                8.38%
         57 Quail Run Rd.
         Henderson, NV 89014

         Henry Kartchner                 2,585,705(3)            18.65%
         3216 S. Everett Place
         Kennewick, WA 99336

         Rex H. Lewis                    2,000,000               15.27%
         2325-A Rennaissance Dr.
         Las Vegas, NV 89119

         Larry Taylor                    1,297,665(4)             9.90%
         12250 S. Kirkwood #625
         Stafford, TX 77477

         All Officers & Directors        3,683,746               26.57%
           as a Group(5)

       ---------------
       (1) Another person or person may own beneficially 5% or more of the
           Company's Common Stock without management's having sufficient
           evidence to conclude that such an ownership position currently
           exists.

       (2) All shares are held directly except that (i) Mr. Henry Kartchner's
           beneficial holdings include 1,348,341 shares held directly, 473,625
           shares held by Food Development Corporation, which he controls, and
           exercisable options to acquire 763,739 shares at $0.31 per share held
           by Food Development Corporation, and (ii) Mr. Lewis' shares are held
           by Maya LLC, an entity he controls.

       (3) Mr. Henry Kartchner has agreed to return 250,000 shares to the
           Company for cancellation, which would reduce his beneficial ownership
           to 2,335,705 shares or 17.16% of the outstanding class.

       (4) Since October 31, 1997, Mr. Taylor has returned 600,000 shares to the
           Company for cancellation, reducing his total beneficial ownership to
           429,665 shares, or 3.28% of the outstanding class.

       (5) Includes two individuals, Mr. Henry Kartchner and Mr. Brent
           Kartchner.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        In September 1995, the following six individuals entered into an
agreement of which the Company was a third-party beneficiary: C. Brent
Kartchner, Henry H. Kartchner, Barry Meuse, Owen K. Stephenson, Larry D. Taylor
and Richard Wieworka. Under the agreement, Mr. Stephenson, who represented that
he controlled 6,961,000, or 99.4 %, shares of the Company's 7,000,000
outstanding shares of Common Stock, was to convey 1,066,000 of the shares to
each of the other parties to the agreement. In exchange, the other parties
promised to provide the consideration set forth opposite each of their names
below:


                                      -17-

<PAGE>



Party                       Consideration
-----                       -------------


C. Brent Kartchner          Agreement to provide operational and fabrication
                            services to the Company for minimal compensation to
                            be agreed upon.

Henry H. Kartchner          Economic support and credit required to fabricate
                            and test the initial MST-4000 prototype for minimal
                            compensation.

Barry Meuse                 Agreement to provide management services to the
                            Company, for compensation to be agreed upon.

Larry D. Taylor             Agreement to act as marketing representative for the
                            Company, for compensation to be agreed upon.

Richard Wieworka            Agreement to provide corporate development services
                            to the Company, for compensation to be agreed upon.


        Mr. Stephenson agreed to, and in connection with consummation of the
transactions provided for in the agreement did, transfer and assign the
consideration provided by each of the parties listed in the table above to the
Company. In addition, in order to induce such parties to enter into the
agreement, Mr. Stephenson agreed to provide consulting services to assist in
transforming the Company into a public company with its shares of Common Stock
eligible for public trading in the United States. The Company did not record any
value for the assets transferred and assigned to it by Mr. Stephenson in the
transaction.

        The Company has engaged in transactions with NSA, Inc. ("NSA"), an
entity controlled by Mr. Barry Meuse, who at the time of the transactions was a
more-than-5% stockholder, officer and director of the Company. During the fiscal
year ended December 31, 1996, the Company incurred liabilities to NSA of
$244,880 for administrative support services, travel and other associated costs;
$93,571 for office rent; and $257,023 in noninterest bearing advances or
payments to Company vendors to fund working capital needs. As of October 31,
1996, $138,637 of the aggregate of these amounts had not been paid. The Company
increased its liability to NSA by $265,363 for additional costs, rent and
advances in November and December of 1996. Mr. Meuse ceased to be an officer and
director of the Company in December 1996.

        The Company is disputing claims of NSA for $671,194 in additional costs
and charges allegedly incurred, including $478,184 in salary for Mr. Meuse from
September 1995 to December 1996, 1997 rent of $100,000, and interest of $93,010
on the outstanding balance.

        The Company also has engaged in transactions with Food Development
Corporation ("FDC"), an entity controlled by Henry H. Kartchner, the Company's
Chairman of the Board. During the fiscal year ended October 31, 1996, the
Company reimbursed FDC $275,000 for research and development expenses it had
incurred on behalf of the Company. In addition, in August 1997 the Company
executed a note for $703,282 to FDC to cover the reimbursement of


                                      -18-

<PAGE>


other research and development expenses incurred by FDC on behalf of the
Company, including an additional $183,407 in fiscal year 1995, $469,770 in
fiscal year 1996, and $661,677 in fiscal year 1997. The note bears interest at
10% annually, and is due no later than May 1, 1998.

        From March to October 1996, Phoenix Financial and Eagle Trust, entities
believed to have been controlled by Owen K. Stephenson, whom management believes
was a more-than-5% beneficial owner of the Company's Common Stock at the time,
loaned the Company $1,884,004, with no provision being made for the payment of
interest. In December 1996, the Company issued 450,139 shares of Common Stock
(equal to $4.185 per share) to repay the loans in full. The same entities loaned
the Company an additional $450,000 in early fiscal year 1997, with no provision
being made for the payment of interest. The Company repaid this amount in April
1997 by issuing 109,939 shares of Common Stock (equal to $4.09 per share).

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

Financial Statements

        The following financial statements are included in this report:

        Report of Independent Certified Public Accountants

        Balance Sheets as of October 31, 1995 and 1996

        Statements of Operations for the years ended October 31, 1995 and 1996

        Statements of Stockholder's Deficit for the years ended October 31, 1995
        and 1996

        Statements of Cash Flows for the years ended October 31, 1995 and 1996

        Notes to Financial Statements

Exhibits

           The exhibits to this report are identified in the Exhibit Index,
which appears immediately after the signature page and is incorporated in this
Item 13 by this reference.

Reports on Form 8-K

           No reports on Form 8-K were filed by the Company during the last
quarter of the fiscal year covered by this report.


                                      -19-


<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
November 24, 1997.


                              IMPERIAL PETROLEUM RECOVERY CORPORATION


                              By   /s/ Henry H. Kartchner
                                   ------------------------------------
                                   Henry H. Kartchner
                                   Chairman and Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons in the
capacities and on the dates indicated.


/s/ Henry H. Kartchner                                       November 24, 1997
--------------------------------------
Henry H. Kartchner
Chairman and Chief Executive Officer
(Principal Executive Officer)


/s/ C. Brent Kartchner                                       November 24, 1997
--------------------------------------
C. Brent Kartchner
Vice President and Director



                                      -20-


<PAGE>

IMPERIAL PETROLEUM RECOVERY CORPORATION
(A DEVELOPMENT STAGE COMPANY)


Financial Statements and Report of
Independent Certified Public
Accountants

October 31, 1996 and 1995
---------------------------------------------










<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Contents

-------------------------------------------------------------------------------


Report of Independent Certified Public Accountants               3


Financial Statements

   Balance Sheets                                               4-5

   Statements of Operations                                      6

   Statements of Stockholders' Deficit                           7

   Statements of Cash Flows                                      8

   Notes to Financial Statements                               9-16



<PAGE>



Report of Independent Certified Public Accountants


Board of Directors
Imperial Petroleum Recovery Corporation
   (a development stage company)


We have audited the accompanying balance sheets of Imperial Petroleum Recovery
Corporation (a development stage company) (a Nevada corporation) as of October
31, 1996 and 1995, and the related statements of operations, changes in
stockholders' equity and cash flows for the years then ended and for cumulative
amounts since inception. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Imperial Petroleum Recovery
Corporation (a development stage company) as of October 31, 1996 and 1995, and
the results of its operations and its cash flows for the years then ended and
for cumulative amounts since inception in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company has incurred cumulative net losses of approximately $4,804,746 since
inception of operations and as of October 31, 1996, the Company's current
liabilities exceeded its current assets by $400,555 and its total liabilities
exceeded its total assets by $3,009,535. These factors, among others, as
discussed in Note A to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.


                                                              GRANT THORNTON LLP

Vienna, Virginia
June 9, 1997, except for Note D,
   as to which the date is July 9, 1997; Note E, as to which the date is August
   15, 1997; and Note G, as to which the date is July 7, 1997



                                                                              3
<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Balance Sheets
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
October 31,                                                       1996               1995
-------------------------------------------------------------------------------------------------
                                                                                  (as restated;
                                                                                   see Note H)
<S>                                                            <C>                   <C>
Assets

Current Assets
   Cash and cash equivalents                                   $      -             $208,339
   Officer and employee advances                                146,884               15,000
   Inventory                                                    132,000                    -
   Deposits                                                           -                1,989
                                                               ----------------------------------

Total Current Assets                                            278,884              225,328

Property and Equipment, net of accumulated depreciation
   of $3,362 at October 31, 1996                                158,501                    -
 
Technology Rights--held for note settlement                     339,500                    -
                                                               ----------------------------------

                                                               $776,885             $225,328
-------------------------------------------------------------------------------------------------
</TABLE>




                                                                               4


<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Balance Sheets--Continued

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
October 31,                                                        1996               1995
-------------------------------------------------------------------------------------------------
                                                                                  (as restated;
                                                                                   see Note H)
<S>                                                            <C>                  <C>

Liabilities and Stockholders' Deficit

Current Liabilities
   Bank overdraft                                              $    51,934          $       -
   Notes payable--Phonon acquisition--current portion               20,000                  -
   Accounts payable--trade                                         341,707                  -
   Accounts payable--National Security Analysts, Inc.              138,638            458,407
   Accrued employee expense reimbursements                         124,542             50,661
   Current portion of abandoned lease obligation                     2,618                  -
                                                               ----------------------------------

Total Current Liabilities                                          679,439            509,068

Note Payable--Phonon acquisition--noncurrent                       339,500                  -

Note Payable--Food Development Corporation                         661,677                  -

Accrued Lease Obligation--noncurrent                               100,000                  -

Obligations to Be Settled in Stock
   Loans from affiliated entities                                1,884,004                  -
   Abandoned lease obligation                                       59,300                  -
   Phonon acquisition                                               62,500                  -
                                                               ----------------------------------
                                                                 2,005,804                  -

Commitments and Contingencies                                            -                  -

Stockholders' Deficit
   Common stock--authorized 100,000,000 shares; $.001
      par value; issued and outstanding 8,315,080 and
      7,884,372 shares at October 31, 1996 and 1995,
      respectively                                                   8,315             7,882
   Common stock subscribed                                          (7,730)           (7,730)
   Additional paid-in capital                                    1,794,626           416,348
   Deficit accumulated during the development stage             (4,804,746)         (700,240)
                                                               ----------------------------------

Total Stockholders' Deficit                                     (3,009,535)         (283,740)
                                                               ----------------------------------

                                                               $   776,885         $ 225,328
-------------------------------------------------------------------------------------------------

</TABLE>

                The accompanying notes are an integral part of these statements.


                                                                               5



<PAGE>


Imperial Petroleum Recovery Corporation
(a development stage company)

Statements of Operations

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                         Cumulative
                                                           Amounts             Year ended October 31,
                                                            Since              ----------------------
                                                          Inception            1996              1995
----------------------------------------------------------------------------------------------------------
                                                                                   (as restated;
                                                                                    see Note H)

<S>                                                     <C>                 <C>                <C>     
Revenue                                                 $          -        $        -         $       -

Cost of Goods Sold                                                 -                 -                 -
                                                        --------------------------------------------------

Gross Profit                                                       -                 -                 -

Operating Expenses
   Research and development expenses--prototype            1,795,324         1,355,324           440,000
   Acquired research and development--Phonon
      Technologies                                           349,500           349,500                 -
   General and administrative expenses
      Internal administration, selling and marketing
        expense                                            1,508,062         1,430,720            77,342
   Administrative and operating support costs--
      related parties                                        991,628           808,221           183,407
   Loss on abandonment of leased facility                    161,918           161,918                 -
                                                        --------------------------------------------------

Loss from Operations                                      (4,806,432)       (4,105,683)         (700,749)

Other Income
   Interest income                                             1,686             1,177               509
                                                        --------------------------------------------------

Net Loss                                                $ (4,804,746)      $(4,104,506)       $ (700,240)
----------------------------------------------------------------------------------------------------------

Loss per Share                                                             $      (.46)       $     (.41)
----------------------------------------------------------------------------------------------------------

Weighted Average Shares Outstanding                                          8,980,081         7,679,126
----------------------------------------------------------------------------------------------------------
</TABLE>

                The accompanying notes are an integral part of these statements.


                                                                               6
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)

Statements of Stockholders' Deficit

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Years ended October 31, 1996 and 1995
---------------------------------------------------------------------------------------------------------------------
                                                                                                            Common        
                                                                            Price per       Common           Stock        
                                                          Date                Share         Shares        Subscribed      
                                                          ----                -----         ------        ----------      
<S>                                          <C>                             <C>           <C>              <C>  
Balance, November 1, 1994                                                                  7,729,702        $(7,730)      

Issuance of Common Stock for Cash            September 1995-October 1995     $1.94            89,812              -        
                                             September 1995-October 1995      3.85            62,858              -        
                                                                                        
Net Loss                                                                                           -              -        
                                                                                           --------------------------
Balance, October 31, 1995                                                                  7,882,372         (7,730)       
                                                                                        
Issuance of Common Stock for Cash            November 1995-April 1996         1.94           158,734              -        
                                             November 1995-April 1996         2.41            13,794              -        
                                             November 1995-April 1996         3.17            21,626              -        
                                             November 1995-April 1996         3.88            60,044              -        
                                             November 1995-April 1996         4.86            11,890              -        
                                             November 1995-April 1996         5.07             7,366              -        
                                             July 1996                        3.00            83,333              -        
                                             September 1996                   4.34            11,513              -        
                                                                                        
Issuance of Common Stock to Vendor                                                      
   for Services Rendered                     August 1996                      5.94            25,750              -        
                                                                                        
Issuance of Common Stock to Employees                                                   
   for Services Rendered                     October 1996                     4.84            38,658              -        
                                                                                        
Net Loss                                                                                           -              -        
                                                                                           --------------------------
Balance, October 31, 1996                                                                  8,315,080        $(7,730)      
---------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                          Deficit      
                                                                        Accumulated    
                                                       Additional        During the     
                                          Common        Paid-in         Development    
                                          Stock         Capital            Stage       
                                          -----         -------            -----       
<S>                                      <C>          <C>              <C>  
Balance, November 1, 1994                $7,730       $       -        $         -      
                                                                                        
Issuance of Common Stock for Cash            90         174,310                  -      
                                             62         242,038                  -      
                                                                                        
Net Loss                                      -               -           (700,240)     
                                         -------------------------------------------                                               
Balance, October 31, 1995                 7,882         416,348           (700,240)     
                                                                                        
Issuance of Common Stock for Cash           159         308,067                  -      
                                             14          33,351                  -      
                                             22          68,478                  -      
                                             60         233,120                  -      
                                             12          57,822                  -      
                                              7          37,393                  -      
                                             83         249,917                  -      
                                             12          49,989                  -      
                                                                                        
Issuance of Common Stock to Vendor                                                      
   for Services Rendered                     26         152,974                  -      
                                                                                        
Issuance of Common Stock to Employees                                                   
   for Services Rendered                     38         187,167                  -      
                                                                                        
Net Loss                                      -               -         (4,104,506)     
                                         -------------------------------------------
Balance, October 31, 1996                 8,315      $1,794,626        $(4,804,746)     
------------------------------------------------------------------------------------
</TABLE>

                The accompanying notes are an integral part of these statements.

                                                                               7
<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Statements of Cash Flows

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                         Cumulative
                                                           Amounts              Year ended October 31,
                                                            Since               ----------------------
                                                          Inception             1996              1995
----------------------------------------------------------------------------------------------------------
                                                                                            (as restated;
                                                                                             see Note H)

<S>                                                      <C>               <C>                 <C>
Increase (Decrease) in Cash and Cash Equivalents

Cash Flows from Operating Activities
   Net loss                                              $(4,804,746)      $(4,104,506)        $(700,240)
                                                         -------------------------------------------------
   Adjustments to reconcile net loss to net
     cash used in operating activities
       Depreciation                                            3,360             3,360                 -
       Noncash charge associated with acquisition            349,500           349,500                 -
       Accrued loss on abandonment of leased facility        161,918           161,918                 -
       Charges associated with stock issuances to
          vendor                                             153,000           153,000                 -
       Related party expenses included in note
          payable                                            661,677           661,677                 -
       Changes in assets and liabilities
          Increase in inventory                             (132,000)         (132,000)                -
          Decrease (increase) in deposits                          -             1,989            (1,989)
          Increase in officer and employee advances         (146,884)         (131,884)          (15,000)
          Increase in accrued liabilities                    124,542            73,881            50,661
          Increase in accounts payable                       480,345            21,938           458,407
                                                         -------------------------------------------------

Total Adjustments                                          1,655,458         1,163,379           492,079
                                                         -------------------------------------------------

Net Cash Used in Operating Activities                     (3,149,288)       (2,941,127)         (208,161)
                                                         -------------------------------------------------

Cash Flows from Investing Activities
   Cash paid for acquisition                                 (94,000)          (94,000)                -
   Additions to property and equipment                      (161,863)         (161,863)                -
                                                         -------------------------------------------------

Net Cash Used in Investing Activities                       (255,863)         (255,863)                -
                                                         -------------------------------------------------

Cash Flows from Financing Activities
   Proceeds from issuance of common stock                  1,642,213         1,225,713           416,500
   Proceeds from loans from affiliated entities            1,884,004         1,884,004                 -
   Payments on notes payable                                (173,000)         (173,000)                -
   Proceeds from bank overdraft                               51,934            51,934                 -
                                                         -------------------------------------------------

Net Cash Provided by Financing Activities                  3,405,151         2,988,651           416,500
                                                         -------------------------------------------------

Net (Decrease) Increase in Cash                                    -          (208,339)          208,339

Cash and Cash Equivalents, Beginning of Period                     -           208,339                 -
                                                         -------------------------------------------------

Cash and Cash Equivalents, End of Period                  $        -         $       -         $ 208,339
----------------------------------------------------------------------------------------------------------
</TABLE>

                The accompanying notes are an integral part of these statements.


                                                                               8
<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Notes to Financial Statements

-------------------------------------------------------------------------------
October 31, 1996 and 1995
-------------------------------------------------------------------------------


NOTE A--REALIZATION OF ASSETS


   The accompanying financial statements have been prepared in conformity with
   generally accepted accounting principles, which contemplate continuation of
   the Company as a going concern. However, the Company has sustained
   substantial losses from operations since inception, and such losses have
   continued since October 31, 1996. In addition, the Company has used, rather
   than provided, cash in its operations.

   In view of the matters described in the preceding paragraph, recoverability
   of a major portion of the recorded asset amounts shown in the accompanying
   balance sheet is dependent upon continued operations of the Company, which in
   turn is dependent upon the Company's ability to meet is financing
   requirements on a continuing basis, to maintain present financing and to
   succeed in its future operations. The financial statements do not include any
   adjustments relating to the recoverability and classification of recorded
   asset amounts or amounts and classification of liabilities that might be
   necessary should the Company be unable to continue in existence.

   The Company has taken the following steps to revise its operating and
   financial requirements, which it believes are sufficient to provide the
   Company with the ability to continue in existence.

   A change in management occurred in December 1996, wherein the number of
   administrative and marketing personnel was reduced, operations were relocated
   to less costly facilities, and marketing and promotion costs were lowered.
   The Company's senior management continues to forego cash-based compensation
   until cash flow improves.

   In mid-1997, the Company completed development and demonstration of a
   prototype unit, and is prepared to begin production for interested customers.

   Management has aggressively sought to restructure its liabilities to reduce
   near-term cash requirements. Such restructuring activities include the
   following:

   o   In July 1997, an agreement was reached to settle the remaining
       obligation resulting from the Company's acquisition of assets from Phonon
       Technologies, Inc., by issuing 100,000 shares of common stock and
       reassigning the rights to certain medical technology previously acquired.

   o   In June 1997, the Company settled its commitment under a long-term lease
       in Las Vegas, Nevada, which carried a monthly commitment in excess of
       $25,000, by issuing 100,000 shares of common stock and by agreeing to pay
       the landlord $100,000 in June 1998.

   o   In August 1997, the Company reached an agreement with Food Development
       Corporation (FDC), a company which is owned by the chairman of the
       Company's board of directors and which has funded operations since
       inception. The agreement required the Company to repay $703,000, of which
       $661,000 was outstanding at October 31, 1996, no earlier than May 1,
       1998. The note is convertible by FDC into common stock anytime prior to
       payment.



                                                                               9



<PAGE>






Imperial Petroleum Recovery Corporation
(a development stage company)

Notes to Financial Statements--Continued

-------------------------------------------------------------------------------
October 31, 1996 and 1995
-------------------------------------------------------------------------------


NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


   Organization

   Imperial Petroleum Recovery Corporation (a development stage company
   incorporated in Nevada) (the Company) has been in the development stage since
   commencement of operations in fiscal year 1995. Operations to date comprise
   developing and marketing crude oil sludge, recovery process technology. Since
   December 1996, principal operations have been conducted in Texas.

   Use of Estimates

   In preparing financial statements in conformity with generally accepted
   accounting principles, management is required to make estimates and
   assumptions that affect the reported amounts of assets and liabilities and
   the disclosure of contingent assets and liabilities at the date of the
   financial statements and revenue and expenses during the reporting period.
   Actual results could differ from those estimates.

   Property and Equipment

   Property and equipment are stated at cost. Depreciation and amortization are
   provided for using the straight-line method. Property and equipment are
   depreciated over the estimated economic lives estimated to be five years.

   Research and Development Expenses

   Costs incurred in connection with developing a prototype and demonstration
   model of a system designed for crude oil sludge, recovery process technology
   have been expensed as incurred. Certain costs incurred for components of the
   system have been capitalized as inventory because they have alternative
   future uses.

   Cash and Cash Equivalents

   Cash and cash equivalents are defined as cash in checking and money market
   accounts, and short-term investments with original maturity dates of three
   months or less.

   The Company maintains its cash in bank deposit accounts which, at times, may
   exceed federally insured limits. Management believes the Company is not
   exposed to any significant credit risk on cash and cash equivalents.

   Fair Value of Financial Instruments

   Financial instruments in the accompanying financial statements principally
   consist of notes payable. Such notes include the following:

   o   An obligation to FDC which at October 31, 1996, amounted to
       approximately $661,000. Management is unable to estimate its fair value
       because the amount is due to a related party and market information on
       notes of this type is unavailable;



                                                                              10



                                                                          <PAGE>




Imperial Petroleum Recovery Corporation
(a development stage company)

Notes to Financial Statements--Continued

-------------------------------------------------------------------------------
October 31, 1996 and 1995
-------------------------------------------------------------------------------


NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued


   o   An obligation to the seller of certain assets acquired in August 1996 is
       stated at 1) the value of common stock issued in July 1997 in partial
       satisfaction of the note and 2) the remaining amount of the note of
       $339,500 which was settled by reassigning certain technology to the
       seller.

   Income Taxes

   The Company has not provided for a deferred tax asset associated with net
   operating losses generated to date because of uncertainty as to realization
   of the related tax benefits. As of October 31, 1996, the Company has a net
   operating loss carryforward of approximately $2,100,000 which is available to
   be applied against taxable income generated through 2011. Additional costs
   totaling approximately $2,700,000 incurred through October 31, 1996, are
   being classified as start-up costs for income tax reporting purposes, and
   will be amortized over a five-year period beginning in fiscal year 1997. Upon
   a change in control of the Company, the use of all or a portion of the net
   operating loss carryforward may be limited.

   Loss per Share

   The computation of the loss per share is based upon the weighted average
   number of common shares outstanding in each period and gives retroactive
   effect to a stock dividend in December 1996.


-------------------------------------------------------------------------------


NOTE C--NOTES AND LOANS PAYABLE


   Phonon Acquisition

   In connection with the purchase of certain assets from Phonon Technologies,
   Inc., in August 1996 (as described in Note G), the Company executed a
   noninterest bearing, non-recourse note payable to the seller in the amount of
   $595,000. Through October 31, 1996, the Company made payments totaling
   $173,000 against this obligation. In November 1996, the Company paid an
   additional $20,000 on the note. In a settlement agreement reached in July
   1997, the Company has committed to retire a portion of the remaining
   principal outstanding by issuing 100,000 shares of common stock in August
   1997. The obligation of $62,500 related to the stock issuance has been
   classified as a noncurrent liability in the accompanying 1996 financial
   statements, pending issuance of the stock. In addition, the Company agreed to
   reassign the rights to certain technology acquired in the purchase in
   satisfaction of the remaining balance.

   Affiliated Entities

   From March through October 1996, the Company was loaned $1,884,004 from two
   entities affiliated with a stockholder of the Company. The loans bore no
   interest. In December 1996, the Company issued 450,139 shares of common stock
   to repay the loans in full. The loans have been classified as noncurrent
   liabilities in the accompanying balance sheet pending issuance of the stock,
   and interest was not imputed because of the short time the loans were
   outstanding.



                                                                              11



<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Notes to Financial Statements--Continued

-------------------------------------------------------------------------------
October 31, 1996 and 1995
-------------------------------------------------------------------------------


NOTE C--NOTES AND LOANS PAYABLE--Continued


   The Company received approximately $450,000 from the same entities as
   additional loans in early 1997. The loans were repaid in April 1997 when the
   Company issued 109,939 shares of common stock.


-------------------------------------------------------------------------------


NOTE D--COMMITMENTS AND CONTINGENCIES


   Operating Leases

   The Company leases office space and research facility in Stafford, Texas,
   under a month-to-month operating lease. During fiscal year 1996 and through
   December 1996, the Company leased office space from NSA, Inc. (see Note E),
   for which it paid approximately $12,500 per month. Upon the relocation of
   operations to Texas in December 1996, such lease payments ceased.

   In July 1996, the Company entered into a 62-month lease for offices
   manufacturing and research space in Las Vegas, Nevada. The Company did not
   commence operations in the leased facility because of delays in bringing its
   products to market and has since attempted to locate a subtenant or
   replacement tenant. As a result of the abandonment, the Company recorded a
   charge to operations of $161,918, which is the cost attributable to a
   settlement reached in July 1997. The settlement provides for the payment of
   $100,000 plus interest of 10% in July 1998, the issuance of 100,000 shares of
   common stock, and a cash payment at settlement of $2,618. The stock issuance
   commitment has been valued using the value of the Company's stock at the
   settlement date, and the associated liability has been classified as a
   noncurrent obligation pending issuance of the stock.

   Total rent expense, excluding the loss from the abandoned lease described
   above, for the year ended October 31, 1996, was approximately $351,000.

   Litigation and Asserted Claims

   A lawsuit involving the Company was filed on February 9, 1995. The defendant,
   Thermal Wave International, Inc. (TWI), filed third-party claims against
   third-party defendants, including the Company, on August 20, 1996. TWI
   alleged that the Company (1) is misrepresenting itself as the exclusive
   source of a technology designed to perform oil sludge remediation through
   treatment by microwave radiation despite that such technology was allegedly
   acquired and developed by TWI; (2) has disclosed and/or made commercial use
   of TWI's trade secrets; (3) has violated ss. 43(a) of the Lanham Act; (4) has
   violated ss. 16.29 of the Texas Business and Commerce Code; (5) has engaged
   in unfair competition, false advertising and misappropriation of proprietary
   information under the common law of Texas; and (6) has engaged in a
   conspiracy to misappropriate, misrepresent and wrongfully exploit technology
   of TWI.



                                                                              12



<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Notes to Financial Statements--Continued

-------------------------------------------------------------------------------
October 31, 1996 and 1995
-------------------------------------------------------------------------------


NOTE D--COMMITMENTS AND CONTINGENCIES--Continued


   TWI sought the following remedies against the Company: (1) actual damages of
   an unspecified amount; (2) disgorgement of profits; (3) punitive damages of
   an unspecified amount; (4) attorneys' fees of an unspecified amount; (5) pre-
   and post-judgment interest; (6) costs of court; (7) a permanent injunction to
   enjoin (a) use of trade secrets or other proprietary information allegedly
   belonging to TWI, (b) acts of unfair competition, (c) false advertising, (d)
   acts constituting violations of ss. 16.29 of the Texas Business and Commerce
   Code, and (e) competing with TWI; and (8) to require (a) the Company to make
   appropriate disclosures to correct alleged false or misleading statements,
   and (b) the Company disclose to TWI all details of alleged false or
   misleading statements.

   Management believes the claims against it are without merit and is vigorously
   defending itself. Management is unable to predict the possible outcome of
   this matter.

   The Company has been presented with another claim in the amount of $250,000
   associated with a customer's deposit for a contract. The Company issued
   83,333 shares as collateral for the deposit and has classified the proceeds
   received as an addition to stockholders' equity in the accompanying financial
   statements, as management believes the amount is nonrefundable. The Company's
   Board of Directors and management vigorously dispute the customer's right to
   the refund under several defenses which they believe are meritorious; they do
   not believe the ultimate outcome of this matter will have a material, adverse
   impact on the Company's financial statements.

   The Company is involved in other litigation incident to the ordinary conduct
   of its business. Management believes the claims are without merit and is
   unable to predict the possible outcome of these matters.


-------------------------------------------------------------------------------


NOTE E--RELATED PARTY TRANSACTIONS


   NSA, Inc.

   The Company engages in several transactions with NSA, Inc. (NSA), an entity
   controlled by a stockholder and former director of the Company. These
   transactions are summarized as follows:

<TABLE>
<CAPTION>
                                                                                           Amounts for the
                                                                                             Year Ended
                                                                                             October 31,
                                                                                                1996
----------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>     
   Administrative support services, travel and other associated costs                         $244,880
   Office rent                                                                                  93,571
   Noninterest bearing advances or payments to Company vendors to fund
     working capital needs                                                                     257,023
                                                                                              ------------

                                                                                              $595,474
                                                                                              ------------
</TABLE>



                                                                              13



<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Notes to Financial Statements--Continued



-------------------------------------------------------------------------------
October 31, 1996 and 1995
-------------------------------------------------------------------------------


NOTE E--RELATED PARTY TRANSACTIONS--Continued


   The Company has recorded a liability to NSA at October 31, 1996, of $138,637.
   Subsequent to October 31, 1996, the Company has increased the liability by
   $265,363 for additional costs, rent, and advances in November and December
   1996. However, the Company is disputing $671,194 in additional costs and
   charges sought by NSA associated with salary and overhead for an officer of
   NSA (who was part of the Company's management through December 1996) of
   $478,184; interest on the outstanding balance of $93,010; and 1997 rent of
   $100,000 on certain office space. Because a definitive settlement agreement
   has not been reached with NSA regarding the Company's obligation, further
   negotiations may result in a liability different than that recorded in the
   financial statements. The effect of such a change will be recorded in the
   period a settlement is reached.

   During the year ended October 31, 1996, an agreement was executed providing
   for the Company to acquire NSA, Inc., in an exchange of securities.
   Subsequent to executing the agreement, the Board of Directors of the Company
   voided the merger, believing it was not in the best interest of the Company
   to merge with NSA. All shares of common stock issued in connection with the
   merger were subsequently returned to the Company and not reflected as
   outstanding shares in the accompanying financial statements.

   Food Development Corporation

   The Company engages in several transactions with Food Development Corporation
   (FDC), an entity controlled by a stockholder and director of the Company. In
   addition, included in research and development expense in fiscal year 1995 is
   $275,000 associated with prototype development costs funded by FDC.

   For the years ended October 31, 1996 and 1995, FDC incurred expenses on
   behalf of the Company amounting to $469,770 and $183,407, respectively. As of
   October 31, 1996, the Company recorded a liability of $661,677 to FDC. In
   August 1997, the Company executed a note payable to FDC in the amount of
   $703,282, which includes the October 31, 1996, liability and expenses of
   $76,261 incurred subsequent to October 31, 1996. The note bears interest at
   10%, computed prospectively from August 15, 1997, and is due no earlier than
   May 1, 1998. FDC may convert the balance due anytime into an equivalent
   number of shares of common stock at the market value on the date of the
   conversion.


-------------------------------------------------------------------------------


NOTE F--STOCKHOLDERS' EQUITY


   In December 1996, the Company declared a 3% stock dividend issuable to
   stockholders of record as of the declaration date. As a result, the
   accompanying financial statements retroactively give effect to the dividend.



                                                                              14



<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Notes to Financial Statements--Continued

-------------------------------------------------------------------------------
October 31, 1996 and 1995
-------------------------------------------------------------------------------

NOTE F--STOCKHOLDERS' EQUITY--Continued


   In August 1996, the Company issued 25,750 shares of common stock to an
   attorney for legal services rendered on behalf of the Company. Legal expenses
   were charged for $153,000 to record the fair value of the shares issued based
   upon the trading price of the shares.

   In September and October 1996, the Company issued 38,658 shares of common
   stock to certain employees of the Company, NSA and FDC. Compensation expense
   recorded as a result of the stock issuance was $187,205 based upon the
   trading price of the shares at the date of issuance.


-------------------------------------------------------------------------------


NOTE G--SIGNIFICANT TRANSACTIONS


   In August 1996, the Company acquired certain assets consisting of technology,
   patents and furniture and laboratory equipment from Phonon Technologies, Inc.
   (PTI), a Houston, Texas, based research and development company, engaged in
   the development of microwave chemistry technologies. The purchase price for
   the assets was $689,000, of which $94,000 was paid at closing and the
   remainder financed by a non-recourse note payable collateralized only by the
   technology and assets acquired. The Company allocated $349,500 of the
   purchase price to acquired research and development costs which were expensed
   in the statement of operations. The remaining $339,500 related to other
   technology was capitalized. As described in Note C, the Company reached an
   agreement in July 1997 to restructure the remaining balance due on the note
   payable. The settlement included reassigning the capitalized technology to
   the seller in satisfaction of the remaining balance on the note of $339,500.

   PTI had not realized any revenue from the acquired technologies prior to the
   acquisition and the Company did not hire any permanent employees or occupy
   facilities of PTI. As such, the Company does not believe this acquisition
   constitutes a business acquired and has, therefore, omitted pro forma
   disclosures required for business combinations.


-------------------------------------------------------------------------------


NOTE H--RESTATEMENT


   The 1995 financial statements have been restated to properly reflect expenses
   incurred on behalf of the Company by an affiliated entity and to reflect
   certain cash activity not previously reflected. The effect of the restatement
   was to increase the deficit accumulated during the development stage as of
   October 31, 1995, by $674,068 and to increase net loss for the year ended
   October 31, 1995, by $674,068.



                                                                              15



<PAGE>



Imperial Petroleum Recovery Corporation
(a development stage company)

Notes to Financial Statements--Continued


-------------------------------------------------------------------------------
October 31, 1996 and 1995
-------------------------------------------------------------------------------


NOTE I--SUPPLEMENTAL INFORMATION ON NON-CASH FINANCING AND INVESTING
        ACTIVITIES


   As discussed in Notes C and G, the Company acquired certain assets in part by
   issuing a promissory note in the amount of $595,000.


-------------------------------------------------------------------------------


NOTE J--SUBSEQUENT EVENTS


   Sale of Inventory

   In June 1997, the Company sold a prototype component carried as inventory at
   original cost of $132,000 in the accompanying financial statements for
   $234,000, payable in 36 monthly installments.

   Notes Payable

   In April and May 1997, the Company was loaned $346,067 by stockholders who
   are former officers of the Company. The obligations bear interest at 10% and
   are payable no later than one year from the origination date of each loan.




                                                                              16



<PAGE>


                     Imperial Petroleum Recovery Corporation

                          Exhibit Index to Form 10-KSB

Exhibit No.                           Identification of Exhibit
-----------                           -------------------------

    3.1                   Articles of Incorporation of the Company (incorporated
                          by reference to Exhibits 2 and 2.1 to the Company's
                          Registration Statement on Form 10-SB filed with the
                          Commission on August 8, 1996, Commission File No.
                          0-21169)

    3.2                   Bylaws of the Company

     27                   Financial data schedule