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

<TABLE>
<S>                                                                   <C>

For the fiscal year ended October 31, 1998                            Commission File No. 0-21169
</TABLE>

                     IMPERIAL PETROLEUM RECOVERY CORPORATION
                  (Name of Issuer as Specified in its Charter)
<TABLE>
   <S>                                                                    <C> 

                    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)
</TABLE>

                                 (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 $0.001 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 |X| No |_|

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. |X|

The issuer's revenues for its most recent fiscal year were approximately
$26,000.

The aggregate market value of shares of Common Stock held by non-affiliates
(based on the January 29, 1999 last sale price) was approximately $17,516,765.

As of January 29, 1999, 14,988,722 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 "IPRC") is a
development stage company committed to developing and marketing a proprietary
oil sludge remediation process and equipment that uses high energy microwaves to
separate water, oil and solids. The Company calls the process "Microwave Sludge
Treatment" ("MST"), and believes it can provide an effective, ecologically sound
and economical method of processing crude oil sludge and emulsions. Management
believes the use of microwave energy for sludge remediation and oil recovery
reduces usage of energy, chemical pollutants, reagents and solvents, and will
minimize the generation of by-products or waste streams. Processing time should
be reduced. Laboratory work has shown that the microwave system is 30 times
faster and takes up 90% less space than conventional emulsion cracking systems.
Management believes the MST system offers one of the first truly effective,
economical, and safe methods to address this global problem. The MST process
recovers usable hydrocarbon compounds from material that otherwise would be of
little value or require disposal. Based on prototype testing and demonstrations,
management believes that approximately 50% to 90% of the crude oil recovered
through the MST process can be reclaimed for sale.

         The Company is concentrating its marketing efforts on North America.
Several potential domestic customers are reviewing the results of IPRC's field
test trials before determining whether to enter into contracts to acquire the
Company's products. Internationally, the Company has had what management regards
as serious discussions with entities in Kuwait, the Netherlands and Venezuela
about using the MST process to clean up stored sludge or emulsions. No
assurances can be given that any of these activities will result in sales
revenues for the Company.

Current Product Offerings

         The Company currently offers three product lines, each meeting a
specific need within the hydrocarbon reclamation process:

         o Microwave Sludge Technology System (MST-4000, MST-2000, MST-1000)

         o Sludge Tank/Pit Heating Unit (SMU-60)

         o Truck Melting System (TMS-60)

         The MST system is the Company's principal product line. An MST unit
includes a computer-controlled microwave sludge remediation system consisting of
all the elements needed to reclaim oil from oil sludge and "rag layer" water
located in tank storage and waste pits. MST systems are modular and can be
conjoined to handle larger capacity requirements as required by the customer.
The core of an MST unit 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 introduced its first MST system in 1996 for remediating oil sludge
to water, marketable oil and solids.


                                      -2-
<PAGE>


         The sludge tank/pit heating unit (SMU-60) is a low-cost sludge
liquefaction and pumping platform. It is mobile, either trailer or track
mounted, and provides an extended reach capability of up to 60 feet. Requiring
no open flame, this unit employs the Company's MST technology and can turn
sludge into a soluble product for ease of removal.

         The truck melting system (TMS-60) is the third line of products
currently offered by IPRC. This unit complements the Company's other product
lines by providing the customer with the means to preheat oil sludge within a
tanker truck to facilitate unloading into an MST system unit or an SMU-60.

         All products currently are available for order and have a delivery
schedule of approximately 120 days. Complete parts support and training programs
are available for all products.

         The Company assembles its products in its Houston, Texas facility,
using components procured primarily from outside subcontractors and vendors. The
Company manufactures certain items itself and builds product units to individual
customers' specifications. Each unit using the MST process will vary in size and
sophistication in the software modules.

         The Company offers its products 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 products are to be operated by the customer's or partner's
personnel, after receiving technical training from the Company. IPRC 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 device to assure that the Company and its partners
maintain control of the system and that any usage 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 refined the
MST process based on its extensive testing and feedback from potential customers
and technical experts. Modifications have greatly reduced maintenance costs of
MST units.

         The Company receives sludge and emulsion samples for testing at its new
laboratory in Houston. The lab serves as a bench scale testing facility, capable
of processing five to eight samples per day and duplicating the commercial MST
system's process. The laboratory is also used for the development of new
processes and specialized equipment. This lab is adjacent to the Company's
manufacturing facility.

                                      -3-

<PAGE>

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 approximately 111 operable
petroleum refineries. The Company is focusing its marketing efforts on
refineries located in the United States and Canada.

         Another potential market for the Company's products is oil field waste
management. The Company has developed a marketing plan through which it intends
to attempt to penetrate this market.

         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.

         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 a variety of processes to
dispose of solid and oily non-hazardous oil field wastes. The following table
provides information on these processes:


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

                                                    Estimated costs
                                                    (provided by disposal
                                                    companies between
     Processes                                      June 1996 and March 1997)
------------------------------------------------------------------------------------------------

|X|  Recycling                                      $40-$45 / hour (tank bottoms)
|X|  Chemical treatment/reuse                       $12-$25 / ton
|X|  Biological treatment/reuse                     $12-$28 / cubic yard
|X|  Landfill                                       $30-$60 / ton (liquids may be solidified @
                                                    $150 / ton and landfilled)
|X|  Landspread                                     $95 / ton; $38 / barrel
|X|  Thermal treatment                              $40-$50 / ton; $10.50 / barrel
|X|  Reuse                                          $52-$77 / barrel (tank bottoms)
|X|  Incinerator                                    $26-$30 / ton (tank bottoms)
|X|  Treat / injection                              $8.50-$11 / barrel (depends on oil &
                                                    gas content)
|X|  Cavern                                         $1.95-$2.85 / barrel (discounts for high
                                                    oil content)
|X|  Chemical treat / pit                           $9-$12 / barrel

</TABLE>

                                       -4-

<PAGE>


         Management believes that the MST process offers significant competitive
advantages over competing oil sludge remediation processes, in that the MST
process is more effective and more economical than competing systems. In
addition, fewer environmental problems appear to be associated with the MST
process. Heat, pressure, chemical, and centrifuge processes can achieve partial
remediation. But these methods have drawbacks. They are expensive, pose
additional environmental risks of their own, often leave volumes of untreated
hydrocarbons, and usually require the transportation of sludge to special
remediation sites. Use of a centrifuge/chemical 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.
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.

         Oil sludge remediation services are being provided at over 80 sites
within the 10-state area encompassed by Arizona, California, Colorado,
Louisiana, Mississippi, New Mexico, Nevada, Texas, Utah, and Wyoming. Each
company providing these services is using a technology which has been effective.
Management believes, however, that each of these technologies can be greatly
enhanced by the introduction of IPRC's remediation systems. The Railroad
Commission of Texas has identified 38 permitted reclamation plants within the
state of Texas. Each of these locations represents both a competitor and a
potential customer for IPRC.

         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.

         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.


                                      -5-

<PAGE>

         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 currently own patents to protect its design. 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. 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. 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 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.


                                      -6-

<PAGE>

Suppliers

         The Company primarily uses standard parts and components from a variety
of suppliers to produce the hardware for its products. 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 systems 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 January 29, 1999, the Company had eight full-time employees, four
engaged in testing and manufacturing and four involved in sales and
administration.


ITEM 2.  DESCRIPTION OF PROPERTY

         The Company leases 4,519 square feet of office space and 7,500 square
feet of manufacturing and laboratory space in Houston, Texas under leases that
expire through the year 2000. The total lease payment for the leased space is
approximately $6,300 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;

         (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


                                      -7-

<PAGE>

         (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 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.

         As of September 1997, the Company was in dispute with Continental
Electronics Corporation over a contract for software development. In September
of 1998, the Company negotiated a settlement of claims with Continental
Electronics Corporation by signing a 5-year, unsecured, non-interest bearing
note in the amount of $121,500.

         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 matters were submitted to a vote of the Company's security holders
during the fiscal year covered by this report.


                                     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 quarters within the last two
fiscal years:


                                      -8-
<PAGE>

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


         Fiscal Year 1997                   Low Bid  High Bid
         ----------------                   -------  --------

         First Quarter (11/1/96-1/31/97)    $ 1.180  $ 4.000
         Second Quarter (2/1/97-4/30/97)    $ 0.687  $ 3.000
         Third Quarter (5/1/97-7/31/97)     $ 0.375  $ 0.687
         Fourth Quarter (8/1/97-10/31/97)   $ 0.312  $ 0.875

         Fiscal Year 1998                   Low Bid  High Bid
         ----------------                   -------  --------

         First Quarter (11/1/97-1/31/98)    $ 0.500  $ 0.938
         Second Quarter (2/1/98-4/30/98)    $ 0.562  $ 0.875
         Third Quarter (5/1/98-7/31/98)     $ 0.343  $ 0.718
         Fourth Quarter (8/1/98-10/31/98)   $ 0.343  $ 0.969

         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 January 29, 1999, there were 666 registered holders of the
Company's Common Stock.

Dividends

         The Company has not paid cash dividends to date, and does not expect to
pay any cash dividends in the foreseeable future. The Company intends to retain
any earnings to finance its future growth.

Recent Sales of Unregistered Securities

         In fiscal year 1998, the Company issued securities without registration
under the Securities Act of 1933, as follows:

         On December 11, 1997, Maya LLC acquired beneficial ownership from the
Company of 500,000 shares of the Company's Common Stock, and a Warrant to
purchase an additional 3,500,000 shares of its Common Stock in exchange for
$400,000 cash. The Warrant is exercisable for $1.00 per share and expires
December 11, 2001.

         On March 11, 1998, Maya LLC acquired beneficial ownership from the
Company of 500,000 shares of the Company's Common Stock, and a Warrant to
purchase an additional 3,500,000 shares of its Common Stock in exchange for
$100,000 cash and a 90-day promissory note of $295,068. The Warrant is
exercisable for $1.00 per share and expires March 11, 2002.

         On June 11, 1998, Maya LLC acquired beneficial ownership from the
Company of 500,000 shares of the Company's Common Stock, to be issued on July
11, 1998, and a Warrant to purchase an additional 3,500,000 shares of its Common
Stock, which bears an effective date of July 11, 1998, in exchange of $100,000
cash and a 90-day promissory note of $295,069. The Warrant is exercisable for
$1.00 per share and expires July 11, 2002.

                                      -9-
<PAGE>

         On the dates set forth in the table below, the Company issued the
number of shares of its Common Stock indicated in the table without registration
under the Securities Act of 1933:

<TABLE>
<CAPTION>
                                                  Person to            Purpose of              Previous
Issuance Date            No. of Shares           Whom Issued            Issuance             Closing Price
-------------            -------------           -----------            --------             -------------
<S>                         <C>                    <C>               <C>                          <C>
Nov. 19, 1997                4,000                 Investor          Cash investment              $0.843
                                                                        of $2,200
June 3, 1998                17,000                 Investor           Discharge debt              $0.718
                                                                        of $7,500
</TABLE>

         On December 8, 1998, in fiscal year 1999, Maya LLC acquired beneficial
ownership from the Company of 125,000 shares of the Company's Common Stock, and
a Warrant to purchase an additional 875,000 shares of its Common Stock in
exchange for $100,000 cash. The Warrant is exercisable for $1.00 per share and
expires December 8, 2002.

         In addition, the Company has issued the following shares of its Common
Stock without registration under the Securities Act of 1933 in the first
calendar quarter of 1999:

<TABLE>
<CAPTION>
                                                  Person to             Purpose of               Previous
Issuance Date            No. of Shares           Whom Issued             Issuance              Closing Price
-------------            -------------           -----------             --------              -------------
<S>                        <C>                   <C>                 <C>                           <C>
Jan. 4, 1999                10,000               Employee 1          Bonus for fiscal              $0.625
                                                                        year 1999
Jan. 4, 1999                10,000               Employee 2          Bonus for fiscal              $0.625
                                                                        year 1999
Jan. 4, 1999                10,000               Employee 3          Bonus for fiscal              $0.625
                                                                        year 1999
Jan. 19, 1999                2,490               Consultant          Discharge account             $0.75
                                                                     payable of $1,494
Jan. 25, 1999              100,000               Investor            Cash investment               $0.90
                                                                        of $50,000
</TABLE>

         The Company also issued shares of its Common Stock without registration
under the Securities Act of 1933 during fiscal year 1997. On April 1, 1997, the
Company issued a stock certificate evidencing 50,000 shares sold for $40,000
cash to an individual investor at $0.80 per share. On July 3, 1997, September 1,
1997 and September 15, 1997, the Company sold 300,000 shares, 350,000 shares and
1,350,000 shares, respectively, for cash to an individual investor at an average
price of $0.38 per share, with total gross proceeds of $760,000. On September
15, 1997, the Company issued a stock certificate evidencing 5,000 shares sold
for $2,500 cash to an investor at $0.50 per share. The Company also issued
shares to various consultants for services performed for the Company, as shown
in the following table:

<TABLE>
<CAPTION>
     Date of                                         No. of                Co. Debt             Price Per
Stock Certificate            Identifier           Shares Issued            Forgiven               Share
-----------------            ----------           -------------            --------               -----
<S>                         <C>                        <C>                 <C>                    <C>
    5/15/97                 Consultant 1               200,000             $130,000               $0.65

    6/15/97                 Consultant 2                 5,400                2,700                0.50

     7/8/97                 Consultant 3                10,000                5,000                0.50

    7/14/97                 Consultant 2                 5,400                2,700                0.50

    8/11/97                 Consultant 2                 5,400                2,700                0.50

    8/11/97                 Consultant 4                10,000                5,000                0.50

    8/11/97                 Consultant 5                10,000                5,000                0.50

    8/26/97                 Consultant 2                 3,600                1,800                0.50

    9/12/97                 Consultant 2                 5,400                2,700                0.50

   10/28/97                 Consultant 6               200,088                62,027.28            0.31
</TABLE>

                                      -10-
<PAGE>

                  In addition, the Company issued shares of its Common Stock to
certain employees in lieu of cash, as shown in the following table:


<TABLE>
<CAPTION>
     Date of                                         No. of                Co. Debt             Price Per
Stock Certificate            Identifier           Shares Issued            Forgiven               Share
-----------------            ----------           -------------            --------               -----
<S>                         <C>                        <C>                <C>                     <C>
     6/18/97                 Employee 1                34,000             $17,000.00                0.50

     6/18/97                 Employee 2                 5,000               2,500.00                0.50

     6/18/97                 Employee 3                 8,700               4,350.00                0.50

     6/18/97                 Employee 4                 5,833               2,916.50                0.50

     6/18/97                 Employee 5                   500                 300.00                0.50

     8/11/97                 Employee 1                11,667               5,833.50                0.50

    8/11/97                  Employee 3                 8,700               4,350.00                0.50

    8/11/97                  Employee 4                 5,833               2,916.50                0.50

    8/11/97                  Employee 2                 5,000               2,500.00                0.50

    8/11/97                  Employee 1                22,366              11,183.00                0.50
</TABLE>

In all instances except the 22,366 shares issued to an employee, the debt
forgiven was a debt for salary or wages. In the case of the 22,366 shares, the
debt represented reimbursement for relocation expenses.

         Also in fiscal year 1997, the Company issued shares of its Common Stock
without registration under the Securities Act of 1933 to certain parties for the
purposes shown in the following table.

<TABLE>
<CAPTION>
     Date of                     No. of                Purpose of 
Stock Certificate            Shares Issued               Issuance               Financial Terms
-----------------            -------------               --------               ---------------
<S>                           <C>                 <C>                            <C>
   12/9/96                    450,139             Loan repayment                 Debt of $1,884,004 cancelled
                                                                                 ($4.185 per share)

   4/9/97                     109,939             Loan repayment                 Debt of $450,000 cancelled
                                                                                 ($4.09 per share)

   6/3/97                      10,000             Loan repayment                 Debt of $10,000 cancelled
                                                                                 ($0.30 per share)

   6/18/97                      3,000             Loan repayment                 Debt of $1,000 cancelled
                                                                                 ($0.30 per share)

   7/21/97                    147,200             Reimbursement for              Debt of $73,600 cancelled
                                                  expenses advanced              ($0.50 per share)

   7/24/97                    100,000             Settlement of claim            Settlement amount of
                                                  for abandonment of             $63,500 ($0.635 per share)
                                                  leased premises
                                                  
   7/24/97                      3,000             Loan repayment                 Debt of $1,000 cancelled
                                                                                 ($0.30 per share)

   7/29/97                    326,425             Reimbursement for              Debt of $163,212.33 cancelled
                                                  expenses advanced              ($0.50 per share)

   8/11/97                     56,070             Debt settlement                Settlement amount of
                                                                                 $28,035 ($0.50 per share)

   9/25/97                    100,000             Settlement of claims of        Settlement amount of
                                                  Phonon Technologies            $62,500 ($0.625 per share)
</TABLE>

         The Company 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 securities discussed above without registration under
the Securities Act of 1933 in fiscal years 1997 through 1999. The Company made a
determination in each case that the person to whom the securities were issued
did not need the protections that registration would afford. The certificates
representing the securities issued were marked with a legend indicating that
transfer of the securities was restricted because they had not been sold in a
registered offering.

                                      -11-
<PAGE>

                  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               Price per Share*           No. of
  Date             Purchasers              Purchase Price                                      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 to reflect .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.

                                      -12-
<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 in
fiscal year 1996 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 OR PLAN OF OPERATION

Overview

         The Company took substantial steps in fiscal year 1998 to transform
itself into a profit-generating entity. The Company has sustained substantial
losses since inception, primarily due to research and development expenses
related to its MST System.

         The year began with an agreement between the Company and an oil
processing plant in Eastern Texas. An MST System demonstration unit was placed
in the plant and operated for a period of six months. Several teams of petroleum
industry engineers and executives toured the facility during the operation, and
sampling was done to prove the effectiveness of the technology. The research and
development was extremely valuable to the Company and provided testing of some
of the most difficult emulsions with very satisfactory results. The research
supported the Company's belief that the MST System is capable of recovering the
hydrocarbon with a basic solids and water content of less than 4% while reducing
processing costs. With these results, the Company was able to move into a
refinery setting with increased confidence.

         In June, the MST System demonstration unit was transported to
Bakersfield, California, where it was upgraded and brought into compliance with
California licensing requirements. It was then moved to the Shell Oil Refinery
in Martinez, California. Shell agreed to defray the expenses of the
demonstration and paid the cost of mobilization and demobilization of the
System. The unit was placed at the Shell refinery to treat the waste stream,
earning approximately $26,000 within 30 days. This revenue was used to further
upgrade the MST System for the next scheduled demonstration in the Los Angeles
basin.

                                      -13-
<PAGE>

         An agreement was reached with Mobil Oil Corporation in July, 1998 and
the Company was accepted to the approved contractors list at Mobil's Torrance
Refinery. An MST System was fully incorporated into Mobil's Crude Oil Unit and
began processing emulsions from the desalter waste stream. Testing began on July
21, 1998 with an agreement to process 10,000 barrels of emulsions. Although the
Company earned no revenue from the initial test, the acceptance, research
results and credibility gained from the exposure of IPRC'S technology proved to
be invaluable.

         During the duration of the initial Mobil agreement, constant testing
was done by Mobil engineers as well as by Company personnel. Members of the
management team of Mobil's Technology Company were very supportive of the
technology and its cost-cutting capabilities. In October, Mobil suggested an
extension of the agreement and the MST System demonstration unit was then used
to process waste oil from the Tank Cleaning Unit of the refinery. This portion
of the agreement yielded revenue of approximately $29,000 for the Company in
fiscal year 1999. It also verified another important application of the MST's
technology on some of the most difficult emulsions at the refinery, slop oil.
The MST System continued to operate at this site until December 23, 1998.

         Management expects to reach agreement with at least one major petroleum
company on a long-term contract for the MST System in the second quarter of
fiscal year 1999. In addition, management expects to continue to deploy the
demonstration unit throughout the United States and Canada to publicize the MST
System's oil recovering capabilities and potential cost savings.

         Because of the present economic climate in the energy sector, the major
emphasis of the Company is on cost cutting and process savings for its customers
and potential customers. The MST System has proven to generate significant cost
savings. Management believes that these cost savings will encourage petroleum
companies to accept the MST technology to help them create savings.

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

Fiscal Year Ended October 31, 1998 Compared to Fiscal Year Ended 
October 31, 1997

         Operating expenses in fiscal 1998 were $1,472,187 as compared to
$2,818,599 in fiscal 1997, a decrease of 47.8%. The decrease is partially
attributable to management's aggressiveness in restructuring the Company's
liabilities to reduce near-term cash requirements and to completion of the
development and demonstration of a prototype MST System. Research and
development expenses in fiscal 1998 were $499,655 as compared to $1,001,398 in
fiscal 1997, a decrease of 50.1%. The Company's research and development staff
continued to make improvements in the MST-4000 model of its MST system and to
create an MST-1000 model. By the end of fiscal 1998, the MST-1000 was completed
and a majority of the improvements had been completed.

                                      -14-

<PAGE>

         General and administrative expenses in fiscal 1998 totaled $972,532 as
compared to $1,817,201 in fiscal 1997, a decrease of 46.5%. The decrease is
attributable to management's aggressive implementation of significant cost
cutting measures.

         The Company recognized gains from the settlement of liabilities during
fiscal year 1998 of $123,778 compared to $207,086 in fiscal 1997.

Liquidity and Capital Resources

         IPRC's operations have been capital intensive. The Company has funded
operations principally from the private placement of equity securities,
primarily common stock, and warrants exercisable for common stock. On October
31, 1998, IPRC's aggregate liabilities were approximately $1,108,000 and the
Company had negative working capital of approximately $830,000.

         During the first quarter of 1999, the Company raised approximately
$150,000 from the sale of 225,000 shares of its Common Stock. These funds are
expected to satisfy immediate and near-term cash flow requirements. Additional
funding and/or cash flow from the sale of the Company's products will be needed
in 1999, however, to sustain the operations of the Company.

         Management feels that it has identified sufficient funds to manufacture
the required MST Systems and has devised arrangements to introduce new, related
products which is expected to increase revenues. The Company anticipates steady
growth, a strong fiscal first quarter and a more satisfactory year.

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

Year 2000 Compliance

         The Company has undertaken a program to address the Year 2000 issue
with respect to the Company's information and operating systems, including
billing, accounting and financial reporting systems. Since the Company is
relatively new and small its only computer-related functions are office
functions which have been tested at a cost less than $5,000 and found to be in
compliance.

         Since the Company has not yet begun production of the MST, it is
difficult to assess the compliance of major suppliers and material service
providers. However, in the future measures will be taken to assure said
compliance.

         The Company intends to develop contingency plans to handle its most
reasonably likely worst case Year 2000 scenarios, which it has not yet fully
identified. The Company currently estimates that it will incur additional costs
which are not expected to exceed approximately $5,000 to complete its Year 2000
compliance work. Although the Company's Year 2000 efforts are intended to
minimize the adverse effects of the Year 2000 issue on the Company's business
and operations, the actual effects of the issue and the success or failure of
the Company's efforts described above cannot be known until the Year 2000 or
later. Failure by the Company and its major suppliers, other material service
providers and major distributors to address adequately their respective Year
2000 issues in a timely manner (insofar as such issues relate to the Company's
business) could have a material adverse effect on the Company's business,
results of operations and financial condition.

                                      -15-
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

         Please see attached.


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

         Not required.


                                    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, 74, and C. Brent Kartchner, 52.

         Henry H. 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. 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. Henry H. Kartchner is the father
of C. Brent Kartchner.

         C. Brent Kartchner has been President of the Company since January
1998, Vice President of Operations since September 1995, and a director of the
Company since September 1995. 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. C. Brent Kartchner is the son
of Henry H. Kartchner.

                                      -16-
<PAGE>

         Scott Jensen, 27, was elected Secretary and Treasurer of the Company in
January 1998. He had served as Controller of the Company since December 1996,
and had worked for the Company since 1995. Mr. Jensen has been involved in many
aspects of the Company's business, including manufacturing, accounting, finance,
and operations. He aided in the manufacture of the Company's first MST unit. Mr.
Jensen received a bachelor's degree in business management from Brigham Young
University, Hawaii, in 1995.

Section 16(a) Beneficial Ownership Reporting Compliance

         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. To management's
knowledge, all executive officers, directors and 10% stockholders met the
requirements of Section 16(a) during the 1998 fiscal year.


ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation Table

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

<TABLE>
<CAPTION>

                                                                    Long Term Compensation         
                                                             -----------------------------------------
                                 Annual Compensation        Awards                   Payouts      
                              ------------------------      ------------------       -------------------
     (a)             (b)     (c)         (d)     (e)         (f)         (g)           (h)       (i)
                                                Other       Rest-       Secur-
Name                                            Annual      ricted      ities                  All other
and                                             Compen-     Stock       Underlying   LTIP      Compensa-
Principal                   Salary      Bonus   sation      Award(s)    Options/     Payouts   tion
Position            Year      ($)        ($)      ($)         ($)       SARs(#)      ($)          ($)
--------            ----    --------   ------- ---------   ---------    -------      -------  ----------
<S>                 <C>    <C>          <C>    <C>            <C>         <C>          <C>        <C>
Henry H. Kartchner  1998      0           0        0           0           0            0          0
Chairman & CEO      1997      0           0        0           0           0            0          0
                    1996    12,000        0        0           0           0            0          0

C. Brent Kartchner  1998   120,000        0        0           0           0            0          0
President           1997   120,000        0        0           0           0            0          0
                    1996    17,500        0        0           0           0            0          0

</TABLE>


                                      -17-


<PAGE>


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 IPRC executive
officers in the fiscal year ended October 31, 1998 and none since.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners and Management

         As of January 29, 1999, 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 named in the table below has sole power to vote, or
dispose or direct the disposition, of all shares beneficially owned, subject to
applicable community property laws.


<TABLE>
<CAPTION>
         Five-Percent Owners and Management Holdings(1)
         ------------------------------------------------------------
         Name and                             Amount and
         Address of                           Nature of
         Beneficial                           Beneficial
         Owner                                Ownership(2)             Percent of Class(5)
         ---------------------------------------------------------------------------------
         <S>                                 <C>                              <C>

         C. Brent Kartchner                   1,068,041                         7.1%
         57 Quail Run Rd.
         Henderson, NV 89014

         Henry H. Kartchner                   2,530,452                        16.9%
         3216 S. Everett Place
         Kennewick, WA 99336

         Rex H. Lewis                        15,000,000                        56.9%
         2325-A Renaissance Dr.
         Las Vegas, NV 89119

         All Executive Officers               3,598,493                        24.0%(4)
         & Directors as a Group(3)

</TABLE>

                                      -18-
<PAGE>
         ----------------
         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 H.
            Kartchner's beneficial holdings include 1,087,646 shares held
            directly by Food Development Corporation, which he controls, and
            (ii) Mr. Lewis' beneficial holdings are held by Maya LLC, an entity
            he controls, and includes warrants to acquire 11,375,000 shares of
            the Company's Common Stock for $1.00 per share until December 8,
            2002.

         3. Includes two individuals, Mr. Henry H. Kartchner and Mr. C. Brent
            Kartchner.

         4. May not equal the sum of individual holdings percentages because,
            under SEC rules, different denominators may be used to calculate
            certain individual percentages.

         5. The percentage ownership for the options held by the indicated
            individuals is based on an adjusted total of issued and outstanding
            shares giving effect only to the exercise of each individual's
            options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On November 1, 1998, the Company entered into a Management Agreement
with Maya LLC for a period of five years. Maya LLC is controlled by Rex H.
Lewis, who is named as a major shareholder of the Company under Item 11. Under
the Management Agreement, Maya LLC agreed to give consultation and advice on
selection and retention of management employees, planning and development,
budgeting, accounting, and general business in exchange for a management fee
equal to five percent of the gross revenue of the Company.

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, 1998 and 1997

              Statements of Operations for the years ended October 31, 1998 and
              1997 and cumulative amounts since inception

              Statements of Stockholders' Deficit for the years ended October
              31, 1998 and 1997 and cumulative amounts since inception

              Statements of Cash Flows for the years ended October 31, 1998 and
              1997 and cumulative amounts since inception

              Notes to Financial Statements

                                      -19-
<PAGE>

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 ended October 31, 1998.


                                   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
February 16, 1999.


                                    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                   February 16, 1999
------------------------------------
Henry H. Kartchner
Chairman and Chief Executive Officer
(Principal Executive Officer)


  /s/  C. Brent Kartchner                   February 16, 1999
------------------------------------
C. Brent Kartchner
President and Director
(Principal Financial Officer)


                                      -20-
<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-KSB filed with the Commission with a filing
                date of August 8, 1996, Commission File No. 0-21169).

3.2             Bylaws of the Company (incorporated by reference to Exhibit 3.2
                to the Company's Annual Report on Form 10-KSB for the fiscal
                year ended October 31, 1996, filed with the Commission with a
                filing date of November 26, 1997, Commission File No. 0-21169).

10.1            Convertible Promissory Note of the Company, bearing interest
                from August 25, 1997, to Food Development Corporation
                (incorporated by reference to Exhibit 1 to the Schedule 13D
                filed by Henry H. Kartchner with the Commission with a filing
                date of January 20, 1998, CIK No. 0001047620).

10.2*           Management Agreement between the Company and Maya LLC dated
                November 1, 1998.

27*             Financial data schedule.

------------------
*  Filed herewith.



<PAGE>


                     Imperial Petroleum Recovery Corporation

                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

                                                                                 Page
<S>                                                                             <C>

FINANCIAL STATEMENTS

Report of independent certified public accountants                                 F-2

Balance Sheets as of October 31, 1998 and 1997                                     F-3

Statements of Operations for the years ended October 31, 1998
    and 1997 and cumulative amounts since inception                                F-4

Statements of Stockholders' Deficit for the years ended October 31, 1998
    and 1997 and cumulative amounts since inception                                F-5

Statements of Cash Flows for the years ended October 31, 1998
    and 1997 and cumulative amounts since inception                                F-8

Notes to Financial Statements                                                     F-10

</TABLE>

                                      F-1
<PAGE>




                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
Imperial Petroleum Recovery Corporation


We have audited the accompanying balance sheets of Imperial Petroleum Recovery
Corporation (a development stage Company) as of October 31, 1998 and 1997, and
the related statements of operations, stockholders' deficit and cash flows for
the years then ended and 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 audits 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, 1998 and 1997, and
the results of its operations and its cash flows for the years then ended and
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 $8,754,346 since inception of
operations and as of October 31, 1998, the Company's current liabilities
exceeded its current assets by $830,278 and its total liabilities exceeded its
total assets by $891,653. These factors, among others, as discussed in Note B 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 B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


                                             /s/ Grant Thornton LLP
                                             ----------------------
                                             GRANT THORNTON LLP



Salt Lake City, Utah
January 8, 1999

                                       F-2
<PAGE>



                                      Imperial Petroleum Recovery Corporation
                                           (a development stage company)

                                                  BALANCE SHEETS

                                                    October 31,

                                                      ASSETS

<TABLE>
<CAPTION>

                                                                                  1998           1997
                                                                              -----------    -----------
<S>                                                                           <C>           <C> 

 CURRENT ASSETS
    Cash and cash equivalents                                                      49,342         30,498
    Inventory, net of reserve                                                        --             --
    Prepaid expenses                                                                7,221         32,266
                                                                              -----------    -----------
           Total current assets                                                    56,563         62,764

PROPERTY AND EQUIPMENT, AT COST, NET                                              144,712        137,614

other assets                                                                       15,413         10,032
                                                                              -----------    -----------

                                                                                  216,688        210,410
                                                                              ===========    ===========


                      LIABILITIES AND STOCKHOLDERS' DEFICIT


CURRENT LIABILITIES
    Trade accounts payable                                                        175,471        525,667
    Payables to related parties                                                   252,605           --
    Accrued liabilities                                                            94,990         80,149
    Current maturities of long-term obligations                                   363,775        116,559
                                                                              -----------    -----------
           Total current liabilities                                              886,841        722,375

LONG-TERM OBLIGATIONS - less current maturities                                   221,500        288,780

COMMITMENTS AND CONTINGENCIES                                                        --             --

STOCKHOLDERS' DEFICIT
    Common stock, par value $0.001; authorized 100,000,000 shares; reserved
      10,700,000; issued and outstanding 13,731,421 and 12,567,421
      shares at 1998 and 1997                                                      13,732         12,568
    Additional paid-in capital                                                  7,855,470      6,622,614
    Common stock subscriptions receivable                                          (6,509)        (6,909)
    Deficit accumulated during the development stage                           (8,754,346)    (7,429,018)
                                                                              -----------    -----------

           Total stockholders' deficit                                           (891,653)      (800,745)
                                                                              -----------    -----------

                                                                                  216,688        210,410
                                                                              ===========    ===========

</TABLE>


        The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>



                                      Imperial Petroleum Recovery Corporation
                                           (a development stage company)

                                             STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>


                                                         
                                                         Cumulative
                                                          amounts        Year ended October 31,
                                                           since       ---------------------------
                                                         inception         1998           1997
                                                       --------------  ------------   ------------
<S>                                                    <C>            <C>            <C> 

Revenues                                                     26,289         26,289           --
                                                        -----------    -----------    -----------

Operating expenses
    General and administrative expenses
       Internal administration, selling and marketing
         expense                                          3,766,653        754,637      1,503,954
       Administrative and operating support costs -
         related parties                                  1,522,770        217,895        313,247
    Research and development expenses - prototype         3,296,377        499,655      1,001,398
    Acquired research and development - Phonon
      Technologies                                          349,500           --             --
    Loss on abandonment of leased facility                  161,918           --             --
                                                        -----------    -----------    -----------

                                                          9,097,218      1,472,187      2,818,599
                                                        -----------    -----------    -----------

           Loss from operations                          (9,070,929)    (1,445,898)    (2,818,599)
Other income (expense), including interest, net             (14,281)        (3,208)       (12,759)
                                                        -----------    -----------    -----------

           Loss before extraordinary item                (9,085,210)    (1,449,106)    (2,831,358)
Extraordinary item - gain on extinguishment of debt         330,864        123,778        207,086
                                                        -----------    -----------    -----------

           NET LOSS                                      (8,754,346)    (1,325,328)    (2,624,272)
                                                        ===========    ===========    ===========

Net loss per common share - basic
    Loss before extraordinary item                                           (0.10)         (0.29)
    Extraordinary item                                                        0.01           0.02
                                                                       -----------    -----------

           Net loss                                                          (0.09)         (0.27)
                                                                       ===========    ===========
</TABLE>





        The accompanying notes are an integral part of these statements.

                                      F-4

<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                       STATEMENTS OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                      Years ended October 31, 1998, 1997, 1996 and period from inception to October 31, 1995

                                                                        Price               Common stock                            
                                                                         per       -------------------------------   Subscriptions  
                                                        Date            share           Shares         Par value      receivable    
                                             --------------------   -------------  ----------------   ------------  --------------- 
<S>                                          <C>                    <C>            <C>               <C>             <C>            
Balances as of November 1, 1994                                     $      --           7,729,702    $      7,730    $     (7,730) 
Issuance of common stock for cash            Sept - Oct 1995             1.94              89,812              90              --   
                                             Sept - Oct 1995             3.85              62,858              62              --   
Net loss                                                                   --                  --              --              --   
                                                                    -------------  ---------------   ------------    ------------   
Balances as of October 31, 1995                                            --           7,882,372           7,882          (7,730)  
Issuance of common stock for cash            Nov 1995 - Apr 1996         1.94             158,734             159              --   
                                             Nov 1995 - Apr 1996         2.41              13,794              14              --   
                                             Nov 1995 - Apr 1996         3.17              21,626              22              --   
                                             Nov 1995 - Apr 1996         3.88              60,044              60              --   
                                             Nov 1995 - Apr 1996         4.86              11,890              12              --   
                                             Nov 1995 - Apr 1996         5.07               7,366               7              --   
                                             July 1996                   3.00              83,333              83              --   
                                             Sept 1996                   4.34              11,513              12              --   
Issuance of common stock to vendors
   for services rendered                     Aug 1996                    5.94              25,750              26              --   
Issuance of common stock to employees
   for services rendered                     Oct 1996                    4.84              38,658              38              --   
Net loss                                                                                       --              --              --   
                                                                                   ----------------     ------------   -------------
Balances as of October 31, 1996                                                         8,315,080           8,315          (7,730)  
Issuance of common stock for cash            Apr 1997                    0.80              50,000              50              --   
                                             July 1997                   0.40             300,000             300              --   
                                             Aug 1997                    0.34             350,000             350              --   
                                             Sept 1997                   0.40           1,000,000           1,000              --   
                                             Sept 1997                   0.34             350,000             350              --   



<CAPTION>
                                                                Deficit    
                                                              accumulated  
                                              Additional       during the  
                                               paid-in        development  
                                               capital           stage     
                                             ------------   ---------------
Balances as of November 1, 1994              $        --     $          -- 
Issuance of common stock for cash                174,310                -- 
                                                 242,038                -- 
Net loss                                              --          (700,240)
                                            ------------      -------------
Balances as of October 31, 1995                  416,348          (700,240)
Issuance of common stock for cash                308,067                -- 
                                                  33,351                -- 
                                                  68,478                -- 
                                                 233,120                -- 
                                                  57,822                -- 
                                                  37,393                -- 
                                                 249,917                -- 
                                                  49,989                -- 
Issuance of common stock to vendors                                        
   for services rendered                         152,974                -- 
Issuance of common stock to employees                                      
   for services rendered                         187,167                -- 
Net loss                                              --        (4,104,506)
                                             ------------      ------------
Balances as of October 31, 1996                1,794,626        (4,804,746)
Issuance of common stock for cash                 39,950                -- 
                                                 119,700                -- 
                                                 119,650                -- 
                                                 399,000                -- 
                                                 119,650                -- 
</TABLE>

                                   (continued)

                                      F-5




<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                 STATEMENTS OF STOCKHOLDERS' DEFICIT - CONTINUED

<TABLE>
<CAPTION>
                     Years ended October 31, 1998, 1997, 1996 and period from inception to October 31, 1995
                                                                                                                                    
                                                                        Price               Common stock                            
                                                                         per       -------------------------------   Subscriptions  
                                                        Date            share           Shares         Par value      receivable    
                                             --------------------   -------------  ----------------   ------------  --------------- 
<S>                                                  <C>                <C>            <C>              <C>             <C>         
Contribution of capital by stockholders                                                                   --             821        
Issuance of common stock to affiliated                               
   entities in satisfaction of loans and                             
   accounts payable                                  Dec 1996           3.19           766,659           767              --        
                                                     Apr 1997           2.26           100,000           100              --        
                                                     July 1997          0.50           473,625           474              --        
Issuance of common stock to employees                                
   in satisfaction of loans payable                  June 1997          0.30            33,000            33              --        
                                                     July 1997          0.30             3,000             3              --        
                                                     Aug 1997           0.50            22,366            22              --        
Issuance of common stock to vendor in satisfaction                   
   of accounts payable                               Aug 1997           0.50            58,070            58              --        
                                                     Sept 1997          0.50             5,000             5              --        
Issuance of common stock in satisfaction                             
   of lease obligation                               July 1997          0.59           100,000           100              --        
Issuance of common stock in satisfaction                             
   of acquisition liability                          Sept 1997          0.63           100,000           100              --        
Issuance of common stock to vendors                                  
   for services rendered                             Apr 1997           0.65           200,000           200              --        
                                                     July 1997          0.50            20,800            21              --        
                                                     Aug 1997           0.50            29,000            29              --        
                                                     Sept 1997          0.50             5,400             5              --        
                                                     Oct 1997           0.31           200,088           200              --        
                                                                     
                                                                 

<CAPTION>
                                                                              Deficit  
                                                                            accumulated
                                                            Additional       during the
                                                             paid-in        development
                                                             capital           stage   
                                                           ------------   ---------------
<S>                                                         <C>                <C>
Contribution of capital by stockholders                       678,738          --
Issuance of common stock to affiliated                                           
   entities in satisfaction of loans and                                         
   accounts payable                                         2,448,544          --
                                                              225,962          --
                                                              236,338          --
Issuance of common stock to employees                                            
   in satisfaction of loans payable                            10,967          --
                                                                  997          --
                                                               11,161          --
Issuance of common stock to vendor in satisfaction                               
   of accounts payable                                         28,978          --
                                                                4,995          --
Issuance of common stock in satisfaction                                         
   of lease obligation                                         59,200          --
Issuance of common stock in satisfaction                                         
   of acquisition liability                                    62,400          --
Issuance of common stock to vendors                                              
   for services rendered                                      129,800          --
                                                               10,379          --
                                                               14,471          --
                                                                2,695          --
                                                               61,827          --
</TABLE>


                                   (continued)

                                      F-6

<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                 STATEMENTS OF STOCKHOLDERS' DEFICIT - CONTINUED

<TABLE>
<CAPTION>
                     Years ended October 31, 1998, 1997, 1996 and period from inception to October 31, 1995
                                                                                                                                    
                                                                        Price               Common stock                            
                                                                         per       -------------------------------   Subscriptions  
                                                      Date              share           Shares         Par value      receivable    
                                             --------------------   -------------  ----------------   ------------  --------------- 
<S>                                                  <C>                <C>            <C>              <C>             <C>         
Issuance of common stock to employees for
   services rendered                                 June 1997           0.50              54,133              55              --   
                                                     Aug 1997            0.50              31,200              31              --   
Net loss                                                                                       --              --              --   
                                                                                       ----------         -------       ---------   
Balances as of October 31, 1997                                                        12,567,421          12,568          (6,909)  
Issuance of common stock for cash
                                                     Nov 1997            0.55               4,000               4              --   
                                                     Dec 1997            0.68             500,000             500              --   
                                                     Mar 1998            0.66             500,000             500              --   
                                                     June 1998           0.66             500,000             500              --   
Issuance of warrants for cash
                                                     Dec 1997            0.12                  --              --              --   
                                                     Mar 1998            0.14                  --              --              --   
                                                     June 1998           0.14                  --              --              --   
Issuance of common stock to vendor in
   satisfaction of accounts payable                  Sept 1998           0.78              43,000              43              --   

Issuance of common stock to employees for
   services rendered                                 June 1998           0.50              17,000              17              --   

Cancellation of stock subscriptions                  Oct 1998            0.78            (400,000)           (400)            400   

Net loss                                                                                       --              --              --
                                                                                       ----------         -------       ---------   
Balances as of October 31, 1998                                                        13,731,421         $13,732       $  (6,509) 
                                                                                       ==========         =======       =========  


<CAPTION>
                                                                              Deficit  
                                                                            accumulated
                                                            Additional       during the
                                                             paid-in        development
                                                             capital           stage   
                                                           ------------   ---------------
<S>                                                       <C>              <C>
Issuance of common stock to employees for                 
   services rendered                                             27,018              --  
                                                                 15,568              --  
Net loss                                                             --      (2,624,272) 
                                                           ------------    ------------- 
Balances as of October 31, 1997                               6,622,614      (7,429,018) 
Issuance of common stock for cash                                                        
                                                                  2,196             --   
                                                                339,500             --   
                                                                324,568             --   
                                                                324,569             --   
Issuance of warrants for cash                                                            
                                                                 60,000             --   
                                                                 70,000             --   
                                                                 70,000             --   
Issuance of common stock to vendor in                                                    
   satisfaction of accounts payable                              33,540             --   
                                                                                         
Issuance of common stock to employees for                                                
   services rendered                                              8,483             --   
                                                                                         
Cancellation of stock subscriptions                                  --             --   
                                                                                         
Net loss                                                             --      (1,325,328) 
                                                           ------------    ------------
Balances as of October 31, 1998                            $  7,855,470    $ (8,754,346)
                                                           ============    ============= 

</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-7


<PAGE>



                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                            STATEMENTS OF CASH FLOWS




<TABLE>
<CAPTION>
                                                       Cumulative 
                                                         amounts         Year ended October 31,
                                                          since       ---------------------------
                                                        inception        1998           1997
                                                      -------------   -----------   ------------
<S>                                                   <C>            <C>            <C>
Increase (decrease) in cash and cash equivalents
    Cash flows from operating activities
       Net loss                                       $(8,754,346)   $(1,325,328)   $(2,624,272)
       Adjustments to reconcile net loss
         to net cash used in operating activities
         Gain on extinguishment of debt                  (330,864)      (123,778)      (207,086)
         Depreciation                                      51,213         20,133         27,720
         Noncash charge associated with
           acquisition                                    349,500             --             --
         Accrued loss on abandonment of
           leased facility                                161,918             --             --
         Charges associated with stock issuances
           to employees and vendors                       457,382         42,083        262,299
         Noncash expenses incurred by affiliate           661,677             --             --
         Loss on disposal of property and equipment        13,177             --         13,177
         Changes in assets and liabilities
           Inventory                                           --             --        132,000
           Other assets                                   (22,634)        19,664        (42,298)
           Officer and employee advances                       --             --        146,884
           Payables                                     1,067,931        206,234        382,327
           Accrued liabilities                             95,965         14,841        (44,393)
           Accrued lease obligations                       (2,618)            --         (2,618)
                                                      -----------    -----------    -----------

                  Total adjustments                     2,502,647        179,177        668,012
                                                      -----------    -----------    -----------

                  Net cash used in
                    operating activities               (6,251,699)    (1,146,151)    (1,956,260)
                                                      -----------    -----------    -----------

    Cash flows from investing activities
       Cash paid for acquisition                          (94,000)            --             --
       Additions to property and equipment               (209,104)       (27,231)       (20,010)
                                                      -----------    -----------    -----------

                  Net cash used in
                    investing activities                 (303,104)       (27,231)       (20,010)
                                                      -----------    -----------    -----------
</TABLE>


                                   (Continued)

                                      F-8
<PAGE>



                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                      STATEMENTS OF CASH FLOWS - CONTINUED


<TABLE>
<CAPTION>

                                                   Cumulative
                                                     amounts        Year ended October 31,
                                                      since       --------------------------
                                                    inception         1998           1997
                                                  -------------   -----------    -----------
<S>                                                <C>              <C>          <C>
    Cash flows from financing activities
       Proceeds from issuance of common stock
         and warrants                                4,673,495      1,192,337      1,838,945
       Proceeds from loans                           2,521,569          5,000        632,565
       Payments on notes payable                      (590,919)        (5,111)      (412,808)
       Proceeds from bank overdraft                         --             --        (51,934)
                                                   -----------    -----------    -----------

                  Net cash provided by
                    financing activities             6,604,145      1,192,226      2,006,768
                                                   -----------    -----------    -----------

                  Net increase in cash                  49,342         18,844         30,498

Cash and cash equivalents at beginning of period            --         30,498             --
                                                   -----------    -----------    -----------

Cash and cash equivalents at end of period              49,342         49,342         30,498
                                                   ===========    ===========    ===========

Supplemental disclosure of cash flow information
------------------------------------------------

    Cash paid during the period for
       Interest                                         64,852         39,287         25,565
</TABLE>

Noncash activities
------------------

The following noncash activities occurred in 1998:

The Company cancelled a stock subscription receivable for 400,000 shares of
common stock in the amount of $400.

Accounts payables were restructured to notes payable in the amount of
approximately $196,500. An extraordinary gain of approximately $43,800 was
realized on the restructuring.

The Company issued 60,000 shares of common stock to an employee and a vendor for
services received. The fair value of the services was approximately $42,100.

An extraordinary gain was realized on the forgiveness of accounts payable to
vendors in the amount of approximately $63,500.

An extraordinary gain was realized on the forgiveness of a note payable to a
financing company in the amount of approximately $16,400.



        The accompanying notes are an integral part of these statements.

                                      F-9
<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       1.   Organization and business activity

       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 and is committed to
       developing and marketing a proprietary oil sludge remediation process and
       equipment that uses high energy microwaves to separate water, oil and
       solids. Company operations take place in Texas. The Company's corporate
       offices are in Nevada.

       2.   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.

       3.   Cash and cash equivalents

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

       4.   Inventory

       Inventory consists of components to be integrated into the Company's
       products to be sold to customers. Inventory is valued at lower of cost or
       market. Cost is determined using the first-in, first-out method. Orders
       for inventory have not commenced as of October 1998. As such, management
       has recorded a reserve of $260,000 against the value of inventory on
       hand. The recoverability of inventory is dependent upon the Company
       generating sales of such products. Management anticipates product sales
       commencing in 1999.

       5.   Property and equipment

       Depreciation is provided for in amounts sufficient to relate the cost of
       depreciable assets to operations over their estimated service lives. The
       straight-line method of depreciation is followed for substantially all
       assets for financial reporting purposes.


                                      F-10
<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       6.   Other assets

       Other assets (long-term) consist of long-term deposits and patents. The
       cost of patents are capitalized and amortized to operations over their
       estimated useful lives or statutory lives whichever is shorter.
       Amortization is computed on the straight-line method. As of October 31,
       1998, amortization had not commenced.

       7.   Research and development expenses

       Costs incurred in connection with developing a prototype and a
       demonstration model of a system designed for crude oil sludge, recovery
       process technology have been expensed as incurred.

       8.   Advertising costs

       Advertising costs are expensed in the period incurred.

       9.   Revenue recognition

       Revenue on contracts from crude oil sludge recovery services is accounted
       for principally by the percentage-of-completion method whereby revenue is
       recognized based on the estimated stage of completion of individual
       contracts.

       Revenue in 1998 in the amount of $26,289 is the result of the Company
       leasing its crude oil sludge recovery equipment under contract. There
       were no product sales, contract or otherwise, during 1998 or 1997.

       10.  Fair value of financial instruments

       Cash and cash equivalents, accounts payable and accrued liabilities are
       reflected in the financial statements at fair value because of the
       short-term maturity of these instruments. Notes payable to third parties
       and related parties as reflected in the financial statements approximate
       their fair value.

       11.  Certain reclassifications

       Certain reclassifications have been made to the 1997 financial statements
       to conform with the 1998 presentation.


                                      F-11
<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       12.  Income taxes

       The Company utilizes the liability method of accounting for income taxes.
       Under the liability method, deferred tax assets and liabilities are
       determined based on the difference between the financial statement and
       tax bases of assets and liabilities using enacted tax rates in effect
       during the years in which the differences are expected to reverse. An
       allowance against deferred tax assets is recorded in whole or in part
       when it is more likely than not that such tax benefits will not be
       realized.

       13.  Loss per common share

       During 1998, the Company adopted Statement of Financial Accounting
       Standards No. 128, "Earnings per Share". SFAS 128 requires the disclosure
       of Basic and Diluted Earnings per Share (EPS). Basic EPS is calculated
       using income available to common stockholders divided by the
       weighted-average number of common shares outstanding during the year.
       Diluted EPS is similar to Basic EPS except that the weighted-average of
       common shares outstanding is increased to include the number of
       additional common shares that would have been outstanding if the dilutive
       potential common shares had been issued. Such potentially dilutive common
       shares include stock warrants granted or sold and convertible debt.
       Shares having an antidilutive effect on periods presented are not
       included in the computation of dilutive EPS (Note J). All prior year
       losses per common share have been restated to comply with the provisions
       of SFAS 128.

       14.  Accounting standards not yet adopted

       Reporting comprehensive income

       In September 1997, the Financial Accounting Standards Board issued
       Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting
       Comprehensive Income, effective for years beginning after December 15,
       1997. This Statement establishes standards for reporting and display of
       comprehensive income and its components (revenues, expenses, gains and
       losses) in a full set of general-purpose financial statements. This
       Statement requires that all items that are required to be recognized
       under accounting standards as components of comprehensive income be
       reported in a financial statement that is displayed with the same
       prominence as other financial statements. SFAS 130 does not require a
       specific format for that financial statement but requires that an
       enterprise display an amount representing total comprehensive income for
       the period in that financial statement. The Statement requires that an
       enterprise classify items of other comprehensive income by their nature
       in the financial statement and display the accumulated balance of other
       comprehensive income separately from retained earnings and additional
       paid-in-capital in the equity section of a statement of financial
       position. Reclassification of financial statements for earlier periods
       provided for comparative purposes is required. The Company does not have
       components of comprehensive income in 1998 or 1997. No significant impact
       to the Company's financial statements is expected upon adoption of SFAS
       130.


                                      F-12
<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       14.  Accounting standards not yet adopted - continued

       Disclosures about segments of an enterprise and related information

       Also, in September 1997 the Financial Accounting Standards Board issued
       Statement of Financial Accounting Standards No. 131 (SFAS 131),
       Disclosures about Segments of an Enterprise and Related Information,
       effective for years beginning after December 15, 1997. This Statement
       establishes standards for the way that public business enterprises report
       information about operating segments in annual financial statements and
       requires that those enterprises report information about operating
       segments in interim financial reports issued to shareholders. It also
       establishes standards for related disclosures about products and
       services, geographic areas and major customers. This Statement requires
       that a public business enterprise report financial and descriptive
       information about its reportable operating segments. Operating segments
       are components of an enterprise about which separate financial
       information is available that is evaluated regularly by the chief
       operating decision maker in deciding how to allocate resources and in
       assessing performance. Generally, financial information is required to be
       reported on the basis that it is used internally for evaluating segment
       performance and deciding how to allocate resources to segments. This
       Statement requires that a public business enterprise report a measure of
       segment profit or loss, certain specific revenue and expense items, and
       segment assets. Since the Company is still considered a development stage
       company and no segments have been identified by management, no
       significant impact to the Company's financial statements is expected.


NOTE B - 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 is a
       development stage company and has sustained substantial losses from
       operations since inception. Such losses have continued through the year
       ended October 31, 1998. In addition, the Company has used cash in, rather
       than provided cash from, 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 its 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.


                                      F-13
<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE B - REALIZATION OF ASSETS - CONTINUED

       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.

       During December 1998, the Company reached agreements with certain related
       party creditors to settle debt in exchange for common stock (Note L).

       In early fiscal 1999, the Company extended an agreement with a major
       petroleum company for the utilization of its technology.

       During January 1999, management has conducted discussions with a
       petroleum company concerning a long-term contract for the use of the
       Company's technology


NOTE C - PROPERTY AND EQUIPMENT

       Property and equipment and estimated useful lives consist of the
following:

                                             Years        1998          1997
                                           ---------    ---------    ---------
Furniture and fixtures                           5-7       43,644       16,413
Machinery and equipment                           10       54,174       54,174
Automobiles                                        7       96,236       96,236
                                                        ---------    ---------
                                                          194,054      166,823
Less accumulated depreciation                             (49,342)     (29,209)
                                                        ---------    ---------
                                                          144,712      137,614
                                                        =========    =========


NOTE D - LONG-TERM OBLIGATIONS

       Long-term obligations consist of the following:
                                                            1998         1997
                                                         ---------    ---------
       10% note payable to a corporation controlled by
       a stockholder and director of the Company,
       interest and principal due in November 1998,
       convertible at anytime into 541,783 shares of
       the Company's common stock at $0.44 per share,
       not collateralized                                  303,775     228,780


                                      F-14

<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE D - LONG-TERM OBLIGATIONS - CONTINUED

<TABLE>
<CAPTION>
                                                                            1998        1997
                                                                          -------     -------
<S>                                                                        <C>        <C>
10% note payable to a corporation, due September 2003, interest paid in
    full at date incurred, principal due in full at maturity, not 
    collateralized                                                         121,500         --

10% note payable to a limited partnership, due June 2001, interest due
    semi-annually, principal due in full at maturity, not collateralized   100,000    100,000

10% note payable to an attorney and stockholder, due in full at maturity, 
    convertible at anytime into shares of the Company's common stock at 
    $0.31 per share, not collateralized                                     60,000     60,000

8%-10% notes payable to financing companies, $3,408 payable monthly
   including interest, due in 1998, collateralized by equipment                 --     16,559
                                                                          --------   --------
                                                                           585,275    405,339
Less current maturities                                                    363,775    116,559
                                                                          --------   --------
                                                                           221,500    288,780
                                                                          ========   ========
</TABLE>


       Scheduled maturities of long-term obligations as of October 31, 1998 are
as follows:

           Year ending October 31,
           -----------------------
                  1999                                363,775
                  2000                                     --
                  2001                                100,000
                  2002                                     --
                  2003                                121,500
                  Thereafter                               --
                                                   ----------
                                                      585,275
                                                   ==========



                                      F-15
<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE E - COMMITMENTS AND CONTINGENCIES

       Operating leases

       The Company leases office space, a production and lab facility and
       automobiles under operating leases which expire through the year 2000.
       Under these operating lease agreements the Company is liable to carry
       property insurance and assume the responsibility for maintaining the
       property. The Company's commitment under these leases expires as follows:

           Year ending October 31,
           -----------------------
               1999                                       71,125
               2000                                       42,647
               Thereafter                                      -
                                                       ---------
                                                         113,772
                                                       =========

       Total rent expense for the years ended October 31, 1998 and 1997, was
       approximately $84,900 and $159,000, respectively and cumulative since
       inception of approximately $595,000.

       Litigation

       In February of 1995, Thermal Wave International (TWI) filed third-party
       claims against third party defendants, including the Company. TWI alleges
       Company misrepresentation regarding technological exclusivity, disclosure
       of TWI trade secrets, unfair competition, false advertising and other
       claims. Remedies sought by TWI include: actual damages of an unspecified
       amount, disgorgement of profits, punitive damages of an unspecified
       amount, and other orders.

       Management believes that TWI's claims are without merit and is vigorously
       defending the matter. No amount of liability can be estimated based upon
       the facts of the claim.

       The Company is also included in other litigation arising from operations.
       Management does not believe that any such litigation has merit or that
       any such matter will have a material effect on the Company's financial
       position or results of operations.


NOTE F - STOCKHOLDERS' EQUITY

       1.   Common stock

       During fiscal 1998 and 1997, the Company issued 43,000 and 455,288 shares
       of common stock, respectively, to an attorney and vendors for services
       rendered on behalf of the Company. Expenses associated with these
       issuances were $33,583 and $219,627, respectively, to record the fair
       value of the shares issued based upon the trading price of the shares.


                                      F-16
<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE F - STOCKHOLDERS' EQUITY - CONTINUED

       1.   Common stock - continued

       Also during fiscal 1998 and 1997, the Company issued 17,000 and 85,333
       shares, respectively, of common stock to certain employees of the Company
       for services rendered. Compensation expense recorded as a result of these
       stock issuances in the years ended October 31, 1998 and 1997 was $8,500
       and $42,672, respectively, based upon the trading price of the shares at
       the dates of issuance.

       2.   Stock subscription receivable

       During fiscal 1998, the Company cancelled a stock subscription receivable
       for 400,000 shares in the amount of $400.


NOTE G - ASSET PURCHASE SETTLEMENT

       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 nonrecourse
       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. The
       Company paid an additional amount of $193,000 during 1997. The Company
       reached an agreement in July 1997 to restructure the remaining balance
       due on the note payable ($402,000). The settlement included reassigning
       the capitalized technology to the seller in satisfaction of the remaining
       balance on the note of $339,500 and issuance of 100,000 shares of common
       stock (approximating $62,500).


NOTE H - WARRANTS

       1.   Stock warrants

       The Company's board of directors has the authority to grant stock
       warrants to employees, officers and certain non-employees. These warrants
       are considered nonqualified for income tax purposes. As of October 31,
       1998, the Company has granted or sold warrants to purchase 10,700,000
       shares of the Company's common stock. The Company has reserved this
       amount of its authorized shares. The warrants vest immediately upon grant
       and have a weighted-average remaining contractual life of 3.42 years.


                                      F-17
<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE H - WARRANTS - CONTINUED

       2.   Warrant activity

       The following is a summary of the activity relating to warrants through
October 31, 1998:

<TABLE>
<CAPTION>
                                                                                   Weighted-average
                                                                     Exercise           exercise
                                                     Warrants          price             price
                                                   ------------   --------------   -----------------
<S>                                                 <C>            <C>                   <C>  
     Outstanding at November 1, 1996                        --     $        --           $  --
        Granted                                        200,000            0.50            0.50
                                                    ----------  

     Outstanding at October 13, 1997                   200,000            0.50            0.50
        Granted                                     10,500,000            1.00            1.00
                                                    ----------  
     Outstanding at October 31, 1998                10,700,000       0.50-1.00            0.99
                                                    ==========  
     Exercisable at October 31, 1998                10,700,000       0.50-1.00            0.99
                                                    ==========
</TABLE>


NOTE I - RELATED PARTY TRANSACTIONS

       Related party transactions consist of the following:

       1.  National Security Analysts, Inc.

       In fiscal 1996 and through December 1996, the Company was provided with
       administrative support services and office space by National Security
       Analysts, Inc. (NSA), an entity controlled by a stockholder and former
       director of the Company. Such amounts totaled $236,986 and $338,451 for
       the years ended October 31, 1997 and 1996, respectively. In addition, the
       Company received noninterest-bearing loans in fiscal 1997 totaling
       approximately $335,000 and noninterest-bearing advances to fund working
       capital needs totaling $257,023 in fiscal 1996.

       The Company's liability to NSA at October 31, 1996 was $138,637. During
       fiscal 1997, the Company entered into a settlement agreement (the term of
       which are reflected in the accompanying financial statements) wherein NSA
       agreed to contribute approximately $600,000 of amounts due to the capital
       of the Company as consideration for amounts due from NSA's principal
       shareholder for common stock issued in 1995. In addition, the remaining
       balance due was exchanged for 100,000 shares of common stock. The
       reduction in the amount due to NSA resulting from the settlement of
       approximately $600,000 has been credited to additional paid-in capital.


                                      F-18
<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE I - RELATED PARTY TRANSACTIONS - CONTINUED

       2.  Food Development Corporation

       During fiscal 1996 and early fiscal 1997, Food Development Corporation
       (FDC), an entity controlled by a stockholder and director of the Company,
       incurred expenses on behalf of the Company amounting of $76,261 and
       $469,770, respectively. In addition, included in research and development
       expense in fiscal year 1995 is $275,000 associated with prototype
       development costs funded by FDC.

       In fiscal 1997, the Company issued 473,625 shares of common stock valued
       at $236,812 to FDC in partial satisfaction of the balance due. In
       addition, the Company and FDC agreed to reduce the amount due to FDC by
       approximately $132,000. This reduction has been reflected as an
       extraordinary gain in the accompanying financial statement. In January
       1998, the amount due was recorded as a note payable to FDC which bears
       interest at 10 percent and is due no earlier than November 2, 1998 (Note
       D). As of October 31, 1998, the outstanding balance on the note is
       $303,775. FDC may convert the remaining balance due anytime into shares
       of common stock at $0.44 per share.

       3.  Affiliates of Stockholder

       From March through October 1997, the Company was loaned $1,884,004 from
       two entities affiliated with a stockholder of the Company. The loans bore
       no interest. In fiscal 1997, the Company issued 766,659 shares of common
       stock, to repay the loans in full. The Company received approximately
       $450,000 from the same entities as additional loans in early 1998.

       4.  Payable to Officers

       During 1998, the Company agreed to pay an officer of the Company $217,895
       for services rendered in the Company's behalf. The Company also agreed to
       pay $25,000 for furniture received from the officer. As such, a liability
       in the amount of $242,895 has been recorded in the accounts payable to
       related parties. The Company has recorded in accounts payable to related
       parties additional amounts totaling $9,710 for services rendered by
       officers of the Company.

       5.  Management Agreement

       During November 1998, the Company entered into a five year management
       agreement with a company, controlled by a major stockholder. The
       agreement calls for general business and financial consultation and
       certain management services to be provided to the Company by the related
       party in exchange for an annual management fee equal to five percent of
       the Company's gross revenues.


                                      F-19

<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE J - LOSS PER COMMON SHARE

<TABLE>
<CAPTION>
                   For the Year Ended October 31, 1998
         ------------------------------------------------------
                                                                                    Weighted-average
                                                                     Net Loss            shares          Per share
                                                                    (numerator)       (denominator)       amount
                                                                  --------------    ----------------   ------------
<S>                                                               <C>               <C>                <C>
         Net loss per common share - basic
             Loss before extraordinary item                          (1,449,106)       13,444,674         (0.10)
                                                                  ==============    ================   ============
             Net loss available to common shareholders               (1,325,328)       13,444,674         (0.09)
                                                                  ==============    ================   ============


                   For the Year Ended October 31, 1997
         ------------------------------------------------------

         Net loss per common share - basic
             Loss before extraordinary item                         (2,831,358)         9,658,850         (0.29)
                                                                  ==============    ================   ============
             Net loss available to common shareholders              (2,624,272)         9,658,850         (0.27)
                                                                  ==============    ================   ============
</TABLE>



       The average shares of warrants granted and potentially convertible debt
       instruments were not included in the computation of a diluted loss per
       share because their inclusion would have been antidilutive for the years
       ended October 31, 1998 and 1997 (Notes D and H).


NOTE K - INCOME TAXES

       Deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
                                                                       1998             1997
                                                                  --------------   --------------
<S>                                                               <C>              <C>
        Deferred tax assets (liabilities)
            Benefit of net operating loss carryforwards               2,910,492        2,431,161
            Capitalized start up costs                                   69,495           93,303
            Depreciable assets                                          (19,792)         (15,333)
            Bad debt allowance                                           14,135           14,135
                                                                  --------------   --------------
                                                                      2,974,330        2,523,266
        Less valuation allowance                                     (2,974,330)      (2,523,266)
                                                                  --------------   --------------
                                                                             --               --
                                                                  ==============   ==============
</TABLE>


                                      F-20

<PAGE>

                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS

                            October 31, 1998 and 1997


NOTE K - INCOME TAXES - CONTINUED

       The Company has sustained net operating losses in each of the periods
       presented. There were no deferred tax assets or income tax benefits
       recorded in the financial statements for net deductible temporary
       differences or net operating loss carryforwards because the likelihood of
       realization of the related tax benefits cannot be established.
       Accordingly, a valuation allowance has been recorded to reduce the net
       deferred tax asset to zero and consequently, there is no income tax
       provision or benefit for any of the periods presented. The increase in
       the valuation allowance was $451,064 and $1,038,000 for the years ended
       October 31, 1998 and 1997, respectively.

       As of October 31, 1998, the Company had net operating loss carryforwards
       for tax reporting purposes of approximately $8,500,000 expiring in
       various years through 2018.


NOTE L - SUBSEQUENT EVENTS

       Sale of Stock and Warrant

       During December 1998, the Company sold 225,000 shares of common stock and
       a warrant to purchase an additional 875,000 shares of common stock for
       $150,000.

       Food Development Corporation

       During December 1998, the Company issued 614,021 shares of common stock
       to Food Development Corporation, a related party in exchange for relief
       of a portion of outstanding debt in the amount of $268,327 (Note D).

       Stock issuance to an Officer

       During December 1998, the Company issued 485,790 shares of common stock
       to an officer of the Company in exchange for relief of an outstanding
       liability in the amount of $242,895 (Note I).

       Stock issuances to an Officer and Employees

       During January 1999, the Company issued 30,000 shares of common stock to
       an officer and two employees of the Company for compensation of services
       performed during fiscal year 1999 in the amount of $18,750.

       Stock issuance to a vendor

       During January 1999, the Company issued 2,490 shares of common stock to a
       vendor for satisfaction of an account payable in the amount of $1,494.


                                      F-21