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                      SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                   FORM 10-KSB

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


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

For the fiscal year ended October 31, 1997           Commission File No. 0-21169

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

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


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


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

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

                                      None

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

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

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

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

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

The aggregate market value of shares of Common Stock held by non-affiliates
(based on the January 20, 1998 last sale price) was approximately $7,217,522.

As of January 19, 1998, 13,155,421 shares of the issuer's Common Stock were
outstanding.

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


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<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.

         In  December  1996,  new  management   assumed  control  of  day-to-day
operations  of the Company.  The new  management  included  Henry H.  Kartchner,
Chairman  and  Chief  Executive  Officer,  and C.  Brent  Kartchner,  who is now
President of the Company.  The Company's new management  implemented a number of
cost-cutting  initiatives  aimed at continuing to fund the Company's  operations
from existing  resources  and reducing the level of revenue  required to operate
the Company.

         The Company has not yet recognized sales revenues,  although it shipped
an MST unit to a potential customer in August 1997. 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.


                                      -2-
<PAGE>

Current Product Offerings

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

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

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

         -  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.  One MST  system  unit was  shipped to a
potential  customer in August  1997.  The unit  currently is operating in an oil
reclamation  plant in east Texas.  The  potential  customer  currently has until
approximately March 15, 1998 to decide whether to acquire the unit.

         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 90 days.  Complete parts support and training programs
are available for all products.

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


                                      -3-
<PAGE>

         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.

Marketing

         The Company markets its products primarily for remediation of crude oil
sludge and emulsions  produced in connection  with oil  production and refining.
There are approximately 700 oil refineries worldwide, all of which are potential
customers  of  the  Company.  The  United  States  has  111  operable  petroleum
refineries.  The Company is focusing its marketing efforts on refineries located
in the United States and Canada.

         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:

         -  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

         -  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.

                                      -4-
<PAGE>


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

Competition

         The Company's  competitors are firms that use a variety of processes to
dispose of solid and oily  non-hazardous  oil field wastes.  The following table
provides information on these processes:

<TABLE>
<CAPTION>

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


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

         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.
                                      -5-

<PAGE>

         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:

         -    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.

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

         -    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.

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

                                      -6-
<PAGE>


         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.

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 19, 1998,  the Company had 10 full-time  employees,  five
engaged  in  testing  and   manufacturing   and  five   involved  in  sales  and
administration.

                                      -7-
<PAGE>


ITEM 2.  PROPERTIES

         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

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

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

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

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

                                      -8-
<PAGE>

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


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

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


                                     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 of fiscal
years 1996, 1997, and 1998.

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

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

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

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

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

         1998                  High Bid                 Low Bid
        ------                ----------              ----------

        First Quarter**        $ 0.96                   $ 0.50

        -------
        *  From April 16, 1996, when the Company's stock began trading publicly.
        ** To January 19, 1998.
                                      -9-
<PAGE>

         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  19,  1998,  there  were 559  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 1997,  the  Company  issued  shares of its Common  Stock
without  registration under the Securities Act of 1933 on several occasions.  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
      Stock Certificate           Identifier          Shares Issued            Forgiven           Price Per 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
     Stock Certificate            Identifier          Shares Issued            Forgiven           Price Per 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.


                                      -11-

<PAGE>

         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
       Stock Certificate            Shares Issued     Purpose of 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 expenses     Debt of $73,600
                                                      advanced                       cancelled ($0.50 per
                                                                                     share)

            7/24/97                    100,000        Settlement of claim for        Settlement amount of
                                                      abandonment of leased          $63,500 ($0.635 per
                                                      premises                       share)

            7/24/97                      3,000        Loan repayment                 Debt of $1,000 cancelled
                                                                                     ($0.30 per share)

            7/29/97                    326,425        Reimbursement for expenses     Debt of $163,212.33
                                                      advanced                       cancelled ($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>

                                      -12-

<PAGE>

         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. 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.

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

Overview

         The Company has  sustained  substantial  losses from  operations  since
inception,  and such losses have continued  since October 31, 1997. In addition,
the Company has used, rather than provided, cash in its operations.

         The  Company  has taken  steps to revise its  operating  and  financial
requirements.  Management  believes  these steps are  sufficient  to provide the
Company with the ability to continue operations.

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

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

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

 -   As of August 1997, the Company reached an agreement with Food  Development
     Corporation  (FDC),  a  company  which  is  owned  by the  Chairman  of the
     Company's Board of Directors, to settle IPRC's outstanding debt obligations
     to FDC. The agreement  required the Company to issue a promissory  note due
     no earlier than November 2, 1998 in the principal  amount of  approximately
     $236,000. The note agreement followed a significant reduction of the amount
     due to FDC through the issuance of Common Stock.

 -   The Company  negotiated a settlement  of amounts due to NSA,  Inc. and its
     owner, the former  President of the Company,  under which NSA and the owner
     contributed  the balance of certain notes and liabilities to the capital of
     the Company and agreed to exchange the remaining balance for 100,000 shares
     of Common Stock in the Company. 

                                      -13-
<PAGE>


         The  combined  effect  of these  and  other  actions  has  reduced  the
liabilities of the Company by approximately  $2.8 million as of October 31, 1997
as compared to October 31, 1996.

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

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

         In early 1998,  the  Company  added a new  laboratory,  adjacent to its
manufacturing  plant, to receive and process sludge emulsion samples from around
the world. The laboratory also serves as a bench scale testing facility, capable
of processing  five to eight samples per day and  duplicating the commercial MST
system's process.

Fiscal Year Ended October 31, 1997 Compared to Fiscal Year Ended October 31, 
1996

         Operating  expenses  in fiscal  1997 were $  2,818,599  as  compared to
$4,105,683  in fiscal  1996,  a decrease of 31.3%.  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 1997 were  $280,476 as compared to $1,355,324 in
fiscal 1996, a decrease of 79.3%. During fiscal 1997, 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  1997,  the
MST-1000 was completed and a majority of the  improvements  had been  perfected.
Management  does not believe further  improvements  requiring the expenditure of
significant funds will be necessary.

         General and  administrative  expenses in fiscal 1997 totaled $2,538,123
as compared to $2,238,941 in fiscal 1996, an increase of 13.4%. The increase was
primarily  attributable  to the  performance of promotion and marketing  efforts
internally as opposed to prior years when  affiliated  entities  performed these
functions.

         The Company  realized gains from the  settlement of liabilities  during
fiscal year 1997 of $207,086.

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 debt financing that  subsequently was converted into
common  stock.  On  October  31,  1997,   IPRC's   aggregate   liabilities  were
approximately  $1,011,000  and the Company  had  (negative)  working  capital of
approximately $660,000.

                                      -14-
<PAGE>

         During fiscal year 1997,  management  utilized  extensively  the Common
Stock of the Company to settle may of IPRC's liabilities and obligations.  These
activities  resulted in a reduction of the Company's  liabilities  during fiscal
1997 by  approximately  $2,800,000 and  contributed,  in part, to an increase in
stockholders' equity of the Company by approximately $2,200,000. In addition, in
December  1997,  the  Company  raised  approximately  $400,000  from the sale of
1,004,000  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 1998, however, to
sustain the operations of the Company.

         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.


ITEM 7.  FINANCIAL STATEMENTS

         Please see attached.


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

         Not required because previously reported.


                                    PART III

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

Directors and Executive Officers

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

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


                                      -15-
<PAGE>

         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. Brent Kartchner is the son of Henry Kartchner.

         Scott Jensen, 26, 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.

         During the fiscal year ended  October  31,  1997,  Henry H.  Kartchner,
Chairman and Chief  Executive  Officer of the  Company,  failed to file a Form 4
under  Section  16(a) to report the  purchase on November 26, 1996 for $1.87 per
share and sale on December 9, 1996 for $2.50 per share, both in the open market,
of 10,000 shares of the Company's  Common Stock.  Mr.  Kartchner  also failed to
report on Form 4 his  acquisition  from the  Company of 20,812  shares of Common
Stock in April  1997.  These were shares Mr.  Kartchner  believes he should have
received in September  1995,  in exchange for a commitment  to provide  economic
support and credit required to fabricate and test the Company's initial MST-4000
system prototype for minimal  compensation.  Mr. Kartchner also failed to report
on Form 4 acquisitions by Food  Development  Corporation  ("FDC"),  an entity he
controls,  of 147,200 shares of Common Stock from the Company on July 1, 1997 in
exchange for FDC's cancellation of a debt for $73,600,  326,425 shares of Common
Stock from the Company on July 21, 1997 in exchange for FDC's  cancellation of a
debt for  $163,212.33,  and the right to acquire  541,783 shares of Common Stock
for $0.437 per share upon conversion of a promissory note that accrues  interest
from  August 25,  1997,  which the Company  issued to FDC in exchange  for FDC's
release of a claim for $236,759.18 for research and development expenses FDC had
incurred on behalf of the Company.

                                      -16-

<PAGE>

         Although Henry Kartchner failed to report these transactions on Form 4,
he  reported  them on a Schedule  13D filed with the SEC on  January  16,  1998.
Moreover, Mr. Kartchner intends to file Form 4's to report these transactions in
the very near future.

         Also during the fiscal year ended October 31, 1997, C. Brent Kartchner,
a  director  and  executive  officer  of  the  Company,  failed  to  report  his
acquisition  from the  Company of 20,812  shares of Common  Stock in April 1997.
These were shares Mr.  Kartchner  believes he should have  received in September
1995 in  exchange  for a  commitment  to  provide  operational  and  fabrication
services to the Company for minimal compensation.  Mr. Kartchner intends to file
a Form 4 to report this transaction in the very near future.


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.

                               Annual Compensation

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

         Henry Kartchner,     1997        0          0            0
         Chairman & CEO       1996      12,000       0            0
                              1995        -          -            -
                                                                   
         Brent Kartchner,     1997     120,000       0            0
         Vice President       1996      17,500       0            0
                              1995        -          -            -
                                                                   
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,  1997 and have been none since
then.

                                      -17-
<PAGE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

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

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

         C.  Brent Kartchner        1,118,853                 8.5%
         57 Quail Run Rd.
         Henderson, NV 89014

         Henry H. Kartchner         2,113,749                 15.4%
         3216 S. Everett Place
         Kennewick, WA 99336

         Rex H. Lewis               6,000,000                 35.1%
         2325-A Renaissance Dr.
         Las Vegas, NV 89119

         All Executive Officers     3,232,602                 23.6%(4)
         & Directors
            as a Group(3)

         ---------
         1.   Another  person or person may own  beneficially  5% or more of the
              Company's  Common Stock  without  management's  having  sufficient
              evidence to conclude  that such an  ownership  position  currently
              exists.
         2.   All shares are held directly except that (i) Mr. Henry Kartchner's
              beneficial  holdings  include 473,625 shares held directly by Food
              Development  Corporation,  which he  controls,  and a  convertible
              promissory note held by Food Development Corporation that entitles
              the holder to acquire 541,783 shares at $0.437 per share, and (ii)
              Mr. Lewis' beneficial  holdings are held by Maya LLC, an entity he
              controls,  and include options to acquire  3,500,000 shares of the
              Company's Common Stock for $1.00 per share until Dec. 11, 2001.
         3.   Includes  two  individuals,  Mr.  Henry  Kartchner  and  Mr. Brent
              Kartchner.
         4.   Does not equal the sum of individual holdings percentages because,
              under SEC  rules,  different  denominators  are used to  calculate
              certain individual percentages.

                                      -18-

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company engaged in transactions with NSA, Inc.  ("NSA"),  an entity
controlled by Mr. Barry Meuse, during the time that Mr. Meuse was a more-than-5%
stockholder,  officer and director of the Company.  During the fiscal year ended
October  31,  1996,  the Company  incurred  liabilities  to NSA of $236,986  for
administrative  support  services,  travel and other associated costs. Mr. Meuse
ceased to be an officer and director of the Company in December 1996. In January
1998, the Company  settled all of its  contractual  claims against Mr. Meuse and
all of Mr.  Meuse's  contractual  claims  against  the  company.  See  Note C to
Financial Statements.

         The Company  also has  engaged in  transactions  with Food  Development
Corporation  ("FDC"), an entity controlled by Henry H. Kartchner,  the Company's
Chairman of the Board.  During fiscal year 1996 and early fiscal year 1997,  FDC
incurred  expenses on behalf of the Company  amounting to $76,261 and  $469,770,
respectively.  In addition, $275,000 associated with prototype development costs
funded by FDC were included in the Company's research and development expense in
fiscal year 1995.  In fiscal  1997,  the Company  issued  473,625  shares of its
Common Stock, valued at $236,338,  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 statements.  In January 1998, the amount due
was captured in a promissory note payable to FDC which bears interest at 10% and
is due no earlier than November 2, 1998. As of October 31, 1997, the outstanding
balance on the note was  $228,780.  FDC may  convert the  remaining  balance due
anytime into shares of the Company's Common Stock at $0.437 per share.

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


         In April 1997,  the Company issued 20,812 shares of its Common Stock to
each of Henry  Kartchner  and  Brent  Kartchner.  At the  time,  Henry and Brent
Kartchner  constituted two of the three members of the Board of Directors of the
Company.  It was the  position of Henry and Brent  Kartchner  that each of their
holdings of Company  Common Stock should be increased by 20,812  shares  because
their  original  agreement  to acquire  Common Stock in the Company in September
1995 called for their receipt of such shares.




                                      -19-


<PAGE>

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

              Statements of Operations

              Statement of Stockholders' Deficit

              Statements of Cash Flows

              Notes to Financial Statements

Exhibits

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

Reports on Form 8-K

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

    


                                      -20-

<PAGE>



                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its  behalf  by the  undersigned,  thereunto  duly  authorized,  on
January 29, 1998.


                                    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                        January 29, 1998
------------------------------------
Henry H. Kartchner
Chairman and Chief Executive Officer
(Principal Executive Officer)



/s/  C. Brent Kartchner                        January  29, 1998
------------------------------------
C. Brent Kartchner
President and Director




                                      -21-
<PAGE>









           FINANCIAL STATEMENTS AND REPORT OF
              INDEPENDENT CERTIFIED PUBLIC
                      ACCOUNTANTS

              IMPERIAL PETROLEUM RECOVERY
                      CORPORATION

               October 31, 1997 and 1996









<PAGE>












                                   C O N T E N T S

                                                                         Page
                                                                     -----------

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                        3

FINANCIAL STATEMENTS

        BALANCE SHEETS                                                    5

        STATEMENTS OF OPERATIONS                                          6

        STATEMENT OF STOCKHOLDERS' DEFICIT                                7

        STATEMENTS OF CASH FLOWS                                         10

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                       11







<PAGE>








               Report of Independent Certified Public Accountants




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


        We have audited the accompanying balance sheets of Imperial Petroleum
Recovery Corporation (a development stage company) (a Nevada corporation) as of
October 31, 1997 and 1996, and the related statements of operations, changes in
stockholders' deficit and cash flows for the years then ended and for cumulative
amounts since inception. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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


                                       3
<PAGE>









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

        The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred cumulative net losses of approximately $7,400,000 since
inception of operations and as of October 31, 1997, the Company's current
liabilities exceeded its current assets by $659,611 and its total liabilities
exceeded its total assets by $(800,745). These factors, among others, as
discussed in Note A to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.


                                       Grant Thornton LLP




Houston, Texas
January 22, 1998

                                       4

<PAGE>





                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                                 BALANCE SHEETS
                                   October 31,


                             ASSETS                       1997            1996
                                                     ------------    ----------
CURRENT ASSETS
  Cash and cash equivalents                            $  30,498       $   -
  Officer and employee advances                              -          146,884
  Inventory, net of reserve                                  -          132,000
  Prepaid expenses                                        32,266           -
                                                       ---------        -------
    Total current assets                                  62,764        278,884

PROPERTY AND EQUIPMENT, net of accumulated 
  depreciation of $29,209 and $3,362 at 
  1997 and 1996                                          137,614        158,501

DEPOSITS                                                  10,032           -
TECHNOLOGY RIGHTS - held for note settlement                 -          339,500
                                                      -----------   -----------
                                                       $ 210,410     $  776,885
                                                      ===========   ===========

                    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Bank overdraft                                       $     -        $  51,934
  Notes payable - current portion                         16,559         20,000
  Accounts payable - trade                               525,667        341,707
  Accounts payable - National Security Analysts, Inc.        -          138,638
  Accrued liabilities                                     80,149        124,542
  Current portion of abandoned lease obligation          100,000          2,618
                                                     -----------    -----------
    Total current liabilities                            722,375        679,439

NOTE PAYABLE - Phonon acquisition - noncurrent               -          339,500
NOTE PAYABLE - concurrent                                288,780        661,677
ACCRUED LEASE OBLIGATION - noncurrent                        -          100,000
OBLIGATIONS TO BE SETTLED IN STOCK
  Loans from affiliated entities                             -        1,884,004
  Abandoned lease obligation                                 -           59,300
  Phonon acquisition                                         -           62,500
                                                      ----------     ----------

                                                            -         2,005,804
COMMITMENTS AND CONTINGENCIES                               -              -
STOCKHOLDERS' DEFICIT
    Common stock, - authorized 100,000,000 
      shares; $.001 par value; issued and 
      outstanding 12,567,421 and 
      8,315,080 shares at 1997 and 1996                  12,568         $ 8,315
    Common stock subscribed                              (6,909)         (7,730)
    Additional paid-in capital                        6,622,614       1,794,626
    Deficit accumulated during the development       (7,429,018)     (4,804,746
      stage                                         -----------     -----------
      Total stockholder's equity                       (800,745)     (3,009,535)
                                                    -----------     -----------
                                                   $    210,410    $    776,885
                                                    ===========     ===========

The accompanying notes are an integral part of these statements.


                                       5
<PAGE>




                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                   
                                                    Cumulative           Year ended October 31,
                                                    Amounts Since     -----------------------------
                                                     Inception            1997            1996
                                                 ---------------      ----------       -----------
<S>                                          <C>                   <C>              <C>

Revenue                                     $              -      $         -       $          -
Costs of goods sold                                        -                -                  -
                                             ------------------- ----------------     ------------
         Gross profit                                      -                -                  -
Operating expenses
   Research and development expenses -
      prototype                                        2,075,800          280,476        1,355,324
   Acquired research and development -
      Phonon Technologies                                349,500            -              349,500
   General and administrative expenses
      Internal administration, selling and
         marketing expense                             3,732,938        2,224,876        1,430,720
      Administrative and operating support
         costs - related parties                       1,304,875          313,247          808,221
   Loss on abandonment of leased facility                161,918            -              161,918
                                                     ------------    ------------       ----------
         Loss from operations                         (7,625,031)      (2,818,599)      (4,105,683)
Other income (expense), including interest               (11,073)         (12,759)           1,177
                                                     -----------     ------------       ----------
         Loss before extraordinary gain               (7,636,104)      (2,831,358)      (4,104,506)
Extraordinary gain from settlement of
   liabilities                                           207,086          207,086               -
                                                     -----------      -----------      -----------
         NET LOSS                                    $(7,429,018)     $(2,624,272)     $(4,104,506)
                                                      ==========       ==========       ==========

Loss per share before extraordinary gain                               $    (.29)             (.46)
Extraordinary gain per share                                                 .02                -
                                                                      ----------      ------------
Net loss per share                                                     $    (.27)      $      (.46)
                                                                      ==========     =============
Weighted average shares outstanding                                     9,708,850        8,890,081



</TABLE>



The accompanying notes are an integral part of these statements.

                                       6

<PAGE>





                     Imperial Petroleum Recovery Corporation

                          (a development stage company)

                       STATEMENT OF STOCKHOLDERS' DEFICIT
                   Years ended October 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>

                                                                                    Common            Additional Deficit accumulated
                                                               Price     Common     stock    Common     paid-in        during the
                                      Date                  per share    shares  subscribed  stock      capital    development stage
                              ----------------------------  --------- ---------  ---------- -------   ---------- -------------------
<S>                             <C>                          <C>      <C>          <C>       <C>      <C>                <C>

Balance at November 1, 1994                                           7,729,702    (7,730)  $7,730     $                    $   -
                                                                                                            -
Issuance of common stock       September 1995-October 1995    $1.94      89,812        -        90      174,310                 -
for cash
                               September 1995-October 1995     3.85      62,858        -        62      242,038                 -
Net loss                                                                               -         -          -              (700,240)
                                                                            -                               -
                                                                      ---------   --------  --------   ---------           ---------
Balance at October 31, 1995                                           7,882,372    (7,730)   7,882      416,348            (700,240)
Issuance of common stock       November 1995-April 1996        1.94     158,734        -       159      308,067                 -
 for cash
                               November 1995-April 1996        2.41      13,794        -        14       33,351                 -
                               November 1995-April 1996        3.17      21,626        -        22       68,478                 -
                               November 1995-April 1996        3.88      60,044        -        60      233,120                 -
                               November 1995-April 1996        4.86      11,890        -        12       57,822                 -
                               November 1995-April 1996        5.07       7,366        -         7       37,393                 -
                               July 1996                       3.00      83,333        -        83      249,917                 -
                               September 1996                  4.34      11,513        -        12       49,989                 -
Issuance of common stock to
  vendor for services 
  rendered                     August 1996                     5.94      25,750        -        26      152,974                 -
Issuance of common stock to
  employees for services       October 1996                    4.84      38,658        -        38      187,167                 -
  rendered
Net loss                                                                               -         -                       (4,104,506)
                                                                      ---------   --------- --------   ----------        ----------
Balance at October 31, 1996                                           8,315,080    (7,730)   8,315    1,794,626         (4,804,746)
Issuance of common stock for   April 1997                      0.80      50,000        -        50       39,950                 -
 cash
                               July 1997                       0.40     300,000        -       300      119,700                 -
                               August 1997                     0.34     350,000        -       350      119,650                 -
                               September 1997                  0.40   1,000,000        -     1,000      399,000                 -
                               September 1997                  0.34     350,000        -       350      119,650                 -

</TABLE>
                                       7
<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                 STATEMENT OF STOCKHOLDERS' DEFICIT - CONTINUED
                   Years ended October 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
                                                                                                                     Deficit
                                                                                                                    accumulated
                                                                               Common                  Additional   during the
                                                          Price     Common      stock       Common      paid-in     development
                                           Date         per share   shares    subscribed     stock      capital        stage
                                           ----         ---------   ------    ----------     -----      -------        -----
<S>                                     <C>                <C>     <C>          <C>        <C>        <C>            <C>
Contribution of capital by stock-
   holders                                                                      $   821    $   -      $  678,738     $      -

Issuance of common stock to affiliated
   entities in satisfaction of loans
   and accounts payable                 December 1996      3.19       766,659       -          767     2,448,544            -
                                        April 1997         2.26       100,000       -          100       225,962            -
                                        July 1997          0.50       473,625       -          474       236,338            -

Issuance of common stock to employees
   in satisfaction of loans payable     June 1997          0.30        33,000       -           33        10,967            -
                                        July 1997          0.30         3,000       -            3           997            -
                                        August 1997        0.50        22,366       -           22        11,161            -

Issuance of common stock to vendor in
  satisfaction of accounts payable      August 1997        0.50        58,070       -           58        28,978            -
                                        September 1997     0.50         5,000       -            5         4,995            -

Issuance of common stock in
  satisfaction of lease obligation      July 1997          0.59       100,000       -          100        59,200            -

Issuance of common stock in
   satisfaction of acquisition
   liability                            September 1997     0.63       100,000       -          100        62,400            -

Issuance of common stock to
   vendors for services rendered        April 1997         0.65       200,000       -          200       129,800            -
                                        July 1997          0.50        20,800       -           21        10,379            -
                                        August 1997        0.50        29,000       -           29        14,471            -
                                        September 1997     0.50         5,400       -            5         2,695            -
                                        October 1997       0.31       200,088       -          200        61,827            -
</TABLE>

                                       8


<PAGE>


                    Imperial Petroleum Recovery Corporation
                          (a development stage company)

                 STATEMENT OF STOCKHOLDERS' DEFICIT - CONTINUED
                   Years ended October 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
                                                                                                                     Deficit
                                                                                                                    accumulated
                                                                               Common                  Additional   during the
                                                          Price     Common      stock       Common      paid-in     development
                                           Date         per share   shares    subscribed     stock      capital        stage
                                           ----         ---------   ------    ----------     -----      -------        -----
<S>                                     <C>                <C>     <C>          <C>        <C>        <C>           <C>
Issuance of common stock to
   employees for services rendered      June 1997          0.50        54,133   $   -      $    55    $   27,018    $       -
                                        August 1997        0.50        31,200       -           31        15,568            -

Net loss                                                                 -          -           -             -      (2,624,272)
                                                                   ----------   -------    -------    ----------    -----------
Balance at October 31, 1997                                        12,567,421   $(6,909)   $12,568    $6,622,614    $(7,429,018)
                                                                   ==========   =======    =======    ==========    ===========
</TABLE>


The accompanying notes are an integral part of this statement.

                                       9


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                           Cumulative           Year ended October 31,
                                                          Amounts Since     --------------------------------
                                                            Inception           1997                1996
                                                       ------------------   -------------       ------------
<S>                                                      <C>                 <C>                <C>         
Cash flows from operating activities
    Net loss                                             $(7,429,018)        $(2,624,272)       $(4,104,506)
    Adjustments to reconcile net earnings to net
       loss to net cash used in operating activities
       Gain on settlement of liabilities                    (207,086)           (207,086)             -
       Depreciation                                           31,080              27,720              3,360
       Noncash charge associated with acquisition            349,500               -                349,500
       Accrued loss on abandonment of leased
          facility                                           161,918               -                161,918
       Charges associated with stock issuances
          to employees and vendors                           415,299             262,299            153,000
       Noncash expenses incurred by affiliate                661,677               -                661,677
       Loss on disposal of fixed assets                       13,177              13,177              -
       Changes in assets and liabilities
          Decrease (increase) in inventory                     -                 132,000           (132,000)
          Decrease (increase) in prepaid expenses
             and deposits                                    (42,298)            (42,298)             1,989
          Decrease (increase) in officer and
             employee advances                                 -                 146,884           (131,884)
          (Decrease) increase in accrued liabilities          80,149             (44,393)            73,881
          Increase in accounts payable                       862,672             382,327             21,938
          (Decrease) increase in accrued lease
             obligations                                      (2,618)             (2,618)             -
                                                         -----------         -----------        -----------
             Net cash used in operating activities        (5,105,548)         (1,956,260)        (2,941,127)
Cash flows from investing activities
    Cash paid for acquisition                                (94,000)              -                (94,000)
    Additions to property and equipment                     (181,873)            (20,010)          (161,863)
                                                         -----------         -----------        -----------
             Net cash used by investing activities          (275,873)            (20,010)          (255,863)
Cash flows from financing activities
    Proceeds from issuance of common stock                 3,481,158           1,838,945          1,225,713
    Proceeds from loans                                    2,516,569             632,565          1,884,004
    Payments on notes payable                               (585,808)           (412,808)          (173,000)
    Proceeds from bank overdraft                               -                 (51,934)            51,934
                                                         -----------          ----------        -----------
             Net cash provided by financing activities     5,411,919           2,006,768          2,988,651
                                                         -----------          ----------        -----------
Net (decrease) increase in cash                               30,498              30,498           (208,339)
Cash and cash equivalents at beginning of period               -                   -                208,339
                                                         -----------          ----------        -----------
Cash and cash equivalents at end of period               $    30,498          $   30,498        $     -
                                                         ===========          ==========        ===========
</TABLE>


The accompanying notes are an integral part of these statements.

                                       10


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                          NOTES TO FINANCIAL STATEMENTS
                            October 31, 1997 and 1996


NOTE A - REALIZATION OF ASSETS

   The accompanying financial statements have been prepared in conformity with
   generally accepted accounting principles, which contemplate continuation of
   the Company as a going concern. However, the Company has sustained
   substantial losses from operations since inception, and such losses have
   continued since October 31, 1997. In addition, the Company has used, rather
   than provided, cash in its operations.

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

   The Company has taken significant steps in 1997 to revise its operating and
   financial requirements. However, additional capital or funds generated from
   the sale of the Company's products will be needed in order to provide the
   Company with the ability to continue in existence.

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

   In 1997, the Company completed development and demonstration of a prototype
   unit, and sales of units to third parties are anticipated to begin in 1998.

   Management has aggressively sought to restructure its liabilities to reduce
   near-term cash requirements. In 1997, these activities contributed to a
   reduction of total liabilities by approximately $1,000,000. Such
   restructuring activities include the following:

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

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

                                       11


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                            October 31, 1997 and 1996


NOTE A - REALIZATION OF ASSETS - Continued

   o   The Company has reached an agreement with Food Development Corporation
       (FDC), a company which is owned by the chairman of the Company's board of
       directors to settle amounts outstanding by issuing a note in the amount
       of approximately $236,000, due no earlier than November 2, 1998. The note
       agreement follows a significant reduction of the amount due to FDC
       through the issuance of common stock. Similarly, the Company has
       negotiated a settlement of amounts due to NSA, Inc. and its owner, a
       former stockholder of the Company, wherein NSA and the stockholder
       contributed the balance of certain notes and liabilities to the capital
       of the Company and agreed to exchange the remaining balance for 100,000
       of common stock.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   1.   Organization

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

   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.   Inventories

   Inventories consist of components to be integrated into the Company's
   products to be sold to customers. Inventory is a valued at cost using a
   first-in, first-out flow assumption. However, due to the fact orders from
   customers have not yet been received by the Company as of January 1998,
   management has recorded of reserve of $260,000 against the value of inventory
   on hand, all of which was purchased in fiscal 1996. The recoverability of
   inventory is dependent upon the Company generating sales which require the
   use of such inventory. Management anticipates product sales to commence in
   1998.

   4.   Property and Equipment

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

                                       12


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                            October 31, 1997 and 1996


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

   5.   Research and Development Expenses

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

   6.   Cash and Cash Equivalents

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

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

   7.   Fair Value of Financial Instruments

   Financial instruments in the accompanying financial statements principally
   consist of notes payable due to related parties for which management is
   unable to estimate its fair value because the amount is due to a related
   party and market information on notes of this type is unavailable.

   8.   Income Taxes

   The Company has not provided for a deferred tax asset associated with net
   operating losses generated to date because of uncertainty as to realization
   of the related tax benefits. As of October 31, 1997, the Company has a net
   operating loss carryforward of approximately $5,300,000 which is available to
   be applied against taxable income generated through 2012. Additional costs
   totaling approximately $2,127,938 incurred through October 31, 1996, are
   being classified as start-up costs for income tax reporting purposes, and are
   being amortized over a five-year period beginning in fiscal 1997, the period
   in which the Company's products became available for sale to third party
   customers. Upon a change in control of the Company, the use of all or a
   portion of the net operating loss carryforward and deductibility of start-up
   costs may be limited. The annual amount of usable net operating losses and
   deductible start-up costs would be based upon a calculation of the value of
   the Company multiplied by a Treasury rate in effect at the date of the change
   in control.

   9.   Loss per Share

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

                                       13


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                            October 31, 1997 and 1996


NOTE C - NOTES AND LOANS PAYABLE

   Phonon Acquisition

   In connection with the purchase of certain assets from Phonon Technologies,
   Inc., in August 1996 (as described in Note F), the Company executed a
   noninterest bearing, non-recourse note payable to the seller in the amount of
   $595,000. Through October 31, 1996, the Company made payments totaling
   $173,000 against this obligation. In November 1996, the Company paid an
   additional $20,000 on the note. In a settlement agreement reached in July
   1997, the Company retired a portion of the remaining principal outstanding by
   issuing 100,000 shares of common stock in September 1997. The remaining
   obligation was settled by the issuance of common stock and the assignment of
   the rights to certain technology acquired in the purchase.

   Affiliated Entities

   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. The Company received approximately $450,000 from the same entities
   as additional loans in early 1998. In December 1996 and April 1997, the
   Company issued 450,139 and 316,520 shares of common stock, respectively, to
   repay the loans in full.

   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 non-interest bearing loans in fiscal 1997 totaling approximately
   $335,000 and non-interest 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. In January
   1998, the Company entered into a settlement agreement (the terms 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 of
   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.

                                       14


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                            October 31, 1997 and 1996


NOTE C - NOTES AND LOANS PAYABLE - Continued

   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 to $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
   $236,338 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 an extraordinary gain in the
   accompanying financial statements. In January 1998, the amount due was
   captured in a note payable to FDC which bears interest at 10% and is due no
   earlier than November 2, 1998. As of October 31, 1997, the outstanding
   balance on the note is $228,780. FDC may convert the remaining balance due
   anytime into shares of common stock at $.44 per share.

   Other Notes Payable

   As of October 31, 1997, the Company owes an attorney, who is also a
   stockholder of the Company, $60,000 under a note payable which bears interest
   at 10% and becomes due on November 2, 1998. The note balance is convertible
   at any time into common stock at a conversion rate of $.31 per share.

   The Company is obligated under three other notes payable under which the
   Company owes the lenders an aggregate amount of approximately $16,000 at
   October 31, 1997. All amounts due under these notes mature in fiscal 1998 and
   bear interest at rates ranging from eight to ten percent.

   Notes payable as of October 31, 1997 mature as follows:

        Year ended
        October 31,                                Amount
        -----------                               --------
            1997                                  $ 16,559
            1998                                   288,780
                                                  --------
                                                  $305,339
                                                 =========

                                       15


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                            October 31, 1997 and 1996


NOTE D - 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. The
   Company's commitment under these leases expires as follows:

        Year ended
        October 31,                                 Amount
        -----------                                -------
            1998                                   $77,812
            1999                                    51,058
            2000                                    42,402

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

   Total rent expense for the years ended October 31, 1997 and 1996, was
   approximately $159,000 and $351,000, respectively.

   Litigation and Asserted Claims

   The Company is a third party defendant in litigation. The third party
   plaintiff, Thermal Wave International, Inc. (TWI) claims that the Company has
   misappropriated and utilized to its benefit trade secrets of TWI. TWI also
   claims that the Company has used false advertising in marketing the Company's
   technology and equipment.

                                       16


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                            October 31, 1997 and 1996


NOTE D - COMMITMENTS AND CONTINGENCIES - Continued

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

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

   The Company is involved in other litigation, principally seeking the payment
   of certain accounts payable. The Company has provided for the amount expected
   to be paid upon final settlement of these matters in the accompanying
   financial statements. Management is disputing such claims which it believes
   are without merit and but is unable to predict the possible outcome of these
   matters.


NOTE E - STOCKHOLDERS' EQUITY

   Stock dividend

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

   Other transactions

   For the years ended October 31, 1997 and 1996, the Company issued 200,088 and
   25,750 shares of common stock, respectively, to an attorney and consultants
   for services rendered on behalf of the Company. Expenses associated with
   these issuances was $219,627 and $153,000, respectively, to record the fair
   value of the shares issued based upon the trading price of the shares.

   In fiscal 1997 and 1996, the Company issued 85,333 and 38,658 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, 1997 and 1996 was $42,586 and
   $187,205, respectively, based upon the trading price of the shares at the
   date of issuance.

                                       17


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                            October 31, 1997 and 1996


NOTE F - ASSET PURCHASE

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

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


NOTE G - SUBSEQUENT EVENT

   In December 1997, the Company sold 1,004,000 shares of common stock for
   $402,200.


NOTE H - ACCOUNTING STANDARDS

   1.   Earnings Per Share

   The Financial Accounting Standards Board recently issued Statement of
   Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share,"
   effective for periods ending after December 15, 1997. This Statement
   establishes standards for computing and presenting earnings per share (EPS)
   and applies to entities with publicly held common stock or potential common
   stock. This Statement simplifies the standards for computing earnings per
   share previously found in APB Opinion No. 15, "Earnings per Share," and makes
   them comparable to international EPS standards. It replaces the presentation
   of primary EPS with a presentation of basic EPS. It also requires dual
   presentation of basic and diluted EPS on the face of the income statement for
   all entities with complex capital structures and requires a reconciliation of
   the numerator and denominator of the basic EPS computation to the numerator
   and denominator of the diluted EPS computation. Basic EPS excludes dilution
   and is computed by dividing income available to common stockholders by the
   weighted-average number of common shares outstanding for the period. Since
   the Company does not have any securities or other contracts to issue common
   stock, no significant impact to the Company's financial statements is
   expected.

                                       18


<PAGE>


                     Imperial Petroleum Recovery Corporation
                          (a development stage company)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED
                            October 31, 1997 and 1996


NOTE H - ACCOUNTING STANDARDS - Continued

   2.   Reporting Comprehensive Income

   The Financial Accounting Standards Board recently issued Statement of
   Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
   Income," effective for fiscal 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 a
   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 will comply with the disclosure
   requirements of SFAS 130 in fiscal year 1999.

   3.   Disclosures about Segments of an Enterprise and Related Information

   The Financial Accounting Standards Board recently issued Statement of
   Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
   Segments of an Enterprise and Related Information," effective for periods
   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 bye 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 this
   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.

                                       19

<PAGE>


                     Imperial Petroleum Recovery Corporation

                          Exhibit Index to Form 10-KSB


<TABLE>
<CAPTION>

         Exhibit No.                                  Identification of Exhibit
         -----------                             ---------------------------------
            <S>                <C>    


             3.1               Articles of Incorporation  of the Company  (incorporated by reference to Exhibits
                               2 and 2.1 to the  Company's  Registration  Statement on Form 10-SB filed with the
                               Commission 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)

            27*                Financial data schedule

</TABLE>


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