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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from 
to
 Commission File No. 000-25367
 
 INTERNATIONAL FUEL TECHNOLOGY, INC.
  Nevada
    
    88-0357508(State or other jurisdiction of incorporation or
organization)
    
    (I.R.S. Employer Identification No.)7777 Bonhomme, Suite 1920St. Louis, Missouri
    
    63105(Address of principal executive offices)
    
    (Zip Code)
 (314) 727-3333
 
 þ o
  o o þ
 o þ




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INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Balance SheetsMarch 31, 2006 and December 31, 2005
    
    3Statements of OperationsThree Month Periods Ended March 31, 2006
and March 31, 2005
    
    4Statements of Stockholders EquityThree Months Ended March 31, 2006
    
    5Statements of Cash FlowsThree Month Periods Ended March 31, 2006
and March 31, 2005
    
    6Notes to Financial Statements
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    13Item 4. Controls and Procedures
    
    13PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    13Item 1A.
Risk Factors
    
    13Item 6. Exhibits
    
    14Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 BALANCE SHEETS
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,011,259
    
    
    $
    3,382,012Short-term investments
    
    
    2,479,500
    
    
    
    2,480,500Accounts receivable
    
    
    106,729
    
    
    
    5,451Inventory
    
    
    268,897
    
    
    
    122,724Prepaid expenses
    
    
    52,805
    
    
    
    74,280Total Current Assets
    
    
    4,919,190
    
    
    
    6,064,967Property and equipmentMachinery and equipment
    
    
    43,354
    
    
    
    34,914Accumulated depreciation
    
    
    (28,715
    )
    
    
    (27,617
    )Total Property and Equipment
    
    
    14,639
    
    
    
    7,297Purchased technology, net of accumulated
amortization of $1,933,333 and
$1,833,332 at March 31, 2006 and December
31, 2005, respectively
    
    
    466,667
    
    
    
    566,668Goodwill
    
    
    2,211,805
    
    
    
    2,211,805Other assets
    
    
    4,323
    
    
    
    Total Assets
    
    $
    7,616,624
    
    
    $
    8,850,737LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    224,129
    
    
    $
    486,754Accrued compensation
    
    
    101,938
    
    
    
    155,154Total Current Liabilities
    
    
    326,067
    
    
    
    641,908Commitments and contingenciesStockholders equityCommon
stock, $0.01 par value; 150,000,000
authorized, 84,796,724 and 84,719,724
shares issued and outstanding at March 31,
2006 and December 31, 2005, respectively
    
    
    847,968
    
    
    
    847,198Common stock to be issued: 77,000 shares
at December 31, 2005
    
    
    
    
    
    
    770Discount on common stock
    
    
    (819,923
    )
    
    
    (819,923
    )Additional paid-in capital
    
    
    53,260,593
    
    
    
    52,796,183Accumulated deficit
    
    
    (45,998,081
    )
    
    
    (44,615,399
    )Total Stockholders Equity
    
    
    7,290,557
    
    
    
    8,208,829Total Liabilities and Stockholders Equity
    
    $
    7,616,624
    
    
    $
    8,850,737
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INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 STATEMENTS OF OPERATIONS
 Three months
    
    
    Three monthsended
    
    
    endedMarch 31,
    
    
    March 31,2006
    
    
    2005Revenues
    
    $
    153,840
    
    
    $
    48Operating expenses:Cost of operations (exclusive of
depreciation and amortization)
    
    
    100,485
    
    
    
    21Selling, general and administrative expense
    
    
    888,193
    
    
    
    495,996Stock compensation expense
    
    
    464,410
    
    
    
    422,461Depreciation & amortization
    
    
    101,099
    
    
    
    100,257Total operating expenses
    
    
    1,554,187
    
    
    
    1,018,735Net earnings from operations
    
    
    (1,400,347
    )
    
    
    (1,018,687
    )Interest income
    
    
    17,665
    
    
    
    Total other income (expense), net
    
    
    17,665
    
    
    
    Net earnings
    
    $
    (1,382,682
    )
    
    $
    (1,018,687
    )Basic and diluted net earnings per common share
    
    $
    (.02
    )
    
    $
    (.01
    )Weighted-average common shares outstanding
    
    
    84,796,724
    
    
    
    78,647,405
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INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006
 DiscountCommon
    
    
    Common
    
    
    on
    
    
    AdditionalStock
    
    
    Stock
    
    
    Common
    
    
    Paid-in
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance, December 31, 2005
    
    
    84,796,724
    
    
    $
    847,968
    
    
    $
    (819,923
    )
    
    $
    52,796,183
    
    
    $
    (44,615,399
    )
    
    $
    8,208,829Expense relating to stock-based compensation (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464,410
    
    
    
    
    
    
    
    464,410Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,382,682
    )
    
    
    (1,382,682
    )Balance, March 31, 2006
    
    
    84,796,724
    
    
    $
    847,968
    
    
    $
    (819,923
    )
    
    $
    53,260,593
    
    
    $
    (45,998,081
    )
    
    $
    7,290,557
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INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 STATEMENTS OF CASH FLOWS
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2006
    
    
    2005Cash Flows from Operating Activities:Net earnings
    
    $
    (1,382,682
    )
    
    $
    (1,018,687
    )Adjustments to reconcile net earnings to net cash used in
operating activities:Depreciation and amortization
    
    
    101,099
    
    
    
    100,257Non-cash stock-based compensation
    
    
    464,410
    
    
    
    422,461Change in assets and liabilities:Accounts receivable
    
    
    (101,278
    )
    
    
    Inventory
    
    
    (146,173
    )
    
    
    (204,058
    )Prepaid expenses
    
    
    17,152
    
    
    
    Accounts payable
    
    
    (262,625
    )
    
    
    29,449Accrued expenses
    
    
    (52,216
    )
    
    
    Net cash used in operating activities
    
    
    (1,362,313
    )
    
    
    (670,578
    )Cash Flows from Investing Activities:Acquisition of machinery and equipment
    
    
    (8,440
    )
    
    
    Net cash used in investing activities
    
    
    (8,440
    )
    
    
    Cash Flows from Financing Activities:Proceeds from stock options exercised
    
    
    
    
    
    
    505,000Proceeds from common stock issued
    
    
    
    
    
    
    250,000Net cash provided by financing activities
    
    
    
    
    
    
    755,000Net (decrease)/increase in cash and cash equivalents
    
    
    (1,370,753
    )
    
    
    84,422Cash and cash equivalents, beginning
    
    
    3,382,012
    
    
    
    530,275Cash and cash equivalents, ending
    
    $
    2,011,259
    
    
    $
    614,697Schedule of non-cash operating activities:Shares issued in payment of legal settlement
    
    $
    
    
    
    $
    114,264See Notes to Financial Statements.
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INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 NOTES TO FINANCIAL STATEMENTS
(Unaudited)
 Note 1  Basis of Presentation
    Note 2  2005 Equity Issuance
  Note 3  Accounting for Stock-Based Compensation
 Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95 Accounting for Stock Issued
to Employees
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INTERNATIONAL FUEL TECHNOLOGY, INC.
    2006
    
    
    2005(SFAS 123R)
    
    
    (APB 25)Variable plan accounting related to stock
compensation modifications
    
    $
    
    
    
    $
    142,800Stock-based payments to non-employees
    
    
    37,257
    
    
    
    207,061Stock-based payments to employees/Directors
    
    
    427,153
    
    
    
    72,600Total stock-based compensation expense
    
    $
    464,410
    
    
    $
    422,461
  2005Weighted-average fair value of options granted
    
    $
    0.47Weighted-average assumptions:Risk-free interest rate
    
    
    3.41
    %Dividend yield
    
    
    Expected volatility
    
    
    1.5Expected option life (years)
    
    
    4Net earningsAs reported
    
    ($
    1,018,687
    )Add recorded stock-based compensation expense
    
    
    442,461Deduct stock-based compensation expense as if
recorded under the fair value based method
    
    
    (861,579
    )Pro forma net earnings
    
    ($
    1,457,805
    )Basic and Diluted net earnings per share:As reported
    
    ($
    0.01
    )Pro forma
    
    ($
    0.02
    )
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INTERNATIONAL FUEL TECHNOLOGY, INC.
  Classification in the
Statement of Cash Flow of the Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option.
  Weighted-averageNo. of
    
    
    Grant Date FairOptions
    
    
    ValueNon-vested as of December 31, 2005
    
    
    7,555,099
    
    
    $
    0.63Granted
    
    
    400,000
    
    
    $
    1.60Vested
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Non-vested as of March 31, 2006
    
    
    7,955,099
    
    
    $
    0.68
   
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-looking Statements and Associated Risks
  Overview
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Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005
 TM
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Critical Accounting Policies
  Valuation of Long-Lived Intangible Assets
  (1)
    
    Significant under-performance relative to expected historical or projected future operating
results;(2)
    
    Significant changes in the manner of our use of the acquired assets or the strategy for
our overall business;(3)
    
    Significant negative industry or economic trends;(4)
    
    Significant decline in our stock price for a sustained period; and(5)
    
    Our market capitalization relative to net book value.
  Valuation of Goodwill
 Valuation of Long-Lived Intangible Assets
  Deferred Income Taxes
  Liquidity and Capital Resources
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 (a)
    
    Our management has evaluated, with the participation of our principal executive officer
and principal financial officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (Exchange Act)) as of March 31, 2006. Based on this evaluation, the
principal executive officer and principal financial officer concluded that our disclosure
controls and procedures were effective at the reasonable assurance level at March 31, 2006.
 (b)
    
    There were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal
quarter ended March 31, 2006, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  (1) Because we have transitioned from a development stage to a commercialization phase
for our products with a new technology and little market and sales visibility, we may not be able
to create market demand for our products.
 (2) There is a risk that one or more of the raw material suppliers could stop making a
building block raw material necessary for production of our product and, therefore, cause a
supply shortage until substitution raw materials could be identified and located.
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Item 6. Exhibits
 (a)
    
    The following exhibits are filed as part of this report:
 31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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By:
    
    /s/ Jonathan R. Burst

Jonathan R. Burst
    
    
    
    Date:
    
    May 15, 2006Chief Executive Officer(Principal Executive Officer)By:
    
    /s/ Gary S.Hirstein
    
    
    
    Date
    
    May 15, 2006Gary S. HirsteinExecutive Vice President, Chief Financial Officer and Corporate
Secretary(Principal Financial Officer)
 15