**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**










**FORM
      10-Q**





x QUARTERLY REPORT PURSUANT TO SECTION 13 or
      15(d) OF
      THE
      SECURITIES EXCHANGE ACT OF 1 934





For
      the
      quarterly period ended June
      30, 2007





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.**


(Exact
      name of registrant as specified in its charter)




**Nevada**
            **88-0357508**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)**7777
                Bonhomme, Suite 1920**
              **St.
                Louis, Missouri**
            **63105**(Address
                of principal executive offices)
            (Zip
                Code)**(314)
                727-3333**
              (Registrant’s
                telephone number, including area
                code)










Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




Yes
x  No  o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.




(Check
      one) Large Accelerated Filer o Accelerated Filer o Non-Accelerated
      Filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yes oNox




The
      number of shares outstanding of registrant's only class of stock as of August
      10, 2007: Common stock, par value $0.01 per share - 84,861,326 shares
      outstanding.










**INDEX**





**Page
                No.****PART
                I. FINANCIAL INFORMATION**Item
                1. Financial Statements (Unaudited)Balance
                Sheets— June 30, 2007 and December 31, 2006
            
            **3**Statements
                of Operations—Three-Month and Six-Month Periods Ended June 30, 2007 and
                June 30, 2006
            
            **4**Statement
                of Stockholders’ Equity— Six-Month Period Ended June 30,
                2007
            
            **5**Statements
                of Cash Flows— Six-Month Periods Ended June 30, 2007 and June 30,
                2006
            
            **6**Notes
                to Financial Statements
            
            **7**Item
                2. Management’s Discussion and Analysis of Financial Condition andResults
                of Operations
            
            **11**Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            **17**Item
                4. Controls and Procedures
            
            **17****PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            
            **18**Item
                5. Other Information
            
            **18**Item
                6. Exhibits
            
            **18**





2


**INTERNATIONAL
                FUEL TECHNOLOGY, INC.****BALANCE
                SHEETS**June
                30,
            
            December
                31,2007
            
            2006(Unaudited)**ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            264,464
            
            $
            654,841Short-term
                investments
            
            
            570,525
            
            
            1,506,919Accounts
                receivable
            
            
            11,680
            
            
            19,227Inventory
            
            
            378,690
            
            
            431,363Prepaid
                expenses and other assets
            
            
            32,058
            
            
            69,892**Total
                Current Assets**
            
            
            1,257,417
            
            
            2,682,242Property
                and equipmentMachinery,
                equipment and office furniture
            
            
            65,373
            
            
            63,954Accumulated
                depreciation
            
            
            (40,061
            )
            
            (35,115
            )**Net
                Property and Equipment**
            
            
            25,312
            
            
            28,839Purchased
                technology, net of accumulated amortization of $2,400,000 and $2,233,333
                at June 30, 2007 and December 31, 2006, respectively
            
            
            -
            
            
            166,667Goodwill
            
            
            2,211,805
            
            
            2,211,805**Total
                Assets**
            
            $
            3,494,534
            
            $
            5,089,553**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            236,930
            
            $
            195,139Accrued
                compensation
            
            
            54,447
            
            
            47,628Other
                accrued expenses
            
            
            350,000
            
            
            350,000**Total
                Current Liabilities**
            
            
            641,377
            
            
            592,767Commitments
                and contingenciesStockholders'
                equityCommon
                stock, $0.01 par value; 150,000,000 authorized, 84,861,326 shares
                issued
                and outstanding at June 30, 2007 and December 31, 2006
            
            
            848,614
            
            
            848,614Discount
                on common stock
            
            
            (819,923
            )
            
            (819,923
            )Additional
                paid-in capital
            
            
            54,395,225
            
            
            54,326,473Accumulated
                deficit
            
            
            (51,570,759
            )
            
            (49,858,378
            )**Total
                Stockholders' Equity**
            
            
            2,853,157
            
            
            4,496,786**Total
                Liabilities and Stockholders' Equity**
            
            $
            3,494,534
            
            $
            5,089,553





See
        Notes
        to Financial Statements.
  3


**INTERNATIONAL
                  FUEL TECHNOLOGY, INC.****STATEMENTS
                  OF OPERATIONS****(Unaudited)**Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30,
              
              June
                  30,
              
              June
                  30,2007
              
              2006
              
              2007
              
              2006Revenues
              
              $
              22,910
              
              $
              46,356
              
              $
              34,782
              
              $
              200,196Operating
                  expenses:Cost
                  of operations (exclusive of depreciation and amortization)
              
              
              17,142
              
              
              51,791
              
              
              25,586
              
              
              152,276Selling,
                  general and administrative expense (including stock-
              
              
              484,420
              
              
              1,190,730
              
              
              1,572,615
              
              
              2,543,333based
                  compensation expense) (Note 3)Depreciation
                  and amortization
              
              
              69,160
              
              
              101,430
              
              
              171,613
              
              
              202,529Total
                  operating expenses
              
              
              570,722
              
              
              1,343,951
              
              
              1,769,814
              
              
              2,898,138Net
                  loss from operations
              
              
              (547,812
              )
              
              (1,297,595
              )
              
              (1,735,032
              )
              
              (2,697,942
              )Interest
                  income
              
              
              11,704
              
              
              59,046
              
              
              22,651
              
              
              76,711Net
                  loss
              
              $
              (536,108
              )
              $
              (1,238,549
              )
              $
              (1,712,381
              )
              $
              (2,621,231
              )Basic
                  and diluted net lossper
                  common share
              
              $
              (0.01
              )
              $
              (0.01
              )
              $
              (0.02
              )
              $
              (0.03
              )Weighted-average
                  common shares outstanding
              
              
              84,861,326
              
              
              84,496,724
              
              
              84,861,326
              
              
              84,496,724




See
        Notes
        to Financial Statements.


4




**INTERNATIONAL
      FUEL TECHNOLOGY, INC.**





**STATEMENT
      OF STOCKHOLDERS’ EQUITY**


**FOR
      THE SIX-MONTH PERIOD ENDED JUNE 30, 2007**


(Unaudited)





Common
                Stock Shares
            
            Common
                Stock Amount
            
            Discount
                on Common Stock
            
            Additional
                Paid-in Capital
            
            Accumulated
                Deficit
            
            TotalBalance,
                December 31, 2006
            
            
            84,861,326
            
            $
            848,614
            
            $
            (819,923
            )
            $
            54,326,473
            
            $
            (49,858,378
            )
            $
            4,496,786Expense
                relating to stock-based compensation (Note 3)
            
            
            -
            
            
            -
            
            
            -
            
            
            68,752
            
            
            -
            
            
            68,752Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,712,381
            )
            
            (1,712,381
            )Balance,
                June 30, 2007
            
            
            84,861,326
            
            $
            848,614
            
            $
            (819,923
            )
            $
            54,395,225
            
            $
            (51,570,759
            )
            $
            2,853,157




See
      Notes
      to Financial Statements.





5


**INTERNATIONAL
                  FUEL TECHNOLOGY, INC.****STATEMENTS
                  OF CASH FLOWS****(Unaudited)**
  **Six
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2007**
              
              **2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (1,712,381
              )
              $
              (2,621,231
              )Adjustments
                  to reconcile net loss to net cash used inoperating
                  activities:Depreciation
                  and amortization
              
              
              171,613
              
              
              202,529Non-cash
                  stock-based compensation
              
              
              68,752
              
              
              766,644Change
                  in assets and liabilities:Accounts
                  receivable
              
              
              7,547
              
              
              (43,284
              )Inventory
              
              
              52,673
              
              
              (341,186
              )Prepaid
                  expenses and other assets
              
              
              37,834
              
              
              21,007Accounts
                  payable
              
              
              41,791
              
              
              (280,863
              )Accrued
                  compensation
              
              
              6,819
              
              
              (46,860
              )**Net
                  cash used in operating activities**
              
              
              (1,325,352
              )
              
              (2,343,244
              )Cash
                  flows from investing activities:Redemption
                  of short-term investments
              
              
              936,394
              
              
              -Acquisition
                  of machinery and equipment
              
              
              (1,419
              )
              
              (8,440
              )**Net
                  cash provided by (used in) investing activities**
              
              
              934,975
              
              
              (8,440
              )**Net
                  decrease in cash and cash equivalents**
              
              
              (390,377
              )
              
              (2,351,684
              )Cash
                  and cash equivalents, beginning of period
              
              
              654,841
              
              
              3,382,012Cash
                  and cash equivalents, end of period
              
              $
              264,464
              
              $
              1,030,328
  See
        Notes
        to Financial Statements.
  6


**NOTES
        TO FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **Note
        1 - Basis of Presentation**
 
 International
        Fuel Technology, Inc. ("IFT") was incorporated under the laws of the State
        of
        Nevada on April 9, 1996. We have developed a family of fuel additive product
        formulations which improve fuel economy, lower harmful engine emissions and
        enhance lubricity (reducing engine wear and tear), while decreasing reliance
        on
        petroleum-based fuels through the use of more efficient, alternative and
        renewable fuels. We have received necessary regulatory approval to market
        our
        products currently in the commercialization phase. We began transitioning
        from a
        development stage technology company to a commercial entity during 2002 and
        have
        been increasing our product marketing and sales efforts since. We are focused
        on
        continuing to develop the body of evidence demonstrating the efficacy of
        our
        products applicable to a wide range of markets and industries within these
        markets through industry specific laboratory testing and customer field trials.
        In addition, we are continuing to strengthen our strategic distributor and
        customer contact base. Marketing and sales efforts, in conjunction with the
        additional demonstration of product efficacy through industry specific testing
        and field trials, will complete our transition to a commercial
        enterprise.
 
 The
        interim financial statements included herein have been prepared by IFT, without
        audit, pursuant to the rules and regulations of the Securities and Exchange
        Commission (“SEC”). Certain information and footnote disclosures normally
        included in financial statements prepared in accordance with U.S. generally
        accepted accounting principles (“GAAP”) have been condensed or omitted pursuant
        to such rules and regulations, although we believe that the disclosures are
        adequate to make the information presented not misleading.
 
 These
        statements reflect all adjustments, consisting of normal recurring adjustments,
        which in the opinion of management, are necessary for fair presentation of
        the
        information contained therein. Interim results are not necessarily indicative
        of
        results for a full year. It is suggested that these financial statements
        are
        read in conjunction with the financial statements and notes thereto included
        in
        our annual report on Form 10-K for the year ended December 31, 2006. We follow
        the same accounting policies in preparation of interim reports as we do in
        our
        annual statements.
 
 Basic
        earnings per share are based upon the weighted-average number of common
        shares outstanding for the period. Diluted earnings per share are based
        upon the weighted-average number of common and potentially dilutive common
        shares outstanding for the period. Pursuant to the Financial Accounting
        Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
        No. 128, *Earnings
        per Share* (“SFAS
        128”), no adjustment is made for diluted earnings per share purposes since we
        are reporting a net loss, and common stock equivalents would have an
        anti-dilutive effect. As of June 30, 2007 and 2006, 17,509,624 and
        17,807,592, respectively, common stock equivalents were excluded from the
        computation of diluted net earnings per share since their effect would be
        anti-dilutive.
 
 **Note
        2 - Ability to Continue as a Going Concern**
 
 Our
        financial statements are presented on the going concern basis, which
        contemplates the realization of assets and the satisfaction of liabilities
        in
        the normal course of business. We have incurred significant losses since
        inception and have limited funds with which to operate. Management is in
        the
        process of executing a strategy based upon marketing technologies that offer
        greater fuel economy, enhanced engine performance, along with pollution control
        benefits. We have several technologies in the commercialization stage and
        in
        development. We have received necessary regulatory approval to market our
        products currently in the commercialization phase. During the first quarter
        of
        2002, we began selling our products directly to the commercial marketplace.
        We
        expect to increase our sales to the marketplace, eventually generating a
        level
        of revenues sufficient to generate a positive cash flow and earnings. However,
        it is possible that this may take a few years or may never occur. While
        management cannot make any assurance as to the accuracy of our projections
        of
        future capital needs, management believes we will be able to meet our
        operational cash needs through at least September 2007 without any additional
        funding. As our current cash and short-term investments balance is not
        sufficient to support full year operations for fiscal 2007 at currently planned
        levels, we intend to seek funding through placements of equity securities
        with
        investors. Although
        management believes we will secure additional funding necessary to continue
        operations beyond September 2007, if we are unable to secure this additional
        funding, we will need to significantly curtail operations.
  7
 
 The
        financial statements do not include any adjustments to reflect the possible
        future effects on the recoverability and classification of assets or the
        amounts
        and classification of liabilities that may result from the possible inability
        of
        IFT to continue as a going concern.
 
 **Note
        3 - Stock-based Compensation** ****
 
 Effective
        January 1, 2006, we adopted SFAS No. 123 (revised), *Share-Based
        Payment, an amendment of FASB Statements Nos. 123 and 95* (“SFAS
        123R”), applying the modified prospective method. Under the modified  prospective
        method, SFAS 123R applies to new awards and awards that were outstanding
        as of
        December 31, 2005 that are subsequently vested, modified, repurchased, forfeited
        or cancelled.
  SFAS
        123R
        requires companies to estimate the fair value of share-based employee awards
        on
        the grant date using an option-pricing model and to expense that value over
        the
        requisite service period for each related employee. We use the Black-Scholes
        option-pricing model as the method of valuation for our stock-based
        compensation.
 
 The
        value
        of options and warrants issued to non-employees upon the date of issuance
        are
        expensed over the related service periods. For non-employee options that
        are not
        subject to a performance criterion, we recompute the value of the unvested
        options each quarter-end and adjust the related compensation expense for
        the new
        value. That new value is based on various assumptions using end-of-quarter
        information. For non-employee options subject to a performance criterion,
        of
        which we have only 5,000 options outstanding, expense is recognized when
        it
        becomes probable that the performance criterion will be met.
 
 Stock-based
        compensation expense recorded in the three and six months ended June 30,
        2007
        and 2006 is as follows:
 
 Three
                  Months Ended June 30, 2007
              
              Three
                  Months Ended June 30, 2006
              
              Six
                  Months
                Ended
                  June 30,
                2007
              
              Six
                  Months
                Ended
                  June 30,
                2006Stock-based
                  compensation to non-employees
              
              $
              43,521
              
              $
              96,077
              
              $
              58,896
              
              $
              133,334Stock-based
                  compensation to employees/directors
              
              
              (197,955
              )
              
              206,157
              
              
              9,856
              
              
              633,310Total
                  stock-based compensation expense
              
              $
              (154,434
              )
              $
              302,234
              
              $
              68,752
              
              $
              766,644
 
 **Options
        issued to employees**
 
 During
        the first quarter of 2007, 100,000 employee options were granted. Assumptions
        used to determine the average fair value of these awards ($0.42 per option)
        included an expected term of five years, a volatility rate of 120% and a
        risk
        free interest rate of 4.70%. No employee options were granted in the second
        quarter of 2007.
  8
 
 During
        the second quarter of 2006, 30,000 employee options were granted. Assumptions
        used to determine the average fair value of these awards ($1.05 per option)
        included an expected term of five years, a volatility rate of 122% and a
        risk
        free interest rate of 5.07%. No employee options were granted in the first
        quarter of 2006.
 
 **Options
        issued to non-employees**
 
 No
        non-employee options were granted in the first or second quarters of 2007.
        In
        the first quarter of 2006, 400,000 stock options were granted to a non-employee
        consultant for services through January 31, 2008. These options vest over
        a
        24-month period, and the fair value of the options, recomputed at each quarter
        end as described above, is being expensed over the vesting period. No
        non-employee options were granted in the second quarter of 2006.
 
 **Other**
 
 During
        the second quarter of 2007, 458,366 non-vested employee options were forfeited,
        resulting in the reversal of $370,512 of previously recorded stock-based
        compensation expense. We also recognized $206,764 of additional stock-based
        compensation expense in the second quarter of 2007 as a result of extending
        the
        expiration date of certain options from August 19, 2007 to December 31,
        2009.
 
 In
        2004,
        we granted 7,490,000 stock options and warrants to purchase shares of our
        common
        stock to non-employees. The majority of the non-employee options and warrants
        granted in 2004 had vesting schedules based on the occurrence of certain
        events
        and expense would have been recorded when the occurrence of the events became
        probable, or when the triggering events occurred. The triggering events,
        based
        primarily on revenues, never occurred within the stipulated contractual time
        frames and 6,000,000 of these options and warrants granted to non-employees
        in
        2004 were subsequently cancelled in the second quarter of 2006.
 
 During
        2005, 3,000,000 options were granted to FT Marketing Ltd. (“FTM”), a marketing
        affiliate of Fuel Technologies Ltd. (“FTL”). FTL was formed for the purpose of
        marketing and distributing our products. Mr. Stride, a former director of
        IFT,
        is President of FTL. Mr. Friedland, who owns more than five percent of our
        common stock, is the Chairman of FTL. 1,000,000 of these options vested
        immediately, yielding $720,000 in stock-based compensation expense and expired
        during the second quarter of 2006.
 
 In
        addition, 100,000 options granted to a non-employee during 2003 expired during
        the second quarter of 2006.
 
 No
        shares
        of our common stock and no warrants were sold or issued for services during
        the
        first six months of 2007 and 2006. Additionally, no stock options were exercised
        in the respective periods.
 
 **Note
        4 - Blencathia Merger**
 
 Effective
        October 27, 1999, we merged with Blencathia Acquisition Corporation
        (“Blencathia”). Blencathia was a public shell company with immaterial assets and
        liabilities and 300,000 shares outstanding at the time of the merger, which
        it
        redeemed and cancelled upon the merger. In exchange, we issued 300,000 of
        our
        common shares to the prior Blencathia owner with the contractual understanding
        that such shares were to be sold by that owner to achieve gross cash proceeds
        of
        $500,000. Any excess proceeds were to be returned to us and any deficiency
        was
        to be made up by us issuing additional shares or paying the difference in
        cash.
        As we believed that we controlled the ultimate timing of the sale of these
        300,000 shares by the prior Blencathia owner, we did not consider these shares
        as issued or outstanding for purposes of computing earnings per share.
  9
 
 In
        2006,
        we learned that the prior Blencathia owner had, in fact, sold the 300,000
        shares
        for aggregate proceeds of $150,000, without our consent. Accordingly, in
        the
        fourth quarter of 2006, we recorded $500,000 of general expenses (representing
        the cost of the 1999 merger) and the deemed issuance of $150,000 of common
        stock. The remaining $350,000 obligation is reflected as a current accrued
        expense as of June 30, 2007. We are in negotiations with the prior Blencathia
        owner to resolve this obligation and may ultimately settle the obligation
        with
        either cash or equity securities with a lower market value. The 300,000 shares
        are now reflected as outstanding for earnings per share computations.
 
 **Note
        5 - Adoption of New Accounting Standard**
 
 In
        June
        2006, the FASB issued FASB Interpretation No. 48 , *Accounting
        for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
        109* (“FIN
        48”), which establishes that the financial statement effects of a tax position
        taken or expected to be taken in a tax return are to be recognized in the
        financial statements when it is more likely than not, based on the technical
        merits, that the position will be sustained upon examination. FIN 48 is
        effective for fiscal years beginning after December 15, 2006. W e
        adopted
        the provisions of FIN 48 effective January 1, 2007 with no impact to our
        financial statements. No uncertain tax positions have been identified through
        June 30, 2007.
 
 Should
        we
        need to account for interest and/or penalties related to uncertain tax positions
        or other tax authority assessments, we would classify such expenses as part
        of
        selling, general and administrative expense. The years that remain subject
        to
        examination by federal income tax authorities include all years since
        1997.
 
 **Note
        6 - Legal Proceedings**
 
 In
        December 2005, a former employee of IFT and a former consultant to IFT filed
        a
        joint lawsuit against us and certain of our directors in the St. Louis County,
        Missouri Circuit Court. The relief sought by the plaintiffs included payment
        of
        compensation up to $120,000 per year under the former employee’s Employment
        Agreement, issuance of up to 4,832,616 shares of IFT stock under a Share
        Purchase Agreement entered into between each plaintiff and IFT in April 2001,
        and release from the plaintiffs’ non-competition obligations. The plaintiffs
        also alleged they were harmed by certain misrepresentations of IFT and were
        seeking an undetermined amount of damages for such alleged misrepresentations.
        We filed counter-claims against the plaintiffs, seeking monetary damages
        and
        enforcement of the plaintiffs’ non-competition obligations. During the second
        quarter of 2007, this case was dismissed by the Missouri Circuit Court with
        no
        compensation paid to either party.
 
 On
        July
        31, 2006, we received notice from the American Arbitration Association ("AAA")
        of a Demand for Arbitration dated July 27, 2006 received by the AAA naming
        IFT
        as respondent and TPG Capital Partners (“TPG”), the prior Blencathia owner, as
        the claimant. The arbitration has been requested by TPG to resolve an alleged
        aggregate proceeds shortfall from the sale of IFT securities issued in the
        Blencathia merger. TPG has claimed they sold all of the 300,000 shares and
        the
        sales have not generated at least $500,000 of proceeds, as guaranteed in
        the
        merger documents.
 
 In
        an
        effort to resolve this matter prior to submission to binding arbitration,
        both
        TPG and IFT participated in a non-binding mediation conference on January
        30,
        2007. It is not expected that the ultimate settlement of this matter through
        the
        mediation or binding arbitration process, and considering the recorded
        liability, will have a material adverse effect on IFT.
  10
 
 **Item
        2. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 The
        following is management’s discussion and analysis of certain significant factors
        that have affected our financial condition, results of operations and cash
        flows
        during the periods included in the accompanying financial statements. This
        discussion should be read in conjunction with the financial statements and
        notes
        included in our annual report on Form 10-K for the year ended December 31,
        2006.
 
 **Forward-looking
        Statements and Associated Risks**
 
 This
        quarterly report on Form 10-Q contains forward-looking statements made pursuant
        to the safe harbor provisions of the Securities Litigation Reform Act of
        1995.
        These forward-looking statements are based largely on our expectations and
        are
        subject to a number of risks and uncertainties, many of which are beyond
        our
        control, including, but not limited to, economic, competitive and other factors
        affecting our operations, markets, products and services, expansion strategies
        and other factors described elsewhere in this report and documents filed
        by us
        with the Securities and Exchange Commission (“SEC”), including in our annual
        report on Form 10-K for the year ended December 31, 2006 under the “Risk
        Factors” section. Actual results could differ materially from these
        forward-looking statements. In light of these risks and uncertainties, there
        can
        be no assurance that the forward-looking information contained in this report
        will, in fact, prove accurate. We do not undertake any obligation to revise
        these forward-looking statements to reflect future events or
        circumstances.
 
 **Overview**
 
 We
        are a
        fuel performance enhancement technology company transitioning to a commercial
        enterprise. Our focus is marketing and selling our technology to large,
        commercial fuel consumers in global markets. We believe the macro economic
        environment for our technology and products is excellent now and will continue
        to be so for the foreseeable future. We believe increasingly stringent engine
        and fuel related environmental regulations will likely result in increased
        demand for additive products that help offset adverse fuel and engine
        performance impacts resulting from these regulations. In addition, we believe
        the increase in the price of oil, along with the higher prices expected in
        the
        future, will increase demand for fuel efficiency and conservation. Our products
        and technology are uniquely positioned to benefit from this macro environment
        by
        offering fuel performance enhancement solutions that specifically address
        these
        macro developments and trends.
 
 Building
        upon momentum generated during 2006, additional progress toward our
        corporate and product commercialization goals was accomplished in the first
        half
        of 2007. The favorable laboratory testing and field trial results completed
        during 2006 have led to positive movement towards commercial acceptance of
        our
        products. As a result, we expect several sales opportunities to be realized
        during the second half of 2007.
 
 Specific
        business trends have developed as a result of our commercialization efforts.
        Although consistent customer sales and revenue streams have not yet
        materialized, the number and magnitude of customer trials is increasing at
        a
        rapid rate. We believe the commercialization process for our products is
        composed of five distinct stages:
 
 ·
              Stage
                  1 - independent laboratory testing;
  ·
              Stage
                  2 - initial customer contact detailing independent laboratory results
                  generated;
  ·
              Stage
                  3 - small-scale field trials with potential customers;
  11
  ·
              Stage
                  4 - large-scale field trials with potential customers to confirm
                  favorable
                  results generated from initial small-scale trials;
                  and
  ·
              Stage
                  5 - potential customers become commercial customers.
 
 We
        have
        Stage 3 and Stage 4 activities underway with several potential customers
        in the
        trucking and stationary power industries. Also, we believe favorable results
        from laboratory testing aimed at the rail industry in the U.S. and Europe
        will
        lead to significant Stage 2 and Stage 3 efforts during the second half of
        2007.
        At the conclusion of these active trials and tests, we anticipate results
        that
        correlate closely with the results obtained during the first half of 2006,
        validating that our fuel additives improve fuel economy, lower engine emissions
        and lower maintenance expenses. We believe the successful demonstration of
        these
        product attributes, both in the laboratory and in field testing, will lead
        to
        additional customer sales during the second half of 2007.
 
 Corporate
        developments during the first half of 2007 included the continued use of
        an
        investor and media relations firm to facilitate targeted industry visibility
        of
        our company and products to enhance recognition of our company and identify
        and
        develop prospects among the investing community.
 
 **Results
        of Operations**
 
 Three
        and Six Months Ended June 30, 2007 Compared to the Three and Six Months Ended
        June 30, 2006
 
 *Revenues*
 
 Net
        revenue for the three months ended June 30, 2007 was $22,910, as compared
        to
        $46,356 for the three-month period ended June 30, 2006. Sales revenue in
        the
        second quarter of 2007 was due primarily to sales to distribution partners
        and
        to end-user customers. Sales revenue in the second quarter of 2006 was primarily
        due to contractual purchases by our distributor network and included gross
        sales
        to Fuel Technologies Ltd. (“FTL”) ($69,615), a then-related party to us.
 
 Net
        revenue for the six months ended June 30, 2007 was $34,782, as compared to
        $200,196 for the six-month period ended June 30, 2006. Sales revenue in the
        first two quarters of 2007 was due primarily to sales to distribution partners,
        end-user customers and customers who are currently engaged in field trials.
        Sales revenue in the first two quarters of 2006 was primarily due to contractual
        purchases by our distributor network and included sales to FTL ($208,824),
        a
        then-related party to us.  Sales
        revenue generated during the first six months of 2007 and 2006 resulted
        primarily from the sale of DiesoLIFT TM .
 
 FTL
        was
        formed for the purpose of marketing and distributing our products. Charles
        Stride, a former director of IFT, is President of FTL. Dion Friedland, who
        owns
        more than five percent of our common stock, is the Chairman of FTL. FTL is
        no
        longer an active distributor for our products.
 
 At
        the
        end of the second quarter of 2006, we also accrued $25,136 for a contra-revenue
        international marketing fee that was paid to FT Marketing Ltd. (“FTM”), a
        marketing affiliate of FTL, for revenues and subsequent cash collections
        generated from FTM sales contact leads. These fees are included in the net
        revenue totals described above.
 
 *Operating
        Expenses*
 
 Total
        operating expense was $570,722 for the three months ended June 30, 2007,
        as
        compared to $1,343,951 for the three-month period ended June 30, 2006. This
        represents a $773,229 decrease from the prior period, and was primarily
        attributable to a decrease in stock-based compensation expense (described
        below), and a decrease in selling, general and administrative expense (described
        below).
  12
 
 Total
        operating expense was $1,769,814 for the six months ended June 30, 2007,
        as
        compared to $2,898,138 for the six-month period ended June 30, 2006. This
        represents a $1,128,324 decrease from the prior period, and was primarily
        attributable to a decrease in stock-based compensation expense (described
        below), a decrease in selling, general and administrative expense (described
        below) and a decrease in cost of operations, due to less sales activity in
        the
        first half of 2007.
 
 *Selling,
        General and Administrative Expense*
 
 Selling,
        general and administrative expense for the three months ended June 30, 2007
        was
        $484,420 (including stock-based compensation of $(154,434)), as compared
        to
        $1,190,730 (including stock-based compensation of $302,234) for the three-month
        period ended June 30, 2006. This decrease of $706,310 was primarily attributable
        to the following activities:
 
 ·
              a
                  decrease in stock-based compensation expense ($456,668), primarily
                  due to
                  the reversal of expense previously recorded on options forfeited
                  (prior to
                  vesting) during the second quarter of 2007 and due to expense recorded
                  on
                  options that became fully vested in 2006 and in the first quarter
                  of 2007;
  ·
              a
                  decrease in research and development expense ($167,560) as a result
                  of
                  increased independent product testing activities during the first
                  quarter
                  of 2006, which have now been completed;
                  and
  ·
              a
                  decrease in legal expense ($70,120), as we had increased legal
                  fees
                  associated with an S-1 registration filing and more aggressive
                  intellectual property protection in the second quarter of
                  2006.
 
 Selling,
        general and administrative expense for the six months ended June 30, 2007
        was
        $1,572,615 (including stock-based compensation of $68,752), as compared to
        $2,543,333 (including stock-based compensation of $766,644) for the six-month
        period ended June 30, 2006. This decrease of $970,718 was primarily attributable
        to the following activities:
 
 ·
              a
                  decrease in stock-based compensation expense ($698,072), primarily
                  due to
                  the reversal of expense previously recorded on options forfeited
                  (prior to
                  vesting) during the second quarter of 2007 and due to expense recorded
                  on
                  options that became fully vested in 2006 and in the first quarter
                  of 2007;
  ·
              a
                  decrease in research and development expense ($293,531) as a result
                  of
                  increased independent product testing activities during the first
                  quarter
                  of 2006, which have now been completed;
  ·
              a
                  decrease in legal expense ($97,116), as we had increased legal
                  fees
                  associated with an S-1 registration filing and more aggressive
                  intellectual property protection in the first two quarters of 2006;
                  and
  ·
              an
                  increase in salaries and wage expense ($89,196), primarily due
                  to the
                  addition of two employees since the second quarter of
                  2006.
  *Depreciation
        and Amortization Expense*
 
 Depreciation
        and amortization expense was $69,160 for the three months ended June 30,
        2007,
        as compared to $101,430 for the three months ended June 30, 2006. This decrease
        of $32,270 was primarily attributable to our intellectually property becoming
        fully amortized during the second quarter of 2007.
 
 Depreciation
        and amortization expense was $171,613 for the six months ended June 30, 2007,
        as
        compared to $202,529 for the six months ended June 30, 2006. This decrease
        of
        $30,916 was primarily attributable to our intellectually property becoming
        fully
        amortized during the second quarter of 2007.
  13
 
 *Interest
        Income*
 
 Interest
        income generated from our short-term investment in interest bearing securities
        for the three months ended June 30, 2007 was $11,704, as compared to $59,046
        for
        the three months ended June 30, 2006. The decrease in interest income is
        primarily attributable to a smaller investment balance, as some funds have
        been
        re-allocated for operating purposes.
 
 Interest
        income generated from our short-term investment in interest bearing securities
        for the six months ended June 30, 2007 was $22,651, as compared to $76,711
        for
        the six months ended June 30, 2006. The decrease in interest income is primarily
        attributable to a smaller investment balance, as some funds have been
        re-allocated for operating purposes.
 
 *Provision
        for Income Taxes*
 
 We
        have
        operated at a net loss since inception and have not recorded or paid any
        income
        taxes. We have significant net operating loss carry-forwards that would be
        recognized at such time as we demonstrate the ability to operate on a profitable
        basis for an extended period of time. The deferred income tax asset resulting
        primarily from the net operating loss carry-forwards has been fully reserved
        with a valuation allowance.
 
 *Net
        Loss*
 
 Net
        loss
        for the three months ended June 30, 2007 was a net loss of $536,108, as compared
        to a net loss of $1,238,549 for the three months ended June 30, 2006. The
        decrease in net loss was primarily due to a decrease in stock-based compensation
        expense, research and development expense and legal expense. The basic and
        diluted net loss per common share for the three months ended June 30, 2007
        and
        2006 was $(0.01).
 
 Net
        loss
        for the six months ended June 30, 2007 was a net loss of $1,712,381, as compared
        to a net loss of $2,621,231 for the six months ended June 30, 2006. The decrease
        in net loss was primarily due to a decrease in stock-based compensation expense,
        research and development and legal expense, partially offset by an increase
        in
        salary expense. The basic and diluted net loss per common share for the six
        months ended June 30, 2007 and 2006 was $(0.02) and $(0.03),
        respectively.
 
 **New
        Accounting Pronouncements**
 
 In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued FASB
        Interpretation No. 48 , *Accounting
        for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
        109* (“FIN
        48”), which establishes that the financial statement effects of a tax position
        taken or expected to be taken in a tax return are to be recognized in the
        financial statements when it is more likely than not, based on the technical
        merits, that the position will be sustained upon examination. FIN 48 is
        effective for fiscal years beginning after December 15, 2006. W e
        adopted
        the provisions of FIN 48 effective January 1, 2007 with no impact to our
        financial statements. No uncertain tax positions have been identified through
        June 30, 2007.
 
 Should
        we
        need to account for interest and/or penalties related to uncertain tax positions
        or other tax authority assessments, we would classify such expenses as part
        of
        selling, general and administrative expense. The years that remain subject
        to
        examination by federal income tax authorities include all years since
        1997.
  14
 
 In
        September 2006, the FASB issued SFAS No. 157, *F* *air
        Value Measurements* (“SFAS
        157”) *,* which
        provides guidance on how to measure assets and liabilities that use fair
        value.
        SFAS 157 will apply whenever another U.S. generally accepted accounting
        principles (“GAAP”) standard requires (or permits) assets or liabilities to be
        measured at fair value but does not expand the use of fair value to any new
        circumstances. This standard also will require additional disclosures in
        both
        annual and quarterly reports. SFAS 157 will be effective for financial
        statements issued for fiscal years beginning after November 15, 2007, and
        we
        will adopt SFAS 157 beginning in the first quarter of 2008. We are currently
        evaluating the potential impact this standard may have on our financial position
        and results of operations, but do not believe the impact of the adoption
        will be
        material.
 
 In
        February 2007, the FASB issued SFAS No. 159 *,
        The
        Fair Value Option for Financial Assets and Financial
        Liabilities* ("SFAS
        159"). SFAS 159 permits entities to choose to measure certain financial
        instruments and other eligible items at fair value when the items are not
        otherwise currently required to be measured at fair value. Under SFAS 159,
        the
        decision to measure items at fair value is made at specified election dates
        on
        an irrevocable instrument-by-instrument basis. Entities electing the fair
        value
        option would be required to recognize changes in fair value in earnings and
        to
        expense up front cost and fees associated with the item for which the fair
        value
        option is elected. Entities electing the fair value option are required to
        distinguish, on the face of the statement of financial position, the fair
        value
        of assets and liabilities for which the fair value option has been elected
        and
        similar assets and liabilities measured using another measurement attribute.
        If
        elected, SFAS 159 will be effective as of the beginning of the first fiscal
        year
        that begins after November 15, 2007, with earlier adoption permitted if all
        of
        the requirements of SFAS 157 are adopted. The impact of the adoption of SFAS
        159
        will be dependent on the extent to which we choose to elect to measure eligible
        items at fair value.
  **Critical
        Accounting Policies and Estimates**
 
 Preparation
        of our financial statements and related disclosures in compliance with GAAP
        requires the application of appropriate technical accounting rules and guidance,
        as well as the use of estimates. Our application of these policies involves
        judgments regarding many factors, which in and of themselves could materially
        affect the financial statements and disclosures. We have outlined below the
        critical accounting policies that we believe are most difficult, subjective
        or
        complex. Any change in the assumptions or judgments applied in determining
        the
        following matters, among others, could have a material impact on future
        financial results.
 
 *Revenue
        recognition*
 
 We
        recognize revenue from the sale of our products when the products are shipped,
        and title and risk of loss have passed to the buyer. The majority of our
        revenue
        is from sales to product distributors. Product distributors do not have the
        option to return product that is not immediately sold to an end-user. Therefore,
        our revenue recognition is not conditional on whether a distributor is able
        to
        sell product to an ultimate product end-user. Our sales policies for end-users
        are consistent with product distributor sales policies.
 
 15
  *Valuation
        of long-lived intangible assets*
 
 We
        asses
        the impairment of identifiable long-lived intangible assets whenever events
        or
        changes in circumstances indicate that the carrying value of the intangible
        asset overstates its continuing worth to us and may not be recoverable. Factors
        we consider important, which could trigger an impairment review, include
        the
        following:
 
 ·
              Significant
                  under-performance relative to expected historical or projected
                  future
                  operating results;
  ·
              Significant
                  changes in the manner of our use of the acquired assets or the
                  strategy
                  for our overall business;
  ·
              Significant
                  negative industry or economic
                  trends;
  ·
              Significant
                  decline in our stock price for a sustained period;
                  and
  ·
              Our
                  market capitalization relative to net book
                  value.
 
 As
        of
        June 30, 2007, our intangible asset account balances have been fully amortized.
 
 *Valuation
        of goodwill*
 
 We
        test
        goodwill for impairment at least annually in the fourth quarter. We will
        also
        review goodwill for impairment throughout the year if any events or changes
        in
        circumstances indicate the carrying value may not be recoverable (such triggers
        for impairment review are described above in the section *Valuation
        of long-lived intangible assets* ).
 
 To
        test
        impairment, we use the market approach to determine the fair value of the
        Company. Following this approach, the fair value of the business exceeded
        the
        carrying value of the business as of June 30, 2007. As a result, no impairment
        of goodwill was recorded.
 
 *Deferred
        income taxes*
 
 Deferred
        income taxes are recognized for the tax consequences of “temporary differences”
by applying enacted statutory rates applicable to future years to differences
        between the financial statement carrying amounts and the tax basis of existing
        assets and liabilities. At June 30, 2007, our deferred income tax assets
        consisted principally of net operating loss carry-forwards, and have been
        fully
        offset with a valuation allowance because it is more likely than not that
        a tax
        benefit will not be realized from the assets in the future.
 
 **Liquidity
        and Capital Resources**
 
 A
        critical component of our operating plan affecting our ability to execute
        the
        product commercialization process is the cash resources needed to pursue
        our
        marketing and sales objectives. Until we are able to generate positive and
        sustainable operating cash flow, our ability to attract additional capital
        resources in the future will be critical to continue the funding of our
        operations. The independent registered public accounting firm’s report included
        with the financial statements filed with our 2006 annual report on Form 10-K,
        filed with the SEC on April 2, 2007, indicated a substantial doubt that IFT
        could continue as a going concern.
 
 While
        we
        cannot make any assurances as to the accuracy of our projections of future
        capital needs, we believe that, as a result of the successful sales of equity
        during 2005, we have adequate cash balances to fund operations through at
        least
        September 2007. If we are unable to generate positive and sustainable operating
        cash flows by this time, we will need to raise additional capital to fund
        our
        operations. Although management believes we will secure additional funding
        necessary to continue operations beyond September 2007, if we are unable
        to
        secure this additional funding, we will need to significantly curtail
        operations. Of the approximately $1.2 million of cash we project to need
        to fund
        operations through 2007, $834,989 is available from cash and investments
        as of
        June 30, 2007. We intend to address the cash resources shortfall through
        equity
        financing.
  16
 
 Cash
        used
        in operating activities was $1,325,352 for the six months ended June 30,
        2007,
        compared to $2,343,244 for the six months ended June 30, 2006. The decrease
        in
        cash outflow from operating activities was due primarily to a decrease in
        working capital requirements ($837,850).
 
 Cash
        provided by investing activities was $934,975 for the six months ended June
        30,
        2007, as compared to $8,440 of cash used in investing activities for the
        six
        months ended June 30, 2006. The cash provided in 2007 was due to the net
        redemption of short-term investments during the six-month period, whereas
        we
        purchased a network server during the six months ended June 30,
        2006.
 
 Net
        cash
        decreased by $390,377 for the six months ended June 30, 2007, as compared
        to a
        decrease in net cash of $2,351,684 for the six months ended June 30, 2006,
        primarily due to operating activities being partially subsidized by a net
        redemption of short-term investments.
 
 Working
        capital at June 30, 2007 was $616,040, as compared to $2,089,475 at December
        31,
        2006. This decrease was primarily attributable to funding cash operating
        expenses during the first two quarters of 2007.
 
 During
        the six months ended June 30, 2007 and June 30, 2006, we did not make
        significant investments in property and equipment and do not anticipate doing
        so
        in the immediate future. In addition, a significant portion of our operating
        loss relates to non-cash charges such as depreciation, amortization and
        stock-based compensation expense.
 
 **Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
 
 We
        currently have short-term investments in U.S. Treasury bonds. This investment
        was funded from proceeds received from our sale of equity securities during
        2005. Interest income earned on the investments for the three and six months
        ended June 30, 2007 was $11,704 and $22,651, respectively. A one-percentage
        point change in the rate of interest earned in 2007 would not have had a
        material impact on our financial statements.
 
 **Item
        4. Controls and Procedures**
 
 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 June 30,
        2007. 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 June 30, 2007.
 
 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 June 30, 2007, that have materially affected, or are
        reasonably likely to materially affect, our internal control over financial
        reporting.
 
 17
  **PART
        II. OTHER INFORMATION**
 
 **Item
        1. Legal Proceedings**
 
 We
        are
        subject to various lawsuits and claims with respect to matters arising out
        of
        the normal course of business. While the impact on future financial results
        is
        not subject to reasonable estimation because considerable uncertainty exists,
        management believes, after consulting with counsel, that it is more likely
        than
        not that the ultimate liabilities resulting from such lawsuits and claims
        will
        not materially affect our financial position, results of operations or
        liquidity.
 
 In
        December 2005, a former employee of IFT and a former consultant to IFT filed
        a
        joint lawsuit against us and certain of our directors in the St. Louis County,
        Missouri Circuit Court. The relief sought by the plaintiffs included payment
        of
        compensation up to $120,000 per year under the former employee’s Employment
        Agreement, issuance of up to 4,832,616 shares of IFT stock under a Share
        Purchase Agreement entered into between each plaintiff and IFT in April 2001,
        and release from the plaintiffs’ non-competition obligations. The plaintiffs
        also alleged they were harmed by certain misrepresentations of IFT and were
        seeking an undetermined amount of damages for such alleged misrepresentations.
        We filed counter-claims against the plaintiffs, seeking monetary damages
        and
        enforcement of the plaintiffs’ non-competition obligations. During the second
        quarter of 2007, this case was dismissed by the Missouri Circuit Court with
        no
        compensation paid to either party.
 
 On
        July
        31, 2006, we received notice from the American Arbitration Association (“AAA”)
        of a Demand for Arbitration dated July 27, 2006 received by the AAA naming
        IFT
        as respondent and TPG Capital Partners (“TPG”), the prior Blencathia Acquisition
        Corporation (“Blencathia”) owner, as the claimant. The arbitration has been
        requested by TPG to resolve an alleged aggregate proceeds shortfall from
        the
        sale of IFT securities issued in the Blencathia merger. TPG has claimed they
        sold all of the 300,000 shares and the sales have not generated at least
        $500,000 of proceeds, as guaranteed in the merger documents.
 
 In
        an
        effort to resolve this matter prior to submission to binding arbitration,
        both
        TPG and IFT participated in a non-binding mediation conference on January
        30,
        2007. It is not expected that the ultimate settlement of this matter through
        the
        mediation or binding arbitration process, and considering the recorded
        liability, will have a material adverse effect on IFT.
 
 **Item
        5. Other Information**
 
 (a)
              None.
 
 (b)
              There
                  have been no material changes to the procedures by which security
                  holders
                  may recommend nominees to our Board of Directors since the filing
                  of our
                  quarterly report on Form 10-Q for the fiscal quarter ended March
                  31,
                  2007.
 
 **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.
  18
  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 18 U.S.C. Section 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002.
  19
  SIGNATURES
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 INTERNATIONAL
                  FUEL TECHNOLOGY, INC.
                (Registrant)By:
*/s/
                Jonathan R. Burst*
              
              
              Date:
August
                14, 2007Jonathan
                  R. Burst
                Chief
                  Executive Officer
                (Principal
                  Executive Officer)
 
 By:*/s/
                Stuart D. Beath*
              
              
              Date:August
                14, 2007Stuart
                    D. Beath
                  Chief
                    Financial Officer
                  (Principal
                    Financial Officer)
  20