UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


_________________





FORM
10-Q





T QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For
the quarterly period ended June 30,
2008





OR





£ 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   T           No   £





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


(Check
      one)
            Large
      Accelerated Filer £
            Accelerated
      Filer  £Non-Accelerated
      Filer T
            Smaller
      Reporting Company £(Do
      not check if a smaller reporting
company)





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


Yes   £           No   T





The
number of shares outstanding of registrant's only class of stock as of August
12, 2008: Common stock, par value $0.01 per share – 89,911,326 shares
outstanding, excluding 500,000 shares held in treasury













INDEX








PART
      I.  FINANCIAL INFORMATION
            PAGE
      NO.Item 1.  Financial Statements
      (Unaudited)Balance Sheets — June 30, 2008 and December 31,
      2007
            3Statements of Operations — Three-Month and Six-Month Periods
      Ended June 30, 2008 and June 30, 2007
            4Statement of Stockholders’ Equity — Six-Month Period Ended June
      30, 2008
            5Statements of Cash Flows — Six-Month Periods Ended June 30,
      2008 and June 30, 2007
            6Notes to Financial Statements
            7Item 2.  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            13Item 3.  Quantitative and Qualitative Disclosures
      About Market Risk
            19Item 4T.  Controls and
    Procedures
            19PART
      II.  OTHER INFORMATIONItem 1.  Legal Proceedings
            20Item 2.  Unregistered Sales of Equity Securities
      and Use of Proceeds
            21Item 5.  Other Information
            21Item 6.  Exhibits
            21





Index





INTERNATIONAL
FUEL TECHNOLOGY, INC.





BALANCE
SHEETS


June 30,
            
            
            December 31,2008
            
            
            2007ASSETS
            
            (Unaudited)Current
      assetsCash
      and cash equivalents
            
            $
            1,267,333
            
            
            $
            364,242Accounts
      receivable
            
            
            10,352
            
            
            
            62,463Inventory
            
            
            285,348
            
            
            
            315,553Prepaid
      expenses and other assets
            
            
            23,627
            
            
            
            20,793Total
      Current Assets
            
            
            1,586,660
            
            
            
            763,051Property
      and equipmentMachinery,
      equipment and office furniture
            
            
            63,703
            
            
            
            63,706Accumulated
      depreciation
            
            
            (48,800
            )
            
            
            (44,820
            )Net
      Property and Equipment
            
            
            14,903
            
            
            
            18,886Goodwill
            
            
            2,211,805
            
            
            
            2,211,805Total
      Assets
            
            $
            3,813,368
            
            
            $
            2,993,742LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilitiesAccounts
      payable
            
            $
            195,974
            
            
            $
            215,671Accrued
      compensation
            
            
            23,335
            
            
            
            29,901Accrued
      interest payable
            
            
            -
            
            
            
            5,137Other
      accrued expenses
            
            
            350,000
            
            
            
            350,000Total
      Current Liabilities
            
            
            569,309
            
            
            
            600,709Long-term
      liabilitiesNote
      payable to related party (Note 7)
            
            
            -
            
            
            
            500,000Total
      Long-term Liabilities
            
            
            -
            
            
            
            500,000Total
      Liabilities
            
            
            569,309
            
            
            
            1,100,709Commitments
      and contingenciesStockholders'
      equityCommon
      stock, $0.01 par value; 150,000,000 authorized, 90,411,326 and 84,861,326
      shares issued and outstanding at June 30, 2008 and December 31, 2007,
      respectively
            
            
            904,114
            
            
            
            848,614Treasury
      stock, at cost, 500,000 and 0 shares, respectively (Note
4)
            
            
            (395,000
            )
            
            
            -Discount
      on common stock
            
            
            (819,923
            )
            
            
            (819,923
            )Additional
      paid-in capital
            
            
            60,095,228
            
            
            
            54,445,445Accumulated
      deficit
            
            
            (56,540,360
            )
            
            
            (52,581,103
            )Total
      Stockholders' Equity
            
            
            3,244,059
            
            
            
            1,893,033Total
      Liabilities and Stockholders' Equity
            
            $
            3,813,368
            
            
            $
            2,993,742





See Notes
to Financial Statements.





3
 Index





INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENTS
OF OPERATIONS


(Unaudited)
            
            Three Months Ended
            
            
            Six Months EndedJune 30,
            
            
            June 30,
            
            
            June 30,
            
            
            June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues
            
            $
            5,800
            
            
            $
            22,910
            
            
            $
            36,397
            
            
            $
            34,782Operating
      expenses:Cost
      of operations (exclusive of depreciation and amortization)
            
            
            (417
            )
            
            
            17,142
            
            
            
            27,818
            
            
            
            25,586Selling,
      general and administrative expense (including stock- based compensation
      expense) (Note 3)
            
            
            3,256,061
            
            
            
            484,420
            
            
            
            3,946,702
            
            
            
            1,572,615Depreciation
      and amortization
            
            
            1,852
            
            
            
            69,160
            
            
            
            3,981
            
            
            
            171,613Total
      operating expenses
            
            
            3,257,496
            
            
            
            570,722
            
            
            
            3,978,501
            
            
            
            1,769,814Net
      loss from operations
            
            
            (3,251,696
            )
            
            
            (547,812
            )
            
            
            (3,942,104
            )
            
            
            (1,735,032
            )Other
      non-operating expense (Note 7)
            
            
            (123,836
            )
            
            
            -
            
            
            
            -
            
            
            
            -Interest
      income (expense), net
            
            
            1,239
            
            
            
            11,704
            
            
            
            (17,153
            )
            
            
            22,651Net
      loss
            
            
            (3,374,293
            )
            
            $
            (536,108
            )
            
            
            (3,959,257
            )
            
            $
            (1,712,381
            )Basic
      and diluted net loss per common share
            
            $
            (0.04
            )
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )Weighted-average
      common shares outstanding
            
            
            87,521,216
            
            
            
            84,861,326
            
            
            
            86,249,788
            
            
            
            84,861,326





See Notes
to Financial Statements.





4
 Index





INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENT
OF STOCKHOLDERS’ EQUITY


FOR
THE SIX-MONTH PERIOD ENDED JUNE 30, 2008


(Unaudited)





Common Stock Shares
            
            
            Common Stock Amount
            
            
            
            Treasury Stock
            
            
            Discount on Common Stock
            
            
            Additional Paid-in Capital
            
            
            Accumulated Deficit
            
            
            TotalBalance,
      December 31, 2007
            
            
            84,861,326
            
            
            $
            848,614
            
            
            $
            -
            
            
            $
            (819,923
            )
            
            $
            54,445,445
            
            
            $
            (52,581,103
            )
            
            $
            1,893,033Proceeds
      from issuance of stock
            
            
            4,500,000
            
            
            
            45,000
            
            
            
            -
            
            
            
            -
            
            
            
            2,205,000
            
            
            
            -
            
            
            
            2,250,000Issuance
      of stock for converted debt (Note 7)
            
            
            1,000,000
            
            
            
            10,000
            
            
            
            -
            
            
            
            -
            
            
            
            390,000
            
            
            
            -
            
            
            
            400,000Extinguishment
      of note payable (Note 7)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            123,836
            
            
            
            -
            
            
            
            123,836Purchase
      of treasury stock (Note 4)
            
            
            -
            
            
            
            -
            
            
            
            (395,000
            )
            
            
            -
            
            
            
            145,000
            
            
            
            -
            
            
            
            (250,000
            )Issuance
      of stock for services
            
            
            50,000
            
            
            
            500
            
            
            
            -
            
            
            
            -
            
            
            
            7,500
            
            
            
            -
            
            
            
            8,000Expense
      relating to stock-based compensation (Note 3)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,778,447
            
            
            
            -
            
            
            
            2,778,447Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,959,257
            )
            
            
            (3,959,257
            )Balance, June 30, 2008
            
            
            90,411,326
            
            
            $
            904,114
            
            
            $
            (395,000
            )
            
            $
            (819,923
            )
            
            $
            60,095,228
            
            
            $
            (56,540,360
            )
            
            $
            3,244,059





See Notes
to Financial Statements.





5
 Index





INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENTS
OF CASH FLOWS


(Unaudited)





Six
      Months Ended
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (3,959,257
            )
            
            $
            (1,712,381
            )Shares
      issued for services
            
            
            8,000
            
            
            
            -Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            3,980
            
            
            
            171,613Non-cash
      stock-based compensation
            
            
            2,778,447
            
            
            
            68,752Change
      in assets and liabilities:Accounts
      receivable
            
            
            52,111
            
            
            
            7,547Inventory
            
            
            30,205
            
            
            
            52,673Prepaid
      expenses and other assets
            
            
            (2,834
            )
            
            
            37,834Accounts
      payable
            
            
            (19,697
            )
            
            
            41,791Accrued
      compensation and interest
            
            
            12,136
            
            
            
            6,819Net
      cash used in operating activities
            
            
            (1,096,909
            )
            
            
            (1,325,352
            )Cash
      flows from investing activities:Redemption
      of short-term investments
            
            
            -
            
            
            
            936,394Acquisition
      of machinery and equipment
            
            
            -
            
            
            
            (1,419
            )Net
      cash provided by investing activities
            
            
            -
            
            
            
            934,975Cash
      flows from financing activities:Proceeds
      from issuance of common stock
            
            
            2,250,000
            
            
            
            -Purchase
      of treasury stock (Note 4)
            
            
            (250,000
            )
            
            
            -Net
      cash provided by financing activities
            
            
            2,000,000
            
            
            
            -Net
      increase (decrease) in cash and cash equivalents
            
            
            903,091
            
            
            
            (390,377
            )Cash
      and cash equivalents, beginning of period
            
            
            364,242
            
            
            
            654,841Cash
      and cash equivalents, end of period
            
            $
            1,267,333
            
            
            $
            264,464





See Notes
to Financial Statements.





6
 Index





NOTES TOFINANCIAL STATEMENTS


(Unaudited)





Note
1 – Basis of Presentation





International
Fuel Technology, Inc. ("IFT") is a company that was incorporated under the laws
of the State of Nevada on April 9, 1996.  We have developed a family
of fuel additive product formulations. These unique fuel blends have been
created to improve fuel economy, enhance lubricity (reducing engine wear and
tear) and lower harmful engine emissions, while decreasing reliance on
petroleum-based fuels through the use of more efficient, alternative and
renewable fuels.  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 now focused on
continuing to develop the body of evidence of the efficacy of our products
applicable to a wide range of markets and industries within these markets
through additional industry specific laboratory testing and customer field
trials.  In addition, we are continuing to strengthen our distributor
and customer contact base.  Marketing and sales efforts, in
conjunction with the additional industry specific testing, 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,
2007.  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 shares 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, 2008 and 2007, 27,008,226 and
17,509,624 shares, respectively, of common stock equivalents were excluded from
the computation of diluted net loss 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. The independent registered public accounting
firm’s report included with the financial statements filed with our 2007 annual
report on Form 10-K, filed with the SEC on March 31, 2008, indicated a
substantial doubt that IFT could continue as a going concern.  We have
incurred significant losses since inception and currently have and previously
from time to time have had limited funds with which to
operate.  Management is in the process of executing a strategy based
upon marketing technologies that offer enhanced engine performance and greater
fuel economy along with pollution control benefits. We have several technologies
in the commercialization phase and in development. We have received necessary
regulatory and commercial acceptance for 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
direct sales to the marketplace, eventually generating a level of revenues
sufficient to meet our cash flow and earnings requirements. 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, it is anticipated that a total of approximately $1,200,000 will
be necessary to enable us to adequately fund our operations for the remainder of
the 2008 fiscal year.  With a $2,000,000 equity funding completed
during the second quarter of 2008, our current cash and cash equivalents balance
plus our remaining committed funding of $800,000 is sufficient to support
operations at current planned levels through at least mid-2009.  We
will continue to evaluate sources of additional funding through private
placements of equity and/or debt securities with existing shareholders/investors
of IFT, as well as other external sources. However, there is the possibility
that these sales of equity may not happen at all or may end at some point in the
future. If we are unable to secure this additional funding, we will need to
significantly curtail operations.





7
 Index





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 modifiedprospective method, SFAS
123R applies to awards made on or after the effective date 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 2,705,000 options outstanding, expense
is recognized when it becomes probable that the performance criterion will be
met.





8
 Index





Stock-based
compensation expense recorded in the three and six months ended June 30, 2008
and 2007 is as follows:





Three Months Ended
      June 30,
              2008
            
            
            Three Months Ended
      June 30,
              2007
            
            
            Six Months Ended June 30,
              2008
            
            
            Six Months Ended June 30,
              2007Stock-based compensation to
      employees/Directors
            
            $
            31,260
            
            
            $
            43,521
            
            
            $
            53,432
            
            
            $
            58,896Stock-based compensation to non-employees(1)
            
            
            2,719,678
            
            
            
            (197,955
            )
            
            
            2,725,015
            
            
            
            9,856Total stock-based compensation
      expense
            
            $
            2,750,938
            
            
            $
            (154,434
            )
            
            $
            2,778,447
            
            
            $
            68,752




(1)
            Includes
      compensation to Directors providing consulting services independent
      of their Directorship
responsibilities.







Employee
and Director awards





During
the first quarter of 2008, 175,000 employee options were
granted.  Assumptions used to determine the average fair value of
these awards ($0.24 per option) included an expected term of 5 years, a
volatility rate of 118% and a risk free interest rate of 2.73%.





During
the second quarter of 2008, 150,000 employee options were
granted.  Assumptions used to determine the average fair value of
these awards ($0.66 per option) included an expected term of 5 years, a
volatility rate of 120% and a risk free interest rate of 3.12%.





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 5 years, a
volatility rate of 120% and a risk free interest rate of 4.70%.  These
options were subsequently forfeited in the third quarter of 2007.  No
employee options were granted in the second quarter of 2007.





Non-employee
awards





In the
first quarter of 2008, 100,000 stock options were granted to a non-employee
consultant for services.  These options vest over a 22.5-month
period.  The fair value of the options, which will be recomputed at
each quarter-end as described above, is expensed over the vesting
period.
 
 In the
second quarter of 2008, a total of 10,375,000 stock options were granted to
non-employee consultants for services and to Directors for consulting services
independent of their Directorship responsibilities.  These option
grants are explained below.
 
 During
the second quarter of 2008, 10,000,000 stock options were granted to a
non-employee consultant for future marketing and distribution efforts and
completion of an equity raise.  5,000,000 of these options vested
during the second quarter of 2008, based on performance criteria being
met.  Accordingly, we immediately recognized expense related to these
options.  Assumptions used to determine the average fair value of
these options ($0.22 per option) included an expected term of 2 years, a
volatility rate of 90% and a risk free interest rate of
2.63%.  2,500,000 of these options have a vesting schedule contingent
upon performance criteria which has not yet occurred.  However, we
recognized expense related to these options
since no consulting service obligation was associated with these options.
However, a related consulting agreement was executed in March
2008. Assumptions used to determine the average fair
value of these options ($0.22 per option) included an expected term of
approximately 3 years, a volatility rate of 88% and a risk free interest
rate of 2.18%.  The remaining 2,500,000 options issued to this
non-employee consultant also have a vesting schedule contingent upon performance
criteria which has not yet occurred. Therefore, expense will not be recognized
until it becomes probable that the performance criterion will be
met.
 
 During
the second quarter of 2008, we also granted 375,000 stock options to other
non-employee consultants. 175,000 of these options have a vesting schedule
contingent upon performance criteria which has not yet
occurred.  However, we recognized expense related to these options
since they are
not linked to any type of measurable consulting service
obligation.  Assumptions used to determine the average fair
value of these options (ranging between $0.21 and $0.39 per option) included
expected terms of 5 years, volatility rates ranging between 118% and 120% and
risk free interest rates ranging between 2.66% and 3.26%.
  During
the second quarter of 2008, 200,000 stock options were granted to
a Director for consulting services independent of his Directorship
responsibilities.  100,000 of these options vested immediately upon
grant date, triggering immediate expense recognition. Assumptions used to
determine the average fair value of these options ($0.39 per option) included an
expected term of 5 years, a volatility rate of 118% and a risk free interest
rate of 2.66%.  The remaining 100,000 options vest over a 19.5-month
period.  The fair value of these options, which will be recomputed at
each quarter-end as described above, will be expensed over the vesting
period.


No
options were granted to non-employee consultants in the first or second quarters
of 2007.




9
 Index





During
the first quarter of 2008, we issued 50,000 shares of our common stock to
non-employees for services that were valued at $8,000.  No shares of
our common stock were sold or issued to non-employees for services during the
first six months of 2007.





Other





Late in
the first quarter of 2008 we began negotiations with third parties that
ultimately culminated in a successful equity raise during the second quarter of
2008.  Specifically, IFT sold 4,000,000 shares of common stock for
$2,000,000, or $0.50 per share. This transaction was agreed to on April 22, 2008
at which time the closing price of IFT’s common stock was $0.42 per
share.  Pursuant to an agreement, the entire $2,000,000 was received
by June 9, 2008. In
accordance with the accounting standards, since the agreement entitled the third
party to purchase these shares of common stock over a period of time, the
agreement was valued based on the fair value of the purchase option resulting in
$999,000 of stock-based compensation expense.


No stock
options were exercised during the first two quarters of 2008 and
2007.





500,000
options previously granted to a non-employee consultant expired during the
second quarter of 2008.





Note
4 – Sales and Reacquisition of Stock





During
the second quarter of 2008, we received cash proceeds of $2,050,000 for the
sale of 4,100,000 shares of our common stock to accredited
investors.  100,000 of these shares were sold to a Director of
IFT.




During the first quarter
of 2008, we received cash proceeds of $200,000 for the sale of 400,000 shares of
our common stock to an accredited investor and Director of IFT.




During
the second quarter of 2008, we purchased 500,000 shares of our common
stock from one of our Directors for $250,000.  We have applied
the cost method to account for this treasury stock transaction in our financial
statements.





Note
5 – 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.





In 2006,
we learned that the prior Blencathia owner had, in fact, sold the 300,000 shares
for aggregate proceeds of approximately $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 approximately $150,000 of common stock.  The
remaining $350,000 obligation is reflected as a current accrued
expense.  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.





10
 Index





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 had 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 some or 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, which did not resolve the matter.  Informal discussions are
ongoing.  It is not expected that the ultimate settlement of this
matter, through the mediation or binding arbitration process, and considering we
have recorded a liability for the shortfall amount, will have an additional
adverse material effect on IFT.





Note
6 – Adoption of New Accounting Standard





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
157”), which provides
guidance on how to measure assets and liabilities that use fair value. SFAS 157
applies whenever another 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 requires additional
disclosures in both annual and quarterly reports. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007.  In February 2008, the FASB agreed to defer the effective date
of SFAS 157 for one year for non-financial assets and non-financial liabilities
that are not recognized or disclosed at fair value in the financial statements
on a recurring basis. There is no deferral for financial assets and financial
liabilities, nor for the rare non-financial assets and non-financial liabilities
that are re-measured at fair value at least annually.  We adopted the
provisions of SFAS 157 effective January 1, 2008 with no impact to our financial
position and results of operations.





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, and if so chosen, specifies related
accounting and disclosure requirements.   SFAS 159 is 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. We adopted SFAS 159 effective January 1, 2008 with no impact to our
financial position and results of operations.




Note
7 – Note Payable to a Related Party





During
the fourth quarter of 2007, we obtained an unsecured $500,000 loan from Harry F.
Demetriou, a Director of IFT and the holder of over five (5%) percent of our
common stock.  Pursuant to the terms of the loan, a promissory note
was executed by IFT in favor of Mr. Demetriou in connection with the loan. Terms
of the loan included interest to be accrued at a rate of 15% per year in arrears
with principal and interest due and payable on January 1, 2009.  The
loan was guaranteed by Rex Carr, a Director of IFT and the holder of over five
(5%) percent of our common stock.  All IFT obligations related to this
note were extinguished effective March 31, 2008 with the issuance of 1,000,000
restricted common shares of IFT stock to Mr. Demetriou.  During the
first quarter of 2008, we recorded a non-operating income gain of $123,836 based
on the shares being valued at $400,000 (based on a $0.40/share previous day
closing price) and the extinguishment of $500,000 of principal balance and
$28,836 of accrued interest related to the previously outstanding
loan.  The non-operating income gain was reversed during the second
quarter of 2008 due to Mr. Demetriou being considered a holder of economic
interest in IFT in accordance with SFAS 123R.  The transaction is now
treated as a capital contribution to IFT with no gain on the conversion
recorded.





11
 Index





Note
8 - Equity Commitment from a Related Party





On
December 11, 2007, we obtained an investment commitment from Rex Carr, a
Director of IFT and the holder of over five (5%) of IFT’s common stock, for up
to $1,000,000 of equity purchases from time to time commencing after March 1,
2008.  As of June 30, 2008, $800,000 is available under this equity
commitment.





12
 Index





Item 2.  Management’sDiscussion 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, 2007.





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, 2007 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 commercial goal is the bulk sale of our product slate
to major end-users of diesel fuel and bio-diesel fuel blends: railroad
companies, stationary power generation operators, centrally-fueled truck and bus
fleets and marine vessel operators.  Our primary strategy to
accomplish this goal is to outsource marketing and distribution by partnering
with established third party industry concerns with existing customers and
distribution channels.  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 ever-increasing fuel environmental
regulations will likely result in increased demand for additive products to help
offset adverse fuel performance and engine 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.





Although
significant 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 four 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; and


·     Stage
4 – large-scale field trials with potential customers to confirm favorable
results generated from initial small-scale trials.





We have
Stage 3 and Stage 4 activities underway with several potential customers in the
rail, trucking and stationary power industries.  At the conclusion of
these active trials and tests, we anticipate results that correlate closely with
the positive, observed testing results obtained during 2006 and
2007.  We believe these validations by potential customers will
provide additional support of the efficacy of our products in improving fuel
economy, lowering maintenance expenses and lowering engine
emissions.  We believe the successful demonstration of these product
attributes, both in the laboratory and in real world field-testing, will lead to
customer sales during the remainder of 2008.





13
 Index





Results
of Operations





Three and Six Months Ended
June 30, 2008 Compared to the Three and Six Months Ended June 30,
2007





Revenues





Net
revenue for the three months ended June 30, 2008 was $5,800, as compared to
$22,910 for the three-month period ended June 30, 2007.  Sales revenue
in the second quarters of 2008 and 2007 was due to sales to distribution
partners and end-user customers.





Net
revenue for the six months ended June 30, 2008 was $36,397, as compared to
$34,782 for the six-month period ended June 30, 2007.  Sales revenue
in the first two quarters of 2008 was due to sales to end-user customers,
distribution partners and customers engaged in field trials, partially offset by
a customer return of $6,375.  Sales revenue in the first two quarters
of 2007 was due primarily to sales to distribution partners, end-user customers
and customers who were engaged in field trials.





Sales
revenue generated during the first six months of 2008 and 2007 was primarily
generated from the sale of DiesoLIFTTM.





Operating
Expenses





Total
operating expense was $3,257,496 for the three months ended June 30, 2008, as
compared to $570,722 for the three-month period ended June 30,
2007.  This $2,686,774 increase from the prior period was primarily
attributable to an increase in stock-based compensation expense, partially
offset by decreases in selling, general and administrative expense and
depreciation and amortization expense.  These fluctuations are more
fully described below.





Total
operating expense was $3,978,501 for the six months ended June 30, 2008, as
compared to $1,769,814 for the six-month period ended June 30,
2007.  This $2,208,687 increase from the prior period was primarily
attributable to an increase in stock-based compensation expense, partially
offset by decreases in selling, general and administrative expense and
depreciation and amortization expense.  These fluctuations are more
fully described below.





Cost
of Operations (exclusive of depreciation and amortization)





Cost of
operations (exclusive of depreciation and amortization) was $(417) for the three
months ended June 30, 2008, as compared to $17,142 for the three-month period
ended June 30, 2007.  This decrease corresponds to a decrease in
revenues and a customer return, as explained above.





Cost of
operations (exclusive of depreciation and amortization) was $27,818 for the six
months ended June 30, 2008, as compared to $25,586 for the six-month period
ended June 30, 2007.  This increase corresponds to an increase in
revenues, as explained above.





14
 Index





Selling,
General and Administrative Expense





Selling,
general and administrative expense for the three months ended June 30, 2008 was
$3,256,061 (including stock-based compensation of $2,750,938), as compared to
$484,420 (including stock-based compensation of $(154,434)) for the three-month
period ended June 30, 2007. This increase of $2,771,641 was primarily
attributable to the following activities:





·
            An
      increase in stock-based compensation expense ($2,905,372) primarily due to
      (1) the vesting and immediate expense recognition for options granted
      during the second quarter of  2008 relating to commercial and
      equity capital raise activities (approximately $2,600,000), (2)
      approximately $370,000 of expense reversed during the second quarter of
      2007 related to options that became fully vested or were forfeited
      subsequent to the first quarter of 2007, partially offset by approximately
      $207,000 of expense recorded during the second quarter of 2007 related to
      the modification of option terms for previously granted options,
      and (3) an approximate $35,000 increase in expense due to the effect
      of our fluctuating stock price in relation to options granted to
      non-employees that are re-valued on a quarterly basis;
  and


·
            a
      decrease in salary expense ($81,462) due to the effects of personnel
      changes versus the prior comparable
period.





Selling,
general and administrative expense for the six months ended June 30, 2008 was
$3,946,702 (including stock-based compensation of $2,778,447), as compared to
$1,572,615 (including stock-based compensation of $68,752) for the six-month
period ended June 30, 2007. This increase of $2,374,087 was primarily
attributable to the following activities:





·
            an
      increase in stock-based compensation expense ($2,709,695) due to (1) the
      vesting and immediate expense recognition for options granted during the
      second quarter of  2008 relating to commercial and equity
      capital raise activities (approximately $2,600,000) and
      (2) approximately $370,000 of expense reversed during the second quarter
      of 2007 related to options that became fully vested or were forfeited
      subsequent to the first quarter of 2007, partially offset by approximately
      $207,000 of expense recorded during the second quarter of 2007 related to
      the modification of option
terms;


·
            a
      decrease in salary expense ($178,036) due to the effects of personnel
      changes versus the prior comparable
period;


·
            a
      decrease in professional service expense ($77,055), primarily due to a
      temporary scope reduction in external investor relations services and no
      employment recruitment expenses recorded during
  2008;


·
            a
      decrease in consulting expense ($39,690) due to a reduced scope in
      overseas consulting support versus the prior comparable period;
      and


·
            a
      decrease in corporate travel expense ($25,312) due to less overseas travel
      versus the prior comparable period.





Depreciation
and Amortization Expense





Depreciation
and amortization expense was $1,852 for the three months ended June 30, 2008, as
compared to $69,160 for the three-month period ended June 30,
2007.  This decrease of $67,308 was primarily attributable to our
intellectual property becoming fully amortized during the second quarter of
2007.





Depreciation
and amortization expense was $3,981 for the six months ended June 30, 2008, as
compared to $171,613 for the six-month period ended June 30,
2007.  This decrease of $167,632 was primarily attributable to our
intellectual property becoming fully amortized during the second quarter of
2007.





15
 Index





Interest
(Expense) Income





Net
interest (expense) income for the three months ended June 30, 2008 was $1,239,
as compared to $11,704 for the three-month period ended June 30, 2007. The
decrease in net interest (expense) income is primarily attributable to a lower
amount of funds invested in securities, as investments were utilized to fund
operations upon maturity.





Net
interest (expense) income for the six months ended June 30, 2008 was $(17,153),
as compared to $22,651 for the six-month period ended June 30, 2007. The
decrease in net interest (expense) income is primarily attributable to a lower
amount of funds invested in securities, as investments were utilized to fund
operations upon maturity, and interest expense recorded related to debt issued
in the fourth quarter of 2007, which was converted to equity effective March 31,
2008.





Other
Non-operating Expense





Other
non-operating expense for the three and six months ended June 30, 2008 was
due to a first quarter 2008 gain recorded upon the conversion of debt to equity
involving a transaction with Harry F. Demetriou, a Director of IFT and the
holder of over five (5%) percent of our common stock.  This
non-operating income gain was reversed during the second quarter of 2008 due to
Mr. Demetriou being considered a holder of economic interest in IFT in
accordance with the provisions of SFAS 123R.  The transaction is now
treated as a capital contribution to IFT with no gain on the conversion
recorded.





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, 2008 was a net loss of $3,374,293, as
compared to a net loss of $536,108 for the three months ended June 30,
2007.  The increase in net loss was primarily due to an increase in
stock-based compensation expense, partially offset by a decrease in salary
expense and depreciation and amortization expense.  The basic and
diluted net loss per common share for the three months ended June 30, 2008 and
2007 was $(0.04) and $(0.01), respectively.





Net loss
for the six months ended June 30, 2008 was a net loss of $3,959,257, as compared
to a net loss of $1,712,381 for the six months ended June 30,
2007.  The increase in net loss was primarily due to an increase in
stock-based compensation expense, partially offset by decreases in salary
expense, professional services expense, consulting expense, corporate travel
expense and depreciation and amortization expense.  The basic and
diluted net loss per common share for the six months ended June 30, 2008 and
2007 was $(0.05) and $(0.02), respectively.





16
 Index





New
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141(revised 2007), Business
Combinations, Applying the Acquisition Method (“SFAS 141R”), a revision
of SFAS 141, Business
Combinations. SFAS 141R establishes requirements for the recognition and
measurement of acquired assets, liabilities, goodwill, and non-controlling
interests. SFAS 141R also provides disclosure requirements related to business
combinations. SFAS 141R is effective for fiscal years beginning after December
15, 2008. SFAS 141R will be applied prospectively to business combinations with
an acquisition date on or after the effective date. We do not expect the
adoption of SFAS 141R will have a material impact on our financial
statements.





In
December 2007, the FASB issued SFAS No. 160, Non-Controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new standards for the accounting for and reporting
of non-controlling interests (formerly minority interests) and for the loss of
control of partially owned and consolidated subsidiaries. SFAS 160 does not
change the criteria for consolidating a partially owned entity.  SFAS
160 is effective for fiscal years beginning after December 15, 2008. The
provisions of SFAS 160 will be applied prospectively upon adoption except for
the presentation and disclosure requirements, which will be applied
retrospectively. We do not expect the adoption of SFAS 160 will have a material
impact on our financial statements.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 162”).  SFAS 162 identifies the sources of
accounting principles and the framework for selecting principles used in the
preparation of financial statements of non-governmental entities that are
presented in conformity with GAAP in the United States (“the GAAP
hierarchy”).  SFAS 162 will be effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board’s amendments to AU
Section 411, “The Meaning of Present Fairly in
Conformity With GenerallyAccepted
Accounting Principles.”  The FASB has stated it does not expect
SFAS 162 will result in a change in current practice.  We are
evaluating the impact the adoption of SFAS 162 will have on our financial
statements.


Critical
Accounting Policies and Estimates





Preparation
of our financial statements and related disclosures in compliance with U.S.
generally accepted accounting principles (“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 has passed to the buyer.  A portion of our
revenues 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.





Valuation
of long-lived intangible assets





We assess
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:





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.





17
 Index





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 Valuation of long-lived intangible
assetssection).





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 December 31,
2007.  As a result, no impairment of goodwill was
recorded.  There have been no events that have occurred during the
first two quarters of 2008 that would affect the carrying value of
goodwill.





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, 2008, 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 2007 annual report on Form 10-K,
filed with the SEC on March 31, 2008, 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 a recent equity financing and an
existing equity commitment (entered into with a Board member of IFT and
significant shareholder), we have adequate cash and cash equivalents balances
and commitments to fund operations through at least mid-2009.  As we
will not likely be able to generate positive and sustainable operating cash
flows by this time, we will need to raise additional capital to fund our future
operations. Although management believes we will secure additional funding
necessary to continue operations beyond mid-2009, if we are unable to secure
this additional funding, we will need to significantly curtail
operations.  Of the approximate $1.2 million of cash we project to
need to fund operations for the remainder of 2008, $1,267,333 is available from
cash and cash equivalents as of June 30, 2008 and another $800,000 is available
under an equity commitment from a Director of IFT and a holder of over five (5%)
of our common stock.  We intend to address future, potential cash
resources shortfalls through placements of debt and/or equity
financing.





Cash used
in operating activities was $1,096,909 for the six months ended June 30, 2008,
compared to $1,325,352 for the six months ended June 30, 2007.  The
decrease in cash outflow from operating activities was primarily due a reduction
in cash based expenses such as salary expense, professional services and
corporate and consulting travel expenses.





18
 Index





There was
no cash provided by investing activities for the six months ended June 30, 2008,
as compared to $934,975 of cash provided by investing activities for the six
months ended June 30, 2007.  The decrease in cash provided by
investing activities was primarily due to all outstanding short-term investments
maturing during 2007, with the proceeds utilized to fund
operations.





Cash
provided by financing activities was $2,000,000 for the six months ended June
30, 2008.  No cash was provided by financing activities for the six
months ended June 30, 2007.  This increase in financing cash flow was
primarily due to cash proceeds of $250,000 obtained from the issuance of 500,000
restricted shares of our common stock to related party, accredited investors and
cash proceeds of $2,000,000 for 4,000,000 shares of our common stock issued to
accredited investors, partially offset by a treasury stock acquisition ($250,000
cash disbursement) related to the partial re-purchase of shares previously owned
by a Director.





Net cash
increased by $903,091 for the six months ended June 30, 2008, as compared to a
decrease in net cash of $390,377 for the six months ended June 30,
2007.





Working
capital at June 30, 2008 was $1,017,351, as compared to $162,342 at December 31,
2007.  This increase was primarily attributable to cash proceeds from
the issuance of equity, partially offset by cash-based operating expenses
incurred during the first six months of 2008.





During
the six months ended June 30, 2008 and June 30, 2007, we did not make
significant investments in property and equipment and do not anticipate doing so
in the immediate future.





Item 3.  Quantitative and Qualitative Disclosures About
Market Risk





During
the third quarter of 2007, all of our short-term investments in U.S. Treasury
bonds matured.  We currently have no short-term investments in U.S.
Treasury bonds.  Our previous investment balances were 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 during the first six
months of 2007 would not have had a material impact on our financial
statements.





As a
result of proceeds received from our sale of equity securities during the second
quarter of 2008, cash exceeding a minimum threshold is deposited into an
overnight sweep account, generating interest income.  At times, such
deposits may be in excess of insured limits.  Management believes that
the financial institution holding our financial instruments is financially sound
and, accordingly, minimal credit risk exists with respect to these financial
instruments.





Item 4T.Controls and Procedures





Disclosure
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,
2008.  Disclosure controls and procedures are controls and procedures
designed to reasonably ensure that information required to be disclosed in our
reports filed under the Exchange Act, such as this quarterly report, is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.  Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to our management, including our CEO and CFO, or
persons performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure.  Our disclosure controls and procedures
include some, but not all, components of our internal control over financial
reporting.  Based on this evaluation, the principal executive officer
and principal financial officer concluded that our disclosure controls and
procedures were not effective as of June 30, 2008 due to an existing material
weakness in our internal control over financial reporting as discussed
below.





19
 Index





Change
in Internal Control over Financial Reporting





In our annual report on Form 10-K for
the fiscal year ended December 31, 2007 filed on March 31, 2008, management
identified a material weakness related to IFT’s limited accounting personnel
with sufficient expertise, accounting knowledge and training in GAAP and
financial reporting requirements. Specifically, IFT lacks sufficient personnel
to anticipate, identify, resolve and review complex accounting issues and to
complete a timely review of the financial statements.





A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on at timely basis.


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, 2008, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting. However, as discussed above, we have identified a material weakness
in our internal control over financial reporting.





Plan
for Remediation





Some of
the remediation action steps discussed in our annual report on Form 10-K for the
fiscal year ended December 31, 2007 are dependent on the completion of a
financing to support operations for at least two years.  As such
financing has not yet been achieved, we are currently unable to consider the
hiring of additional accounting and finance staff with the commensurate
knowledge, experience and training necessary to complement the current staff in
the financial reporting functions.





During
the fiscal quarter ended June 30, 2008, we were unable to further develop our
financial statement closing and reporting practices to include additional levels
of checks and balances in our procedures and a timely review.  The
actions we plan to take are subject to continued management review supported by
confirmation and testing, as well as audit committee oversight.





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.





20
 Index





Item 2.  Unregistered Sales of Equity Securities and
Use of Proceeds





On April
15, 2008, we issued 100,000 shares of our common stock in a private placement
transaction to David B. Norris, a Director who qualifies as an accredited
investor. The transaction was exempt from registration pursuant to Rule 506 of
Regulation D promulgated under the Securities Act of 1933.





The
private placement that occurred during the second quarter of 2008 did not
involve underwriters or broker-dealers. Therefore, there were no underwriting
discounts or commissions and we received full gross proceeds (if applicable) of
the offering.





During
the second quarter of 2008, we repurchased our common stock as
follows:






Period
              (a)
      Total Number of Shares Purchased
              (b)
      Average Price Paid per Share
              (c)
      Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              (d)
      Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be
      Purchased Under the Plans or ProgramsApril
      1, 2008 –April
      30, 2008
              0
              N/A
              N/A
              N/AMay
      1, 2008 –May
      31, 2008
              0
              N/A
              N/A
              N/AJune
      1, 2008 –June
      30, 2008
              500,000
      (1)
              $0.50
              0
              N/A
      (2)
 
 (1)
              Shares
      were purchased in a privately negotiated transaction from a significant
      shareholder of IFT common stock and Director.  The transaction
      was accounted for using the cost method for treasury
  stock.
 (2)
              Purchase
      not part of a publicly announced plan or
  program.





Item 5.  Other Information





(a)
            On
      June 18, 2008, IFT purchased 500,000 shares of its common stock from Harry
      F. Demetriou, a Director of IFT who owns more than five percent (5%) of
      our common stock.  IFT paid Mr. Demetriou $0.50 per share for
      the common stock, for an aggregate purchase price of
      $250,000.  The repurchased shares have been treated as treasury
      stock.





(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 quarter ended March 31,
      2008.





Item6.  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 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.





21
 Index





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:  August14,
      2008Jonathan
      R. BurstChief
      Executive Officer(Principal
      Executive Officer)By:
            /s/ Stuart D. Beath
            
            Date:  August 14,
      2008Stuart
      D. BeathChief
      Financial Officer(Principal
      Financial Officer)






22